IEEJ: July 2012 All Right Reserved
Special Bulletin
A Japanese Perspective on the International Energy Landscape (95)

July 19, 2012

Viewpoints for Looking at Growingly Uncertain International Energy Situation:
Middle East, U.S. and China
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, JapanOn July 18, the Institute of Energy Economics, Japan, and the James A. Baker III Institutefor Public Policy, Rice University, cosponsored an international workshop on the theme of"Growingly Uncertain International Situation and Global Energy Markets." The U.S. institute's
founding director, Ambassador Edward Djerejian, and famed U.S. energy experts Amy Jaffe andSteven Lewis made speeches and held panel discussions with IEEJ experts.
Since the year 2011 began with the “Arab Awakening”, the international situation andglobal energy markets have been shaken by such developments as the Great East Japan Earthquake,the tense Iranian situation and the resurging European credit fears. The workshop focused on theMiddle East, the United States and China as particularly important points cited in the title of thisreport.
Japanese media coverage of Arab Awakening developments other than the tense Syriansituation has been declining. But workshop participants noted that the Arab Awakening is a very
grave, deep-rooted problem with no fundamental solution being put forward. An important point
made at the workshop was that the roots and causes of the Arab Awakening should be viewed fromthe historical context of the modern Middle East, including the by-effects of major Western powers'
colonial rule in the Middle East, as symbolized by the 1916 Sykes-Picot Agreement on international
relations after the Ottoman Empire breakup. While complex historical, racial and religious problems
have been intertwined, grassroots discontent with Middle Eastern political systems has grown due toprolonged suppression and corruption problems. Then, a burst of discontent spread like wildfire
more rapidly and widely than expected, supported by the development and diffusion of the Internet
and other telecommunications means. The Arab Awakening problem has thus grown even moreserious.
In this sense, problems deriving from the Arab Awakening are expected to emerge invarious forms in many Middle Eastern countries. Following the Tunisian, Egyptian and Libyan
regimes, Syria's Bashar al-Assad government may collapse as the Syrian situation deteriorates
further on the intensifying military conflict between the Assad regime and dissidents. Furthermore,workshop participants noted that no optimism can be warranted for Middle Eastern countries where
no major changes or serious political instability have so far been seen.
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On the Iran issue that is the most important matter of concern to us in the Middle East for
the immediate future, the workshop discussed the point that attention should be paid to a further
decline in Iranian crude oil exports under tougher sanctions and its impact on the international oilmarket. If Israel takes a stance that it cannot tolerate Iran having nuclear weapon development
capabilities, the workshop also discussed the possibility that it may launch preemptive military
operations some time. The potential of the region's destabilization on such Israeli action could
develop into a serious problem to shake international energy markets, one participant said. Any
military conflict's impacts on international energy markets would differ depending on its timing,
duration and coverage of countries, another said. Given that the Middle East is a large base forsupplying and exporting oil and liquefied natural gas, any military conflict there would exert grave
impacts on the international situation. For Japan that has increased its dependence on LNG and oil
thermal power generation since the March 2011 Fukushima nuclear crisis, particularly, developmentsin the Iranian situation and the fate of the overall Middle East situation could become the mostimportant destabilizing factors for energy security. Workshop participants emphasized theimportance of the Middle East problem and the severity of the present situation, calling for avoiding
complacency.
As the Middle East situation grows more uncertain, the United States is increasing its
presence on the energy supply side of the world. In this sense, some participant said, the center ofgravity is shifting in international energy markets. The shale gas revolution has made U.S. LNG
exports a major matter of concern both within the United States and in the entire world including theAsian market. But the workshop focused on analyses, consideration and discussions of oil problems.
The United States, where shale oil production has been increasing substantially in addition to shale
gas output, is making progress toward the goal of ending its dependence on Middle Eastern oil as
advocated by both the Bush and Obama administrations. There is a bold view that the United States
could become an oil exporter after emerging as an LNG exporter depending on further shale oilproduction. Workshop participants saw such view as still premature. But we may have to pay
attention to U.S. oil supply and demand trends that could shift the global supply-demand balance, thecenter of gravity and the balance of power in international energy markets. If the United States
reduces its dependence on Middle Eastern oil substantially and moves closer to oil self-sufficiency,
its commitment to the stability of the Middle East may be affected somehow. Such development may
cause problems regarding the wider international order. In this sense, we must keep close watch onU.S. trends.
As for China, it is very uncertain how an economic growth slowdown would lower growthin energy demand (imports) including oil, gas and coal. Over a medium to long term, workshop
participants said, there would be two more important points: (1) how China will implement measuresto achieve energy and environmental policy goals under the 12th five-year development plan andwhat achievements it will make in this respect, and (2) who will implement energy policy and how
they will do so after a leadership reshuffle this autumn. How China will develop unconventional gas
resources estimated to exceed U.S. deposits is another uncertain factor that could cause a majorchange in the supply-demand balance in the global natural gas/LNG market, one participant said.
Another view given in the workshop was that China’s shale gas development should be seen from a2

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long-term perspective because of large China-U.S. gaps in infrastructure, technology and humanresources. Anyway, Chinese trends that are well expected to exert decisive effects on global energy
demand growth represents a major uncertainty that could affect the fate of the world.

Contact: report@tky.ieej.or.jp
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