IEEJ： July 2014

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Special Bulletin

A Japanese Perspective on the International Energy Landscape (180)

July 25, 2014

Three Geopolitical Risks Shaking International Energy Situation
Ken Koyama, PhD
Chief Economist, Managing Director
The Institute of Energy Economics, Japan

The international energy market always contains various destabilization factors that
influence market trends. I may say that the absence of destabilization or disturbance factors in themarket would be unusual. In the recent international energy market, however, multiple geopoliticalrisks that are likely to exert very great impacts due to their scales, significance and future
uncertainties have coexisted as market destabilization or disturbance factors. This situation is alsounusual.

It may be needless to say that the geopolitical risks represent a new development in theUkraine situation, the tense Gaza situation and the Iraqi situation. All three risks can respectively
become top news for the world. As these risks are developing simultaneously, a decline indevelopments for one risk leads mass media to reduce their coverage of the risk, making it relatively
unremarkable. In fact, however, each of the risks is chaotic and could destabilize the wholeinternational situation depending on future developments.

Regarding the Ukraine situation, Malaysia Airlines Flight 17 was shot down on July 17,
shocking the entire world. More than a week after the tragic incident in which all 298 passengers andcrewmembers were killed, efforts to settle the incident and identify the cause are failing to makesmooth progress. Western countries and the Ukraine government have claimed that pro-Russia rebels
in control of eastern Ukraine shot the aircraft down. The international community might haveincreasingly come to feel that this claim is plausible. But pro-Russia rebels have denied the claim,
leaving the details of the incident unspecified. The Netherlands, which accounted for the largest
share of the victims in the incident, has taken the initiative in organizing an international
investigation team, launching full investigations at last. Thorough investigations and clarification of
the incident are necessary.

In response to the incident, the international situation has been changing, even though thecause of the incident has not yet been found. Pro-Russia rebels, and Russia suspected to be theirsupporter, have come under growing fire from the international community. The Netherlands andother European countries could toughen their sanctions on Russia. In fact, the European Union
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Council of Foreign Ministers at its July 22 meeting pointed to the significance of thoroughinvestigations and Russia's relevant cooperation and considered enhancing economic sanctions onRussia depending on future developments. It has been pointed out that EU members would havedifficulties in uniting to impose sanctions on Russia due to differences in their economic relations
with Russia. While such basic situation is expected to remain unchanged, their attitude against
Russia is likely to toughen due to the incident. Given that the United States has taken a very toughstance against Russia over the Ukraine problem, the latest incident is expected to lead Russia tobecome further isolated. Rising tensions over Russia will inevitably shake the international energy
situation because of Russia's importance for the international energy market.

The rapid deterioration of the Gaza situation is a problem that cannot be ignored. On July
6, Israel launched retaliation against the Islamic fundamentalist group Hamas that was suspected ofkilling three Israeli boys who went missing and were later found dead on the West Bank of theJordan River. On July 8, Israel started full attacks on Gaza. Since Israel mobilized ground troops tomove into Gaza on July 17, Israel's clash with Hamas has expanded and escalated. More than 700
people have died in Gaza, with more than 30 Israelis killed. As I write this report, despite the largenumber of victims, no move is seen to settle the dispute. The Financial Times described the situation
as raising hurdles to clear before the bloody tragedy is stopped. The Israel-Palestine problem has
been one of the deep-rooted and fundamental destabilization factors in the Middle East. The problem
has newly been ignited. It has become important to watch how the whole of the Middle East would
be affected.

Major developments in the Ukraine and Gaza situations have overshadowed the Iraqi
situation that had dominated media coverage recently. In early June, the ISIS (Islamic State of Iraq
and al-Sham) militia organization took control of Mosul and launched a march to Baghdad,
surprising the world. Since then, the situation has been stalemated due to counterattacks by Iraqi
government forces. But heavy clashes between ISIS militants and government forces have continued,
with the future situation remaining unpredictable. Even if Iraqi government forces sharply recoverlosses, it may be difficult for them to exterminate the armed extremist rebels in Iraq and its
neighbors including Syria and eliminate their influence. The heavy clashes have indicated acentrifugal force expected to work in Iraq in the future. How will such centrifugal force work in thefuture? How will terrorist attacks and military clashes escalate amid growing uncertainties? How
will the Iraqi oil sector be affected over a short to long term? These important questions will be left
unanswered. In this sense, the Iraqi situation can be expected to become top news again depending
on future developments.

In addition to the three major geopolitical risks, the international energy market includes
various geopolitical risks that are not necessarily small. Among them are the Libyan and Nigeriansituations. Interestingly, European and American experts have recognized problems in the South and2

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East China Seas as major geopolitical risks involving energy. Japan, with a vulnerable energy
structure susceptible to developments in the international energy situation, is required to enhance its
resilience to various developments in view of the unpredictable, uncertain international situation.

Contact: report@tky.ieej.or.jp
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