IEEJ: May 2011

Special Bulletin
A Japanese Perspective on the International Energy Landscape (42)

May 13, 2011

China and Energy Security in Asia
Ken Koyama, PhD
Director
Strategy and Industry Research Unit
The Institute of Energy Economics, Japan

From May 1 through 7, I had an opportunity to take part in two international conferences inBangkok and Washington for exchanges of views with many energy experts. While topics at these
conferences ranged wide, common topics included energy security challenges in Asia and China’s
significance with regard to these challenges under the recent international political and economic
environment.
Regarding the recent international political and economic environment, important factors
include the destabilization of the Middle Eastern and North African (MENA) situation, crude oil
price spikes, growing expectations on natural gas, the growing significance in Chinesepolitical/economic/energy situation and the impact of the Great East Japan Earthquake. Based onthese factors, I here would like to make four points about energy security challenges in Asia ofwhich I grew conscious anew through the exchange of views at the international conferences.
First, Asia has been increasing its dependence on energy imports. Energy experts in theworld agree that energy demand growth in Asia (particularly, in emerging countries) will drive
global demand growth over a short, medium and long term. The energy demand growth in Asia may
likely be steady, though depending on economic growth over a short term and on technologicalprogress and the like over a medium to long term. Regarding gas (LNG) and oil, a can’t-miss factor
is that Japan’s demand will be greater than expected earlier due to the Great East Japan Earthquake.
Therefore, Asia’s dependence on oil and gas imports is well expected to increase substantially.
Inevitably, Asia will have to depend more on imports from the Middle East.
In this respect, the destabilization of the Middle Eastern and North African situation has
become a new major issue for energy security in Asia. Due to the new issue, Asian countries will
face a wide range of challenges including short-term problems like the enhancement of emergency
response capacity to address market destabilization, long-term problems such as energy demand
structure improvements and reforms, and diplomacy and international relations measures such as thepromotion of relations with oil-producing Middle Eastern countries and the enhancement of energy
cooperation within Asia. The energy import growth in Asia will also increase the significance ofsecurity of energy transportation from the Middle East and Africa, leading the sea lane issue to link
closer to energy security. Combined with various territorial disputes in Asian waters, the sea lane
problem has surfaced as a new focus of attention. The United States has also grown interested in the1IEEJ: May 2011

problem from a strategic viewpoint.
Second, concerns have grown about the impact of crude oil price spikes, which can belinked close to the growing Asian dependence on energy imports. Factors behind the crude oil pricespikes have been complicated, including geopolitical risks like the Middle Eastern and North African
destabilization, as well as the growing influences of money factors in the oil futures market. As aresult, the crude oil price spikes have become a significant economic challenge for Asian countries
as major oil consumers and importers. In such Asian countries as China where concerns and cautions
have grown about rising inflation, people have naturally grown more conscious of price hikes forenergy resources, foods and other commodities. As factors behind the price hikes have been
complicated, responses to the hikes may not be simple. As for gas subject to growing expectations as
explained below, crude oil price spikes can directly cause LNG price hikes in Asia where LNG
prices are linked to crude oil prices. In respect to this point as well, the crude oil price spikes canaffect energy security in Asia.
Third, supply stability and energy security challenges are attracting attention with respect togas that is expected to enter a “golden age” in Asia as well. As Asia features smaller share of gas inprimary energy supply than Europe and the United States (the share stood at 11% in Asia against
27% in the United States and 26% in the European Union in 2009), Asia’s expansion of gas
consumption means the diversification and dispersion of energy sources that contribute to energy
security. In regard to stable gas supply, meanwhile, there are many problems including whether
timely investment would be made to secure sufficient supply capacity in response to substantial
demand growth in the future and how gas (LNG) prices would be competitive. We must also pay
attention to the fact that how Japan’s substantial LNG demand growth under the impact of the Great
East Japan Earthquake would affect the Asian gas (LNG) market over a short, medium and long term
has become a great matter of concern to energy policy makers and energy industry people in Asia.
The fourth point is how China's presence is significant when energy security in Asia as wellas the above three points is considered. This is because China's presence has remarkably grown
greater as seen from a wide variety of viewpoints including the basic problem of the impact ofChina's growing energy demand and imports on the global energy supply-demand balance andnon-supply/demand aspects such as China's strategies and actions in Asian and global energy
markets. In discussions in the United States, key topics ranged from energy security to supply
security for rare earths and other critical resources. Discussion participants indicated their greatinterests in China's policies and engagement regarding these problems. As for energy security, there
are two matters of concern -- the impact of price spikes as described for the second point above andphysical supply shortages. In the history of energy security, problems have mostly been linked toimpacts of energy price spikes. Few physical supply shortages have been seen. In fact, however,fears of physical supply shortages could be taken as very serious and grave problems. China's rareearth supply restriction last year was taken as bringing about physical supply shortages. Since rareearths are indispensable for various high-technology products, they are of great importance in themilitary industry, technology and other strategic areas. Given these points, rare earth supply security
and China's relevant presence have become matters of great concern. We may have to promote an2

IEEJ: May 2011

accurate analysis on China as a key factor affecting energy security in Asia, and dialogue andcooperation with China in pursuit of energy security as a common interest.
Contact: report@tky.ieej.or.jp

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