Six Steps Toward Increased Energy Security in the Asia Pacific Region

Oil production, consumption, and net surplus or deficit in major regions of the world, 2006 (million barrels per day). Click image to enlarge. Source: BP (2007).

By Kang Wu, Fereidun Fesharaki, Sidney B. Westley and Widhyawan Prawiraatmadja

HONOLULU (Aug. 25) -- Concerns about energy security affect economic performance and political stability all over the world, but nowhere are these issues more critical than in Asia and the Pacific - and oil is at the heart of the region's energy challenge.

Countries in Asia and the Pacific already consume around three times more oil than they produce, and consumption is increasing twice as fast in the region as in the world as a whole. With less than 4 percent of the world's proven oil reserves, the region has few options to increase or even maintain current levels of domestic production, and efforts to diversify to other types of energy, such as natural gas or renewable energy, have achieved only limited success.

Oil consumption in the region could be reduced by eliminating inappropriate government intervention in oil markets, removing price distortions and allowing market prices to reflect the true cost of oil. Tax benefits and incentives should be designed to encourage the use of energy-saving goods and services, such as hybrid automobiles, and to support increased use of renewable energy. In addition to these "carrots," policymakers will need to introduce "sticks" such as higher taxes on excessive energy consumption and higher mandatory standards for automobile fuel efficiency.

Yet the possibilities are limited. Given the region's growing populations, expanding transportation needs and rising expectations for a better standard of living, the demand for oil can only go up. The result is a steadily growing dependence on imported oil, largely from the volatile Middle East.

This is no doubt cause for concern, but a number of policy options can help governments improve the security of their oil supplies and, in the long term, bring oil supply and demand into better alignment. The following policy measures could make a significant contribution to energy security in the region:

1. Initiate joint ventures with oil producers.

Over the years, a number of governments and private companies in Asia and the Pacific have invested in oil exploration and production outside the region. Conversely, governments and companies from oil-producing regions have invested in refining and marketing enterprises in Asia and the Pacific. Such joint investments have created equity partnerships that foster reliable flows of oil, enhancing energy security for Asian and Pacific consumers and revenue security for producers.

Joint projects could be expanded to include construction or expansion of oil-storage facilities in the Asia Pacific region. Middle Eastern companies possess substantial oil-storage facilities in Europe and the Caribbean but little in Asia or the Pacific, despite the high volume of oil exported to the region. Atlantic Basin oil producers might find regional storage facilities particularly beneficial to save on transport costs through economies of scale.

Joint ventures could be especially effective in four areas: exploration and production projects; refineries and retail operations in the Asia Pacific region in cooperation with key oil producers; shared storage facilities; and joint infrastructure, such as pipelines, ports, and terminals. While government support is crucial, each investment project has to make economic sense to survive.

Share of petroleum-product consumption by the industrial, residential/commercial, and transportation sectors, Asia Pacific region, 1970-2015. Click image to enlarge. Source: FACTS Global Energy (2008).

2. Improve the efficiency of domestic oil markets.

After decades of experience with different types of market interventions and regulations, policymakers in the Asia Pacific region are coming to realize that energy security—defined as an uninterrupted supply of energy at the lowest possible cost—can be achieved through the efficient operation of market forces. Yet many countries have interfered with the market to protect domestic suppliers or to help a local industry (such as agriculture) or population group.

In such situations, deregulating energy markets is likely to be disruptive to specific industries or segments of society. Because this can create serious political problems, energy deregulation in countries around the region has tended to move in stops and starts.

The resulting differences in the regulatory environment have led to increased refining capacity in some places and refinery closures in others. India, China, Japan, South Korea, and Taiwan, for example, all provide substantial tariff, as well as non-tariff, protection to their refiners.

Even though market deregulation can lead to improved energy security in the long term, governments must sometimes intervene to deal with short-term disruptions. Any administrative measure should be temporary, however, and should be replaced as soon as possible by long-term policies that allow market forces to determine the price of energy.

3. Build up strategic oil stocks.

One of the most obvious approaches to preventing supply disruptions is to develop or augment strategic stocks of oil. As members of the Organisation for Economic Co-operation and Development's International Energy Agency (OECD/IEA), Japan, South Korea, Australia, and New Zealand maintain mandatory stocks of oil equivalent to at least 90 days of net oil imports. Although not an OECD/IEA member, Taiwan is also relatively well prepared for potential supply disruptions, and Singapore, as a regional refining center and oil-trading hub, has large commercial stocks on hand at any given time. While China has developed its first batch of strategic storage facilities and the program for India is under way, other countries in the region are much more exposed to supply shortages.

The high cost of constructing and maintaining oil storage facilities suggests the value of international assistance or cooperation among neighboring countries. Policymakers throughout the Asia Pacific region need to tackle these issues and move toward the OECD/ IEA standard of maintaining stocks equivalent to 90 days of net oil imports.

4. Strengthen regional cooperation.

Many proposals have been made in recent years to enhance regional cooperation, often involving joint investments outside the region or joint development of infrastructure such as pipelines, ports or processing facilities.

One of the practical ways to cooperate is to coordinate the maintenance of emergency stockpiles among countries in the region. The benefits of a coordinated effort may justify establishing a mechanism for more-affluent countries in the region to provide some initial financial assistance to their less-affluent neighbors.

Another potential area of cooperation is collective bargaining to obtain lower prices and better terms on oil imports from the Middle East. This concept has been widely discussed, but no collective-bargaining arrangement has yet been formulated because of concerns about a negative response from oil-exporting nations.

Two steps toward regional cooperation should receive immediate priority: developing joint oil stocks with financial assistance from Western nations, and harmonizing quality standards for petroleum products to facilitate interregional trade.

5. Reduce transportation bottlenecks.

The Malacca Strait is the Achilles heel of oil supply to East Asia and the Pacific. If the Strait had to be closed for any reason, ships would be diverted to a much longer route, dramatically increasing transport costs.

Because the Asia Pacific region is so fragmented geographically and oil resources are distributed so unevenly across the region, the potential for transporting oil by pipeline is extremely limited. Two modest pipeline projects are currently at the planning or construction stage to bring oil to Northeast Asia from Kazakhstan and Russia. Future development of oil pipelines could help China, Japan and other Asia Pacific nations diversify their sources of supply to some extent.

Pipelines and ports must be built based on economic considerations and not just political or security concerns. The most effective channel for exploring and assessing the possibilities would be through the creation of a multinational task force in the region to study alternative sea routes and ways to improve security in the Malacca Strait through joint patrols, and to study potential pipeline routes, involving the private sector to assure that economic considerations receive priority.

Actual and projected prices of Dubai crude oil: High, medium, and low scenarios, 2002-2020 annual averages (US$ per barrel). Click image to enlarge. Source: FACTS Global Energy (2008).

6. Establish a regional oil futures market.

The two existing international markets in oil futures—the Intercontinental Exchange (ICE) in London and the New York Mercantile Exchange (NYMEX)—play a critical role in the global oil trade. But buyers and sellers in Asia and the Pacific cannot easily use the oil futures markets in the United States or Europe because they are, in effect, trading a different commodity: Oil trading in the United States is based on West Texas Intermediate crude oil, and trade in Europe is based on Brent crude from the North Sea, while trade in the Asia Pacific region is based on Dubai crude. This disconnect between global oil markets at times allows sellers to charge higher prices to customers in the Asia Pacific region.

A promising new development, the Dubai Mercantile Exchange (DME), opened in 2006. With 50 percent ownership by NYMEX, the DME is the first energy futures exchange in the Middle East. In addition, the Dubai Multi Commodities Centre (DMCC) began trading fuel-oil futures at the end of 2006. It is not yet certain whether these two new initiatives will succeed, but they merit strong support from consumers in the Asia Pacific region.

For countries in Asia and the Pacific that expected to follow the pattern of energy-intensive growth seen in the West, the challenge ahead is daunting. They need energy and they need low prices, but they have arrived at the development gate at an inauspicious time. In addition to the measures describe above, they will need to devise new strategies for economic growth based on more efficient use of oil and natural gas, continuing or even increasing dependence on domestic supplies of coal, and ultimately, at least in part, the development of alternative sources of energy.

Kang Wu, Fereidun Fesharaki and Sidney B. Westley are the editors of the East-West Center book Asia's Energy Future: Regional Dynamics and Global Implications. Widhyawan Prawiraatmadja is Senior Vice-President for Corporate Planning at PT Pertamina, Indonesia's state oil company. An expanded version of their policy brief on Asia Pacific energy security can be found as part of the East-West Center's Asia Pacific Issues publication series.


The EAST-WEST CENTER is an education and research organization established by the U.S. Congress in 1960 to strengthen relations and understanding among the peoples and nations of Asia, the Pacific, and the United States. The Center contributes to a peaceful, prosperous and just Asia Pacific community by serving as a vigorous hub for cooperative research, education and dialogue on critical issues of common concern to the Asia Pacific region and the United States. Funding for the Center comes from the U.S. government, with additional support provided by private agencies, individuals, foundations, corporations and the governments of the region.

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