Energy and the Asian Security Nexus.

• Author: Fesharaki, Fereidun

Energy security concerns have always been central to geopolitical interests. Throughout history, the effort to secure access to energy sources and ensure adequate transport routes has demanded technological, commercial, diplomatic and military agility. In this century, countries have focused primarily on the means necessary to secure access to fossil fuels--especially oil. Winston Churchill, Great Britain's First Lord of the Admiralty before the First World War, expressed such intent in his drive to establish the Anglo Persian Oil Company (today British Petroleum) and open up Mideast oil to the outside world. This was of particular concern to him as he sought to transform the British Navy, which had hitherto relied on Welsh coal, into an oil-powered fleet ready to face the German challenge on the high seas.(1) Indeed, the desire for energy security was the motivating force behind European and U.S. foreign policy efforts to speed up the process of unlocking the huge Mideast oil reserves. In the 1970s the emergence of the Organization for Petroleum Exporting Countries (OPEC)--and the oil shocks it engineered--led to a new round of energy security concerns, demanding their own set of appropriate policy responses.

More recently, energy security concerns have shifted to Asia.(2) Governments in the region and elsewhere worry about how much Asia's high economic growth rates will spur energy demand and whether serious conflicts might emerge as a result. Even though this demand suffered a temporary downturn in the wake of the Asian economic crisis, contributing to the slide in world oil prices and presenting a new set of concerns for producing countries, Asia will remain at the fore of the energy security debate.

This article will focus on the region's energy security concerns, analyzing Asia's existing oil supplies, its current security risks and the region's policy options. I will argue that the transformation of energy markets has all but eliminated traditional security threats. While the challenge that Asia faces today--securing the supply and transport of energy--is the same, the conditions in which it must procure these goods has altered dramatically. I will further argue that the new global economic environment, which is based on respect for and reliance on free market forces, has also affected the way governments deal with energy security concerns by encouraging the use of market mechanisms to avoid the costly mistakes that resulted from excessive state interventionism in the past. Finally, since closer energy links between Asia and the Middle East are unavoidable, policy responses related to energy security should be aimed at persuading the countries of the region that stability and peace in the Middle East is equally critical to its prosperity as it is to the West's. Indeed, burden-sharing for the purpose of protecting transport routes is a common global objective.

ENERGY SECURITY: THE RISE OF THE FREE MARKET

Oil supply security--ensuring access not only to the resource base but also to the transport networks delivering it--has been the predominant focus of energy policy and energy security among the oil-importing Asia-Pacific economies. Earlier concepts of energy security were based on several key criteria: maximizing the use of domestic energy resources, increasing energy efficiency through taxes and legislation, diversifying away from oil dependence to multiple energy resources and minimizing oil imports--particularly from the Mideast. Such concepts did not adequately take market forces into account. Indeed, the market was seen to work inefficiently and to respond too swiftly to oil price movements and supply disruptions. Many held that it was the government's duty to intervene in the market to protect the consumer.

This traditional concept of energy security necessitated financial commitments of a large and enduring nature that were seen to be essential. These took a variety of forms: over-investing in certain facilities to ensure redundant capacity in case of supply interruptions; subsidizing freight costs of imports from certain regions; implementing policies to utilize more renewable resources; raising taxes on oil imports to make competing fuels more economical; requiring the private sector or state oil companies to purchase oil in accordance with government-to-government contracts without regard to economics or quality; giving government bureaucracies the power of "informal administrative guidance"; and establishing oil reserves for commodity price stabilization programs that sought to smooth out violent price movements, as in South Korea, the Philippines and Thailand.

Among the most novel ideas in the 1980s was the concept of the flexible switching system developed by Japan's Ministry of International Trade and Industry. The program provided for excess capacity in the electric power sector, so that if any one fuel source (oil, gas or coal) were interrupted, the power sector could continue to function. Some other significant programs were the synthetic fuel programs in the United States in the late 1970s and the "Think Big" programs of New Zealand. The U.S. program sought to tax windfall profits resulting from the deregulation process in order to fund an ambitious synthetic fuels program costing around $100 billion. The New Zealand program consisted of multi-billion dollar projects to convert natural gas into gasoline and to use compressed natural gas for highway transportation.

Yet many governments chose not only to subsidize fuel prices, but also to use their oil revenues to subsidize unprofitable investments and large social welfare projects--and sometimes to live beyond their means. Indeed, fundamental economic reform programs were often delayed because of the high oil income generated by the price movements.

The oil shocks of the 1970s and early 1980s--and the subsequent inflationary pressures and economic recession that often followed in oil-consuming economies--had a major impact on thinking within the private sector. Among the industrialized economies of the Asia-Pacific, the usual calls for a free market and an end to government intervention were muted by a fear that the oil crises might lead to severe worldwide depression. Indeed, in most cases the private sector dutifully followed government guidelines and became a willing partner in the governments' intervention programs. The oil industry in the United States had begun to push for deregulation by the late 1970s, and the policy was implemented by the early 1980s. In contrast, complete deregulation has taken much longer in many Asia-Pacific countries such as Australia, Japan and South Korea.

In time, however, both Asia's governments and its private sector began to see the market as a more reliable source of energy security than was imagined during the 1970s, when energy worries were at their height. Projected supply shortages did not materialize despite the dire forecasts of the past. Meanwhile, government efforts to intervene in energy markets often had to be abandoned and regularly created as many problems as they attempted to solve--unable to keep up with the rapidly evolving energy markets. Awareness of this sorry record was amplified by the elections of U.S. President Ronald Reagan and British Prime Minister Margaret Thatcher, whose free market ideology began to resonate around the globe amidst the demise of the postwar Keynesian consensus that had been based on mistrust of the private sector and faith in the benefits of government intervention.

Ironically, some in the region's private sector found themselves in a difficult position as governments began to reconsider the concept of energy security and moved slowly away from market intervention. The ascendancy of free market thinking...