AEF Report (V): New Rule Sets of Asian energy

Home Articles / Books Projects Barnett Consulting Weblog

Asian Energy Futures Event Report (V):
The New Rule Sets of Asian Energy

Home Articles / Books Projects Barnett Consulting Weblog

Moving from the Here and Now of Asian energy to what we perceive to be its emerging New Rule Sets, we begin with a quick review of what we’re calling the Rules of the Road for Asian energy development over the next couple of decades. We present these "rules" as a sort of inescapable reality with which all of the region’s powers must grapple in the coming years, and to which any interested external powers must pay attention if they are to play a useful role in encouraging regional stability.

We present these "rules" in six paired couplings so as to suggest a ying-and-yang-like tension between trend lines that can often be viewed as both complementary and competing. The couplings are grouped according to Waltz’s three-tiered perspective.

On the system level:

We note the decarbonization trend line of human history, moving from wood to coal to oil to methane to hydrogen. Complementing that trend—in an aggregate sense—is the Kyoto Protocol on greenhouse gases, which encourages movement "down" that trend line, even as the CO2 regulatory regime allows some to trade "up" or "down," depending on assigned ceilings and means to purchase additional allowances from others.
There is the perceived "catch 22" between Asia’s need for large amounts of FDI and the resistance many countries display there regarding the transparency Wall Street and other super-markets require for the sort of long-term faith required in infrastructure investments.

On the nation-state level:

We note the crux of the entire Asian energy problem set: all that infrastructure development will primarily entail private sector money, but too much of the decision making will be performed by government bureaucrats—never a great combination in Wall Street’s opinion.
It’s also important to remember that Asia is a region still beset by powerful inter-state rivalries and some particularly complex political-military flashpoints that can sour the FDI climate with some alacrity. The four key sources of instability in the coming decade will be: Pakistan-India, China-Taiwan, the Koreas, and Indonesia.

On the individual or subnational level:

We note that much of the predicted energy growth will depend on individual consumption and usage patterns connected to appliances, electronics, and car transportation. Moreover, the choice to fuel all that electricity demand is often a by-product of economic times, with gas being an easier choice when times are good and coal a last resort when times are hard.
Finally, workshop participants, while disagreeing on the extent to which green movements would arise in Asia over the coming decades, all agreed that environmental damage (especially health-related concerns from poor air quality) would prove to be an important constraint on many countries’s energy ambitions—unless greater attention was paid to this collective good.

Having enunciated our sense of the rule sets connected with Asian energy developments, we now offer two competing decalogues: one that expresses the positive pathway of achievement according to the new rules (Find Way), and one that expresses a potentially vicious circle of failure (Lose Way).

How Asia achieves its ambitious energy development plans by 2020:

The starting-point proposition is that the world possesses more than enough resources to accommodate Asia’s energy growth requirements. There is enough coal, oil and gas to make all those projections come true, and they all exist in sufficient amounts right on the Eurasian continent. So it’s not the resources themselves that are in doubt here, just the economic and political transactions required to move them from A to B.
Along those lines, so long as the markets work, the resources will flow, but the markets require a certain amount of stability—a sense that economic relationships will pay off over the long haul.
The biggest input to stability is continued economic growth across the Asian market. Populations have been placed on steep consumption trajectories, and expectations of "better days ahead" have been widely instilled. So long as things progress, no matter how slowly, stability is likely to remain.
The energy resources are the key to future growth patterns. The only energy Asia has in abundance is coal, whereas oil and gas must come largely from out of region to accommodate future growth requirements.
The movement of all this energy into the region will require great infrastructure development, especially as the region shifts ahead to greater natural gas use.
All that infrastructure development will necessitate large amounts of foreign direct investment—of the long-term variety.
That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
That general transparency stems first and foremost from an overarching sense of security across the region. When countries feel threatened, they necessarily become more opaque to the world at large, erecting more firewalls between themselves and the outside they fear.
Because serious rivalries still exist across the region, and because multilateral security arrangements are non-existent compared to Europe, the region’s closest thing to a Leviathan is the bilateral security relationships most major players currently possess with the U.S.
If you remove the U.S. military from Asia, you negate the U.S.’s ability to play Leviathan, and thus threaten the underlying security upon which all this development ultimately depends. Right now the U.S. provides the lion’s share of the collective good of Asian security. It is, in many ways, our main export to the region.

How Asia fails to achieve its ambitious energy development plans by 2020:

The starting-point proposition is that the current global security system is based on universal adherence to—or at least deference to—a single global economic rule set. For most of the last century, the world was divided into two competing rule sets, but that basically ended with the fall of the Soviet Bloc. Now, only a single rule set remains (capitalism), although philosophical struggles remain about the Anglo-Saxon model of capitalism.
The single global rule set ends if Asia becomes truly insecure—either internally (state on state) or externally (region versus outside world). If Asia’s regional security collapses, the global rule set collapses along with it, for once Asia’s development path is seen as unique, then markets will work one way in Asia and another way elsewhere in the world.
The internal stability of the region’s major states (and key neighbors) is essential to the security of the region as a whole. Six major players—in addition to the U.S.—seek spheres of influence along largely overlapping definitions of national interest (Russia, China, Japan, India, Indonesia, Australia). Instability in a major regional power therefore invites the perception of vacuum, upsetting the region’s sense of a balance of power.
Increased consumption is a key component of the internal stability of states across Asia.
Energy growth is required to fuel this consumption growth, defined increasingly by ballooning demands for electricity and transportation requirements. Most of this new energy demand will have to be met with outside resources.
The movement of all this energy into the region will require great infrastructure development.
All that infrastructure development will necessitate large amounts of long-term FDI.
That money will not flow in sufficient amounts unless Western financial institutions see sufficient transparency, accountability, and rule of law.
That level of reform is unlikely to occur in Asia without a serious pain trigger in the form of an economic downturn of major proportions or a broad financial panic that crumbles years of economic advance. So long as countries can muddle through without real reform, they will.
If such an immense pain trigger were to occur, the shock to Asia’s body politic could be profound enough to call into question it’s ability to adhere to the concept of a global rule set. In short, major portions of the regional economy could—in effect—drop out of the rule set for indeterminate lengths of time—a sort of firewall capitalism. At that point, all bets would be off regarding the West’s willingness to finance Asian energy developments.

We now turn to the Scenario Dynamics Grid, which is our "black box" model of sorts. Here we seek to arrange, in a systematic fashion, those broad scenario elements that we think—in aggregate—offer us the majority of the explanatory power we need to analyze how this huge process of change unfolds over the coming decades.

The scenario elements we cite here are obviously not the only ones in play, and we don’t pretend that this 3X6 matrix encompasses the universe of change that will be Asian energy from here to 2020. Rather, we choose to focus on these 18 scenario elements because we think it’s important to tackle the subject with both vertical depth (i.e., drilling down through Waltz’s three levels) and horizontal breadth (i.e., our six global "lenses" of economics, politics, technology, culture, environment, and security*).

These 18 scenario elements are, so to speak, signposts directing us to where the change connected with Asian energy developments is most likely to be concentrated—in terms of causality. Naturally, the more we research the subject, the better our signposts become in terms of clarity, but for now, these are the best 18 scenario elements we can identify.

The scenario dynamics grid as a whole should be viewed as a sort of smorgasbord: we think all of these elements are potentially in play for all of the countries in question, but obviously each country’s path will be a selection of sorts from the larger menu of possibilities. As such the grid is purposely defined in a rather generic fashion, so as not to concentrate too much explanatory power on just one country to the detriment of others.

* The six global "lenses" roughly correspond to Thomas Friedman’s notion of "six-dimensional" thinking about globalization, as expressed in his The Lexus and the Olive Tree: Understanding Globalization (New York: Farrar Straus Giroux, 1999), see the chapter, "Tourist With an Attitude," pp. 3-24.

ECONOMICS

Beginning with the economic lens and focusing first on its nexus with the international system, we note that foreign direct investment is the preeminent scenario element for Asia’s energy future. To the extent the region seeks to move off coal (the past) and into natural gas (the future), FDI will be the most important constraining and enabling factor provided by the global economy. To the extent it flows, we see a virtuous circle whereby greater transparency yields greater FDI, which yields more energy infrastructure, which yields greater economic interdependency with the outside world, which yields even more transparency, and so on and so forth. In short, Asia can seek economic autonomy from the global economy only by remaining in the past (coal).

At the level of the nation state, we note the all important question of what sort of energy elasticity the countries exhibit as they seek to roughly double their energy consumption over the coming generation. As a rule of thumb, an underdeveloped country grows one percent of GDP at a "cost" of one-plus percent of increased energy consumption, a developing country exhibits an elasticity of roughly 1:1, and a developed economy 1:<1. The question of Asia’s’ actual elasticity is a tough one because the official statistics of one of the region’s largest economies, China, leave many experts feeling quite skeptical (i.e. China claims the elasticity of a developed economy, but most Western experts believe it’s far closer to 1:1 or worse). The elasticity question is huge because any slight movement up or down that scale significantly alters the region’s overall energy demand. It also signals the extent to which the region is graduating from extensive to intensive economic growth.

Finally, at the individual level, we note urbanization rates. Asia as a whole is rapidly urbanizing, and this is important on two levels with regard to energy. First, concentration of population increases the need for energy infrastructure (e.g., gas pipelines, electrical grids). Second, urbanization actually leads to less overall energy consumption due to the economies of scale.

POLITICS

Turning to politics and focusing first on its nexus with the international system, we note the World Trade Organization and its future potential impact on how Asia interacts with the outside world. Does Asia adhere ever more to the notion of a single global rule set? Accepting the concepts of accountability, transparency and rule of law that that adherence represents? Or does the WTO become a political battle ground pitting the Anglo-Saxon model against the "Asian values" model, or a capitalism "with Chinese characteristics?" A lot depends on whether or not the WTO is viewed by the world as an imposition of Western values (like many view the IMF), or a venue through which the broad forces of globalization (often viewed as "Americanization") and localization can reach compromises.

On the level of the nation-state, we cite the dynamic of pipelines as a measure of genuine acceptance of cross-border interdependency. It’s one thing to buy LNG on the spot market and ship it to your ports, but it’s a far different thing to commit to a permanent pipeline and the bilateral market relationship it entails. It is our simple proposition that "good pipelines make good neighbors." We think this has been proven in East Central Europe over the 1990s, and we think it can be proven yet again in Asia in the next decade.

Finally, at the level of the individual, we focus on the emergence of local green movements and the redefinition of environmental issues as a public good worthy of great political attention. We frankly scoff at the notion that such movements are not "the Asian way of doing things," for we heard similar notions about Russians, for example, under Soviet rule, only to see environmental groups spring up with a vengeance once they were given the political freedom to make their voices heard. In short, we expect Greens to become a potent political force in Asia over the next generation, as is already being seen—in embryonic fashion—in Japan on the issue of nuclear power.*

* For a good example of this sort of grass roots environmentalism, see Elisabeth Rosenthal, "Pollution Victims Start to Fight Back in China," The New York Times, 16 May 2000, p. A1.

TECHNOLOGY

Turning to technology and focusing first on its nexus with the international system, we note the extractive capacity of the global energy market, meaning our collective capability to keep finding and exploiting—at bearable cost—new supplies of oil and natural gas. Pessimists have long predicted the "end of cheap oil" (or even the end of oil, period), only to be proven wrong decade after decade. So long as these Cassandras continue to be proven wrong, we stick to our essential assumption that more than enough gas, oil and coal exists to fuel Asia’s growth over the coming generation. In fact, the wild cards here tend not to be about future shortages, but the possibility of future abundances, as in the case of methane hydrates, which some experts think will eventually dwarf natural gas reserves once a cost-effective method is found for extracting these reserves from the sea bed.

Dropping down to the nation-state level, we cite the importance of a government’s choice in public work projects, such as China’s Three Gorges Dam or Japan’s recent scaling back of plans for future nuclear plant construction. By these choices, governments not only stimulate research and development into particular technologies, but they also reduce the likelihood of other options simply by the fiscal "space" they occupy (e.g., what else could China have done in terms of exploring renewable resources if they hadn’t spent so much money on Three Gorges?). In short, while hardly encompassing the breadth of the market potential for energy development, government choices on energy infrastructure investment generate a strong legacy effect.

Finally, on the individual level, we note the importance of transportation patterns, or more specifically, the choices involved in adopting a car culture. For example, with its low per capita motorization level, it’s possible that Asia could: (a) follow America’s "power car" culture, (b) leap over that to a hybrid culture that deemphasizes all-combustion engines, or (c) focus on mass transit.

CULTURE

Turning to culture and focusing first on its nexus with the international system, we highlight the potential for Kulturkampf along the lines suggested by Samuel Huntington in The Clash of Civilizations and the Remaking of World Order (New York: Simon & Schuster, 1996). This is not to say that we predict great power conflict as a result of Asian energy trends. Rather, we think it’s important to realize how Asia’s growing energy needs can only draw closer together the two civilizations of the world which are the least Western and, conversely, most resistant to the homogenizing process of globalization (seen in the oft-heard question, "Does globalization mean we all have to become Americans?"*). Does this necessarily mean more global conflict? No. Does it complicate the process of globalization? We say yes.

Dropping to the nation-state level, we focus on the culture of a country’s leadership. How do leaders view the energy:security paradigm? Do they, like the U.S. in the 1970s, feel they need to "own the barrel?" Or have they "matured," if we can be so bold to say, to the point where they, like the U.S. in the 1990s, understand that "it’s the price, stupid!" In short, do they still view energy security primarily in terms of bilateral strategic relationships designed to secure access, or do they trust the global markets to always deliver the goods, albeit at a fluctuating price? Is risk defined as disruption or high cost? Much depends on the outlook of the leadership in question. For example, a China led by Li Peng favors the classic security perspective, while a China led by Zhu Rongji clearly belongs to the market school of thought.

Finally, on the individual level we cite the importance of demographic pressures in determining energy futures. With China and India, you’re already talking about the bulk of the world’s future population growth, so small changes in these trajectories have huge implications for the planet as a whole.

* Thomas Friedman quotes a Cairo professor asking this in his article, "One Country, Two Worlds: Egypt Between Nile and Net," The New York Times, 28 January 2000, p. A27.

ENVIRONMENT

Turning to the environment and focusing first on its nexus with the international system, we zero in on global warming and the more specific subject of greenhouse gases. The Kyoto Climate Change Protocol on Greenhouse Gas Emissions, while still not ratified by any of the industrialized, "Annex I" states, does put in place a CO2 trading regime that could have profound implications for the future of global environmental regulation. If it succeeds in fostering a fluid and transparent market for carbon credit trading under a solid global ceiling, then global warming’s potential for generating inter-state tensions may be greatly obviated. More importantly to Asia, the success of such a regime would point to a future of market-based regimes for limiting CO2 emissions, a global subject-area that will inevitably target such coal-intensive emerging economies as China, India, and Indonesia.

Descending to the nation-state level, we note the issue area of acid rain, which is intimately connected to rising demand for electricity and the tendency of most states in the region to fuel such plants with coal. For example, coal-fired electricity plants in northwest China generate substantial amounts of acid rain for Japan’s northern forests. By choosing to rely so heavily on coal, China only "converts energy insecurity into environmental insecurity," in the words of workshop participant Dennis Eklof.* Eventually, this environmental insecurity provides additional inter-state pressure to shift into heavier dependence on natural gas.

Finally, on the individual level, we cite the obvious health issues connected to the region’s relatively heavy reliance on coal, not only for electricity generation but also for cooking.** In combination with high smoking rates, Asia is staring at a huge health care bill over the coming generation.

* See Eklof et. al, "Fueling Asia’s Recovery," p. 41.

** According to a recent study published in the Proceedings of the National Academy of Sciences, 800 million of China’s 1.2 billion people use coal in their homes. Cited by the Associated Press, "Study: Coal Fumes Poisoning Chinese," The New York Times on the Web, 30 March 1999, <http://www.nytimes.com/aponline/I/AP-Coal-Poisoning.html>.

SECURITY

Turning to security and focusing first on its nexus with the international system, we cite the growing network connectivity between East Asia and Southwest Asia, meaning first and foremost the far heavier use of sealines of communication to move all that oil and—increasingly—all that natural gas by tankers. With regard to the SLOCs of Southeast Asia, there are predictions of a rough tripling or more of ship traffic through the various straits, all of which are straddled by an Indonesia now wracked with fragmenting civil strife. These waters also feature some of the highest frequency of piracy seen in the world today, not to mention significant naval build-ups by two of the largest powers—India and China. In short, the region's maritime system is undergoing significant stress at this time, only to be assured of even greater amounts given the region’s burgeoning requirements for Middle East energy exports.

Dropping to the nation-state level, we focus on the long-standing issue of overlapping territorial claims in the South China Sea. Although many-sided maritime disputes exist throughout the region (e.g., from the Arafura Sea between Indonesia and Australia all the way up to the Northern Sea of Japan bordering Russia), the South China Sea dispute, centering on the Spratly Islands, receives by far the most international attention due to the confluence of hydrocarbons and sea-lane defense. Military forces from Vietnam, China, Taiwan, the Philippines, and Malaysia currently "occupy" various portions of this island chain, and minor military skirmishes have occurred over the past two decades.* But the bottom line remains: no serious exploitation of the area’s oil reserves will occur without multilateral resolution of the dispute.

Finally, on the individual level, we note the general lack of significant strategic energy reserves across the region. Japan is the most notable exception, and China has recently made moves in this direction. We place this issue on the subnational level because this is where the impact is most acutely felt during times of disruption.

* See Mark J. Valencia, "Energy and Insecurity in Asia," Survival, Autumn 1997, pp. 85-106.

Next section Report index