The following five slides summarize the decision event report we published concerning our first workshop in the series, Asian Energy Futures. This report is found online at <www.nwc.navy.mil/newrulesets/AEFreport.htm>.

The following individuals participated in this workshop:

• Dr. David Baldwin, Columbia University
• Mr. Jim Bishop, Caithness Energy
• Mr. Jim Caverly, Department of Energy
• VAdm. Arthur Cebrowski, USN, U.S. Naval War College
• Dr. Alberto Coll, Center for Naval Warfare Studies
• Capt. Dave Duffie, USN, Council on Foreign Relations
• Dr. Dennis Eklof, Cambridge Energy Research Associates
• Mr. Mike Feeley, Sino-American Development Corporation
• Adm. William Flanagan, USN (ret.), Cantor Fitzgerald
• Dr. Ellen Frost, Institute for International Economics/National Defense University
• Mr. Doug Gardner, eSpeed
• Dr. Philip Ginsberg, Cantor Fitzgerald
• Dr. David Gordon, National Intelligence Council
• Under Secretary of the Navy Jerry Hultin
• Dr. David Jhirad, Department of Energy
• Cdr. Mark Montgomery, USN, National Security Council
• Mr. Roy Nercesian, Poten Partners
• Dr. Minxin Pei, Carnegie Endowment for International Peace
• Mr. Robert Randolph, U. S. Agency for International Development
• Dr. Leif Rosenberger, U.S. Pacific Command
• Amb. Paul Taylor, Center for Naval Warfare Studies
• Dr. Katsuaki Terasawa, University of Mississippi
• Mr. Neal Wolkoff, New York Mercantile Exchange
• Mr. Lundy Wright, Morgan Stanley Dean Witter.

Asia as a whole currently uses about as much energy as the United States, or about 100 quadrillion Btu. By 2020, however, Asia will roughly double its energy consumption while U.S. consumption rises just over a quarter. Asia’s plus-ups are significant no matter what the energy category:

• Oil increases by roughly 88 percent
• Natural gas, 191 percent
• Coal, 97 percent
• Nuclear, 85 percent when Japan is included, but 178 percent when it is not
• Hydroelectric/renewable, 109 percent.

Of the hydrocarbons, Asia comes close to self-sufficiency only in coal. Natural gas is a far different story. This year Asia will use around 10 trillion cubic feet, with Japan, South Korea and Taiwan representing the lion’s share of consumption. These three already buy up virtually all of the region’s currently available methane. The trick is this: Asia’s demand for natural gas skyrockets to 25 trillion cubic feet by 2020, with the vast bulk of the increase occurring outside of that trio. So if those three countries already buy what’s available in-region, that means the rest of Asia will have to go elsewhere—namely, the former Soviet Union and the Middle East.

Asia currently burns about as much oil as the U.S., or roughly 20 million barrels/day (mbd). Since oil is mostly about transportation nowadays, and Asia’s looking at a quintupling of its car fleet by 2020, there is a huge swag placed on this projection. The Department of Energy’s latest forecast is roughly 36 mbd, but even that means Asia has a whole has to import an additional 12 mbd from out of region, or roughly double what it imports today from the Persian Gulf region.

We foresee a series of "rules of the road" emerging for Asia’s energy future.

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 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’ energy ambitions—unless greater attention was paid to this collective good.

The following Decalogue describes 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" 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.
• Moving all this energy into the region requires 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 in Asia without a serious pain trigger in the formof an economic downturn of major proportions or a broad financial panic that crumbles years of economic advance. So long as states 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.

Looking ahead to long-term outcomes, we generate a quartet of long-range scenarios, or landing paths. The X-Y axis is constructed of two questions:

• What is the balance of the overall energy content?

• High-carb diet = more weighted to coal and oil
• Low-carb diet = more weighted to natural gas and renewables.

• What is the balance of the overall decision-making mechanism?

• State-based strategies = more decision-making control is left to public entities
• Market-based strategies = more decision-making control is left to private entities

The four scenario titles (generated by our participants) are as follows:

• Pipe Dreams (Low-carb diet + Market-based strategies) reflected the participant’s strong skepticism about such a positive outcome combination. It also captured the consensus opinion that gas pipelines would signal movement in this direction. The skepticism stemmed from the participants’ sense that too much cultural change was needed (and too quickly) to achieve the transparency that would, in turn, trigger a sufficient FDI flow for this outcome to unfold.
• Air Today, Gone Tomorrow (High-carb diet + Market-based strategies) reflected the concern of many participants that an unfettered free-market approach would lead to a spoiling of the "commons"—most notably the air. In short, markets promote cost-cutting behavior and Asia’s path of least resistance here is coal-fired electricity.
• Gaz Kapital (Low-carb diet + State-based strategies) reflected the opinion of most participants that, in many instances, it’ll take a strong state to force the sort of monopolistic approach to infrastructure building that a gas-heavy future would require. So, in effect, participants cited this scenario quadrant as a possible transition stage prior to achieving the preferred Pipe Dreams outcome.
• Coal Day in Hell (High-carb diet + State-based strategies) reflected the pessimism most participants held concerning state-dominated economies with large domestic coal supplies. In effect, they believed the temptation to "burn your own" would be too great for power- consciousness bureaucracies to resist. Naturally, this was seen as the worst possible environmental outcome for states with limited political freedom, since no strong venues would exist to promote the public good.