Fueling Asia's Recovery

Daniel Yergin, Dennis Eklof, and Jefferson Edwards

From Foreign Affairs, March/April 1998

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Summary:  The immediate effect of Asia's crisis will be an oil shock, but in the longer term, Asia's energy needs will be the problem. Asia's energy demand will be more than nine million barrels of oil per day higher in 2010 than it was in 1996-a difference greater than the entire current output of Saudi Arabia. But market integration and cooperation will prevent conflict as countries work together to utilize Central and Southeast Asian natural gas reserves. China, for one, has already reached agreements to develop oil fields in Kazakstan and build a massive pipeline to its Xinjiang province. The South China Sea will remain a concern, but the current crisis will help nations move toward the market and away from state control of energy.

Daniel Yergin is president of Cambridge Energy Research Associates. He is coauthor with Joseph Stanislaw of The Commanding Heights: The Battle between Government and the Marketplace That Is Remaking the Modern World and author of The Prize: The Epic Quest for Oil, Money, and Power, for which he received the Pulitzer Prize in 1992. Dennis Eklof is Senior Director and Jefferson Edwards is an Associate of CERA's Asia-Pacific Energy Research Service.

WILL ENERGY SPOIL IT?

The financial contagion sweeping through Asia is forcing a reassessment of the continent's future, including assumptions about energy-the lifeblood of economics and a critical factor in the geopolitics of the region. In recent decades, Asia's rapid economic growth has meant even more rapid increases in the consumption of energy. A failure to satisfy its enormous needs, it was thought, would undermine the Asian economic miracle. But now that miracle is on hold, further complicating the already tangled interaction between energy, economics, and politics. While the recent economic downturn may alleviate some of these demand pressures for now, an inability to satisfy Asia's hunger for energy over the longer term will raise new risks and even dangers. But the solution to its potential energy insecurity is not simply a matter of applying the traditional government-based solutions-resource management and diplomacy. This problem can only be solved by accelerating the trend toward market-based energy strategies.

Supplying energy to Asia has never been a simple task. Indeed, the phenomenal economic growth most East and Southeast Asian countries experienced over the recent decades has been doubly miraculous since it occurred despite severely limited energy resources in some of the fastest-growing economies. Japan, South Korea, Taiwan, and Hong Kong all built powerful, dynamic economies without much domestic oil or natural gas. Though some countries in Asia-Indonesia and China, for example-blessed with an abundance of natural resources, have thus far avoided dependence on foreign energy supplies, in the coming years virtually all Asian countries will become net importers of oil. In fact, in 1993 China moved from being a net exporter of oil to a net importer, representing a fundamental change in Asia's energy balance. Even if the current economic crisis reduces growth in Asia's oil demand to just one percent in each of the next three years, compared with an average 5.2 percent from 1990 to 1995, demand would still be 9 million barrels of oil per day higher in 2010 than in 1996-an increase greater than the entire current output of Saudi Arabia. Demand for electric power-supported by rural electrification programs, increasing urbanization, and the rapid growth of the independent power industry in the past decade-will more than double by 2010, despite the current crisis.

The crisis has two immediate consequences for energy in Asia. The first is an oil price shock for the affected countries similar to that which the world experienced in the 1970s. The rapid devaluation of Asian currencies means that for some countries the dollar price of oil imports is two or three times higher than it was a year ago. These price increases have already become a lightning rod for protest in countries whose politics and underlying social contracts are now so unsettled. In the Philippines and Indonesia, in particular, fuel price hikes have led to social unrest in recent months. The second consequence is that growth in energy demand will slow temporarily, taking the pressure off the supply system, and in the process undermining ...

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