1. Current Status and Issues Surrounding Energy in East Asia
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Chapter 4 Issues and challenges for Japan’s external economic policy This chapter outlines the importance of Japan’s involvement in the issues of East Asia and the concrete orientation of Japan’s multi-tiered external economic policy from the perspective of promoting even closer economic relations between Japan and East Asia and utilizing East Asia’s dynamism for the revitalization of Japan’s economy. Section 1 Measures for the issues of East Asia <Key Points> 1. Current status and issues surrounding energy in East Asia While international energy security has improved on the whole, with the growing diversification of supply sources on a global level, there is an increasing energy demand and dependence on external sources of energy in the East Asian region. This tendency will be exacerbated with future economic growth and there are concerns about the expansion of the impact in the case of risk emergence. In addition, due to the rapid economic growth in the East Asian region in recent years, there has been a tendency towards increased energy-related CO2 emissions in the region. In the future, it will be necessary to heighten energy security in East Asia at the same time as properly considering the issue of global warming. In order to control the increasing demand for energy in the East Asian region and also the increased dependence on external sources, and thus to reduce risk, it will first be necessary to ensure the effective use of resources such as natural gas and coal that exist within the region and to improve the efficacy in using energy. However, with economic growth comes an increased demand for petroleum and there is no escaping the fact that the major portion of this supply is dependent on the Middle East. Given such circumstances, in order to ensure energy security in the East Asian region, multilateral frameworks such as ASEAN+3 and bilateral frameworks should be utilized, and Japan will have to make further efforts in the future towards use of regional energy resources, improvement of energy use and efficiency, sharing of recognition concerning emergency response measures, and the implementation of cooperation projects. 2. Stabilization of the currency and financial systems The stability of currency and financial systems is important in the current environment in which trade and investment aspects in the East Asian region are advancing and accelerating closer together. In a situation in which the currency and financial system is unstable, there is a possibility that this could lead to a downturn in companies’ global activities due to increased foreign exchange risks and that this could hinder the dynamism of East Asia. With regard to this point the Asian currency and economic crises that broke out in 1997 are still fresh in the mind. In the countries that were embroiled in the Asian currency and economic crises, given that long-term domestic credit was financed by short-term foreign - 275 - funds (a double mismatch), once a flight of short-term funds began rapidly due to the bursting of the bubble, this caused a serious credit crunch on the balance sheets of banks and companies. International efforts have been made based on the recognition of the factors that caused the Asian currency and economic crises, and determination that such an event would never occur again. Examples of such efforts are the Announcement of the New Initiative to Overcome the Asian Currency Crisis (New Miyazawa Initiative), and the Chiang Mai Initiative. However, many doubts remain concerning the status of the growth of the capital markets and the ability to provide long-term funds in the countries and regions of East Asia. Given this situation, in order to secure growth of capital markets in greater Asia and the provision of long-term funds, efforts are being promoted under the Asian Bond Market Initiative. This initiative incorporates several measures such as the promotion of market participation by multiple issuers, promotion of issuance of various bonds, including the basket currency bond, and the development of a market-nurturing environment. 1. Current status and issues surrounding energy in East Asia 1 (1) Situation surrounding the energy in East Asia (a) Rising demand and increasing dependence on the Middle East With the growing diversification of supply sources on a global level, the international energy security has improved on the whole, compared to the 1970s. Furthermore, since the mid-1980s, the international oil market has been gradually taking over the power to decide crude oil prices from the Organization of Petroleum Exporting Countries (OPEC). The development of the international oil market spread the awareness that, as long as it is functioning, it is possible to procure petroleum through the market by paying an appropriate price. Thus, the international market has had the effect of further improving the energy security on a global level. Against this backdrop, it should be noted that there is an increasing energy demand and dependence on external sources of energy in the East Asian region. It is likely that the energy demand in East Asia, which serves Japan as a route for transportation of petroleum and a source of natural gas, will increase faster than in other regions. The share of the entire Asian region in the global energy demand increased from 14 percent in 1973 to 28 percent in 2000 and is expected to become 32 percent in 20202, and it is possible that the dependence on external sources for petroleum and other fuels will also increase. Particularly in China, which accounts for one-third of the petroleum demand of the Asian region, there is a movement to suppress coal consumption because of environmental restrictions and the imports of crude oil are increasing rapidly. If such trends accelerate, the dependence on external sources of energy in the East Asian region may increase even further. 1 The entire subsection is based on data from the Ministry of International Trade and Industry (1999a). 2 International Energy Agency (IEA) (2002b). - 276 - (b) Energy security-related issues in East Asia Despite the increasing energy demand and dependence on external sources of energy, the East Asian region does not yet have a fully developed emergency response system, such as provision of an oil stockpile to meet the demand for petroleum in an event of a reduction of supply. The energy demand structure in East Asia and other Asian regions has become increasingly vulnerable, and there are concerns about the expansion of the impact in the case of risk emergence. Looking at the international political situation, various destabilizing factors, such as territorial disputes, political turmoil and weapons of mass destruction issues, have latently piled up and pose an ever-increasing threat to the smooth transportation of petroleum. Particularly close attention should be paid to the changes in the international political situation in the Middle East, a region on which East Asia’s dependence for energy sources—especially oil—is expected to increase even further. Various mid- to long-term destabilizing factors, such as increased unemployment due to the increasing number of young people, concerns over a setback in the Middle East Peace Process and the issue of weapons of mass destruction, have accumulated in the Middle East region, which plays a major role in the global supplies of petroleum. In this and other regions there still exists a possibility for risk emergence, such as reduction of supplies, though the forms of potential risk have changed since the oil crisis. A fresh example of such developments is the suspension of the supplies of natural gas to Japan that took place following the deterioration of the security situation in the Special Territory of Aceh in Indonesia. Another risk scenario, albeit not one that is likely to have a serious impact, is a disruption of transportation of petroleum in a choke point such as South-East Asia, which may lead to stringent demand of tankers and shortage of chartered ships. These are some of the factors that can destabilize the oil supply, and if they do emerge and a panic situation occurs against the backdrop of the insufficient oil stockpile system, it could impact Japan through disrupted oil supply and increase in prices. In most cases of envisioned emergence of risks, the matter of securing enough quantity can be addressed through building of an oil stockpile, but, in terms of prices, it is fully conceivable that the emergence of risks will have an impact on the global economy. That is why attention must be paid to the global expansion of a new risk in the form of increased volatility of crude oil prices3. Behind this increasing volatility of crude oil prices are structural changes such as the curtailment of surplus producing capacity of oil producing countries, as well as the decrease in the refining capacity and inventory days of European and American consuming countries, all of which work as buffers against variable supply and demand. Also, if a reduction of supply occurs in an oil producing country with a large crude oil surplus production capacity, it might have a strong impact not only in terms of prices, but also in terms of quantity. (c) Economic growth and CO2 Global warming is an issue that must be tackled by all of humankind. More than 60 percent of the 3 The West Texas Intermediate (WTI) future crude oil prices rose four times between the end of 1998 and 2000, reaching a peak level of US$37.80 per barrel. - 277 - global greenhouse gas emissions are energy-related CO2 emissions4. This clearly indicates that the global warming issue and the energy issues are inseparable. Furthermore, as greenhouse gas emissions—mainly energy-related CO2 emissions—increase in line with economic development, the rapid economic growth in the Asian region and particularly in China, the Republic of Korea (ROK) and the countries of the Association of South-East Asian Nations (ASEAN) is aggravating the problems of global warming and energy.