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Energy Security Problem Shifts to Asia

Sunday 18 November 2012 by John V Mitchell, Associate Fellow, Energy, Environment and Resources
   

There is a heavy agenda for President Obama during his three day visit to Cambodia, Thailand and Burma. At the East Asia Summit he will join Asean leaders plus representatives from Russia, Japan and China, seeking common cause with his counterparts on issues affecting the balance of powers within Asia, as well as the United States' role there.

The question of Asian energy security should be high up the agenda.

President Obama will arrive with the assurance of a leader whose country is on its way towards the 'freedom from foreign oil' prioritized in his election night speech. The International Energy Agency recently came out to say that, 'In the New Policies Scenario... the United States becomes a net exporter of natural gas by 2020 and is almost self-sufficient in energy, in net terms, by 2035. North America emerges as a net oil exporter.'

This does not amount to US self-sufficiency in oil, as some headlines have claimed. Oil imports are supposed to be offset by exports of shale gas – a US success story – whilst the small print of the report shows US oil and gas imports continuing from Canada, whose production pushes North America as a whole into a net exporter.

Nevertheless, the worry that the US is dependent on Middle East energy is losing substance fast. 'Oil independence' may not be realistic – the 2012 forecasts of the US Department of Energy bring oil imports down from 50% to 22% of consumption only in the most favourable combination of scenarios – but the trend is clear. In Europe, too, the call on imports is not expected to increase. Middle East oil now flows west only for a few special situations, which are roughly balanced by Atlantic exports to Asia.

The net effect is that Asian markets will now absorb all the oil Middle Eastern exporters have available, and the effects of any disruption will fall on them. Their scramble for supplies will increase the price of oil worldwide, but will not lead to lines at gas stations in the US and Europe. This change poses policy questions both for the US and for Asian oil importers.

Some protection is offered against disruptions of supply to OECD countries by the Emergency Response Mechanism of the International Energy Agency, an OECD subsidiary, whose  stocks would compensate for disrupted supplies. Non-OECD countries have had a free ride on this protection so far.

The United States military and naval presence contributes to stability in the Middle East and protects oil shipping through the Straits of Hormuz. This oil now goes east, not west, and the US security of oil supply no longer depends on it. Under these circumstances, how far will the US go to defend sea lanes that mainly benefit Asian markets? In any case, some Asian countries – notably China–may not be happy to rely on the discretion of the US to protect their oil supplies.

Moreover, except for Japan and Korea, they are not participants in the OECD–IEA scheme for maintaining supplies during disruptions (though China and Korea hold the strategic stocks under government control). The US 'pivot to Asia' could include asking the big Asian importers to develop a regional scheme for managing supply disruptions, or to cooperate with the OECD scheme, as a quid pro quo for the US contribution to Asian oil security.

The US will suffer if the next disruption of oil supplies, falling on Asia, causes a storm in oil prices which will disrupt the world and US economies. Obama should bear this in mind as he considers the geostrategic implications of 'freedom from foreign oil'.

Also Read:

What Next for the Oil and Gas Industry?
Programme Report, John Mitchell with Valerie Marcel and Beth Mitchell, October 2012 

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Energy Security Problem Shifts to Asia
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Sunday 18 November 2012
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