Xi Jinping in His Own Words
What China’s Leader Wants—and How to Stop Him From Getting It
With the economies European Union and United States flagging, emerging nations are now the primary drivers of incremental global economic growth. As they have started to boom, world energy demand has increased. In 2011, the International Energy Agency (IEA) estimated that demand would climb by an astounding one-third by 2035, with China, India, and other Asian countries accounting for two-thirds of the rise.
Asian demand (even if it starts to slow) is turning the world's old energy paradigm on its head. The IEA model, which was established as a reaction to the 1973-74 energy crisis, focused on getting sufficient petroleum supplies to developed economies. But that approach is no longer adequate. Whereas developed countries are seeking to reduce petroleum imports through increased domestic energy production and improved efficiency, Asian economies are importing more. In fact, by 2020, China will become the world's largest petroleum importer.
In the meantime, rising political instability in the Middle East and North Africa -- home to an estimated 60 percent of global extractable oil deposits -- is hampering exploration and production. Production could be further endangered if tensions with Iran lead to shipping disruptions in the Strait of Hormuz, through which nearly 20 percent of the world's oil travels. Discrete, random events could quickly shift the global balance of oil from surplus (with weak prices that discourage the development of additional capacity) to scarcity (with unanticipated price increases that constrain growth and upset global economic activity). The era of inexpensive, stable oil and petroleum supplies, fueling ever-increasing global prosperity, is at an end.
As the world's energy paradigm shifts, nations are increasingly looking toward electrification as a means to minimize oil dependency. Countries can generate electricity from natural gas, nuclear, coal, and renewable sources as well as from petroleum.
Analysts believe that natural gas in particular will be a game-changer in the shift toward electrification. Increasingly sophisticated drilling technologies are providing access to natural gas reserves that were previously economically infeasible to tap. On average, natural gas is also 40 percent less carbon-dioxide intensive than coal and 25 percent less than oil. This makes it the "cleanest" fossil fuel. Investors with extensive natural gas reserves, especially those in the United States and Russia, seek to expand its use. Although environmental concerns about drilling must still be addressed, natural gas could serve as a bridge for countries seeking to reduce their dependence on oil before cleaner renewable energy becomes more viable.
The abundance and relative affordability of natural gas has made it an appealing option for Asian economies. In 2010, Asia accounted for 61 percent of the world's liquid natural gas (LNG) imports, with Japan and South Korea contributing the largest share. China, meanwhile, intends to increase domestic natural gas production while securing access to reserves in neighboring countries such as Myanmar (also called Burma). Although natural gas holds substantial promise, it should not be viewed as a panacea. A diversified energy portfolio is still necessary for energy security.
To realize the full potential of electrification, Northeast Asian economies must develop a comprehensive integrated energy infrastructure, which would help mitigate supply chain disruptions, improve the reliability of energy supply, and lower production costs. Meanwhile, the complementary development of a transnational energy policy will enhance regional economic cooperation and strengthen energy security.
For its part, the European Union enhanced its own collective energy security through policy reforms in 2007. The changes helped to liberalize EU members' electricity market, coordinate regulation, and improve system operation. One program, the Trans-European Networks, aims to ensure greater energy security by improving the transportation of electricity and gas across the continent. Another, the European "20-20-20" goals, seeks to increase energy efficiency by 20 percent, reduce CO2 emissions by 20 percent, and achieve 20 percent use of renewables by 2020. To meet these targets, European nations are moving to reconfigure their electricity grid to allow the advanced metering necessary to realize greater efficiencies and the use of emerging renewable technologies.
Before the 2011 earthquake, tsunami, and nuclear accident, Japan had a diversified energy policy: It stockpiled petroleum and encouraged the use of nuclear power, renewables, coal, and natural gas. It also passed policies to increase energy efficiency. The Fukushima incident, however, highlighted the need for reforms. For example, power shortages emphasized the weaknesses of Japan's power grid, which is not only unconnected with neighboring countries but is not even integrated within the country itself. Eastern and western Japan use different frequencies, so utility companies were unable to alleviate electrical shortages and system failures in one region by transmitting power from others.
Before the earthquake, nuclear power met about 30 percent of Japan's electricity needs. The country was planning to increase that to 50 percent by 2030. Now, four of Japan's 54 commercial reactors have been decommissioned; 48 of the remaining 50 sit idle. Although Tokyo believes that nuclear power might still provide some 15 percent of Japanese electricity by 2030, many Japanese oppose restarting any reactors. Meanwhile, imports of LNG, crude oil, and heavy oil have all risen substantially. A recent Deutsche Bank report calculated that Japan's power generation costs in February were $1.9 billion higher than during a typical month before the nuclear plants went offline. If nuclear power is not restored, Japan will need to import $40-$50 billion worth of additional oil and gas supplies each year. This would wipe out half of the country's current account surplus.
Japan should start creating a safer future for nuclear power in Japan and other countries. Best practices from the Fukushima recovery should be institutionalized. For example, a parliamentary investigation commission recently concluded that the accident was caused by human error and a "myth of safety" and could have been avoided. A key lesson should be to think about the unthinkable and implement a truly comprehensive "defense in deep" strategy. Safer nuclear energy could remain a component of Japan's electricity supply for some time to come, although total global reliance on nuclear power is likely to decrease significantly in coming decades because there are few real alternatives.
Currently, more than 75 percent of the revenue Russia receives from fossil fuel exports comes from Europe. However, the nation's determination to "look east" to Asian markets promises to shift this emphasis in the near future. Russia's leading gas producer, Gazprom, and Japan's Far East Gas Company, for example, have already begun developing a $7 billion LNG plant and a gas chemical complex in Vladivostok, which will open in 2016. A 500-mile pipeline extension from Vladivostok to the Japanese city Niigata might also be considered. These pipelines would not only provide Japan more affordable access to natural gas and boost Gazprom exports; they would also enhance future economic cooperation.
The planned Russian-South Korean pipeline through North Korea offers a similar opportunity to ease political conflict in the region. Additionally, although oil pipelines between Russia and China have already been opened, new gas pipelines would be beneficial. These and other potential trade deals would solidify economic cooperation in Northeast Asia and build a foundation for further integration.
Over time, an Asian super grid connecting the Association of Southeast Asian Nations (ASEAN) with India, China, Taiwan, Mongolia, South Korea, Japan, and Russia might become feasible. A concept originally pioneered in 2011 by Masayoshi Son, the founder of SoftBank Mobile, a super grid is a huge energy platform that can utilize a diversified basket of renewable and traditional energy sources. It would allow countries to maximize efficiencies by trading in electrical capacity and renewable energy sources such as wind and solar across national borders.
To develop a super grid and other projects, substantive discussions must begin immediately. Private-sector companies should play a central role, because they are key actors in developing partnerships and transnational energy cooperation. At the recent Japanese-Russian Far East Forum, which took place in Vladivostok in early May, parties discussed gas pipelines and grid connections. Several Russian academics even proposed creating a Northeast Asian energy security forum.
The Asia-Pacific Economic Cooperation Summit of 2012, which will be held in Vladivostok this September, provides an ideal forum to discuss these issues further and begin involving other nations and private-sector entities with an interest in the region. At the 2011 APEC summit, Russian officials recommended energy as a primary initiative for discussion at next year's meeting. Pursuing this agenda can begin the cooperation needed to ensure Asia has access to the energy it needs to drive economic growth and stability far into the future.
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