The Geopolitics of Asia's Rising Oil and Gas Demand
Conclusions and Implications for the United States

The essays, discussions, and analysis from this year’s Energy Security Program offer a wide range of perspectives on Asia’s booming oil and gas demand, as well as on the effect of the region’s inevitably growing role in global energy geopolitics. The choices that Asian stakeholders make about how to manage their energy needs will have vital implications both for U.S. energy security and for broader U.S. strategic power and posture in the Middle East. Additionally, the essays and discussions cast new light on emerging and growing concerns about supply availability and pricing in the Asian markets for liquefied natural gas (LNG), particularly in the wake of Japan’s nuclear energy crisis and the “shale gale” of booming natural gas production in the United States.

At the center of the 2012 research program are the changing geographic patterns in oil and gas demand and the implications for U.S. and Asian engagement in the Middle East. A key component of U.S. interests in the Middle East—and in particular, the U.S. commitment to the maintenance of a post–World War II “Pax Americana”—has centered on the country’s use of strategic power to ensure the access of Western industrial countries to Persian Gulf oil. Yet both North America’s and Europe’s need for Middle East oil is declining rapidly as U.S. oil production rises with the deployment of new technologies, other Western Hemisphere producers boost their output and exports, and Russia grows as a supplier to Western Europe. In the place of the United States and the European Union, Asia is now overwhelmingly the predominant buyer of Persian Gulf oil, driven by strong demand growth from China and India. Consequently, one of the foundations of U.S. interests in the gulf is weakening as global oil flows shift dramatically toward Asia.

Ultimately, do these shifts suggest fundamental changes in the United States’ commitment to the Middle East? Program discussions generated more questions than answers. Central to this debate are issues that go beyond the scope of energy geopolitics and that concern the extent to which the United States is willing and able to continue an overarching strategic commitment in light of deepening fiscal woes, a war-weary public, and broader rebalancing toward the Asia-Pacific. However, as John V. Mitchell and others aptly highlighted, even if the United States does not directly receive any oil from the Middle East, the stability of global oil markets remains in the vital interest of the United States. Today’s oil markets are deeply integrated, and any disruption of Middle East supplies would severely undermine world and U.S. economic growth. Yet no Asian state has demonstrated the strategic power or inclination to exercise a stronger role in ensuring the stability of the Middle East or the reliable flow of gulf oil to world markets. As the world’s sole strategic superpower, the United States remains the dominant power in the Persian Gulf.

Yet continued U.S. commitment to the Middle East should not obscure the enormous tectonic shifts that are underway in the geopolitics of oil and gas. The workshop discussion of Iran sanctions demonstrated how the growing role of the Asian states as huge buyers of oil from the Persian Gulf is already beginning to complicate efforts by the United States to achieve key diplomatic and strategic goals. Washington has expended enormous diplomatic capital to pressure Asian states to collaborate on oil sanctions. As of July 2012, India has yet to convincingly reduce imports, and China maintains that it is already meeting international obligations and that a case has not been made for further sanctions, as described by Zha Daojiong. And while Japan and South Korea have enacted additional sanctions, both previously imported a significant amount of their oil from Iran, which has created dilemmas as each strives to balance competing policy and economic interests. Japan, for example, cannot ignore that these cuts are occurring at a time when it already needs to compensate for enormous shortfalls in power generation from a downturn in its use of nuclear energy. In the context of broader U.S. strategic rebalancing, this issue raised questions for some specialists about whether the United States should be doing more to support its allies and partners on energy, and if there are complementary policies—on LNG exports from North America or in other collaborative fields—that may reduce insecurity and reinforce strategic partnerships. How these changes will evolve remains unclear. What is becoming clearer, though, is that the United States’ ability to shape strategic developments in the Middle East will increasingly depend on cooperation from Asian oil importers.

With this in mind, it is also important to emphasize the extent to which concern among some in Washington about Asian national oil companies (NOC) potentially locking up future oil supplies is likely misplaced. As Philip Andrews-Speed and other panelists argued, such a scenario is practically impossible in a huge, integrated global oil market where supplies are fungible and liquid, transportation of crude oil is cheap, and most internationally traded oil is sold through long-term contracts that are regularly renegotiated. The impulse in some Asian states to try to secure physical control over oil supplies is ultimately unlikely to make any real difference to their own domestic energy security. Supplies can still be disrupted in a war scenario by interdicting the sea lanes, blowing up pipelines, or the capricious actions of host governments. While deriving some political or other intangible benefits from their relationships with home governments, most Asian NOCs have behaved pretty much the same as the large international oil companies and sell their oil production to the closest and most profitable markets globally. Hence, concerns in Washington about the investments of Chinese NOCs in North America and elsewhere are based on a misunderstanding of how the global oil industry works. This finding is especially instructive at the present time, as some in Washington express fears over the acquisition of Nexen, a large Canadian oil company with significant production assets in the Gulf of Mexico, by the China National Offshore Oil Corporation (CNOOC). Chinese ownership of Canadian and U.S. oil production is highly unlikely to significantly alter oil supplies available to the United States, and may even ultimately mean more supplies rather than less. For the most part, these Chinese investments should be treated the same as energy investments from other countries unless there are clear links to Beijing’s wider strategic interests.

Finally, questions surrounding the market outlook for LNG in Asia are emerging as increasingly critical to the overall energy security of the region. A program paper and workshop discussion explored prospects for the Asian LNG market, new and growing energy security concerns about adequate LNG supplies over the next decade, and whether Asia’s excruciatingly high LNG prices can be reduced. Asia has been counting heavily on growing LNG supplies to provide cleaner-burning sources of electricity generation. But with a dramatic increase in demand from Japan and the continuation of oil-linked pricing, the near-term gas market in Asia is becoming prone to a severe supply-demand squeeze. Moreover, the demand shock has accentuated a severe rise in the region’s LNG prices driven by both the demand spike and the traditional LNG price link to rising oil prices. As demonstrated by Tomoko Hosoe, this pressure is advancing Asian interests not only in securing additional supplies but in diversifying supply sources beyond traditional hubs in the Middle East and the Asia-Pacific. Most of these projections anticipate that, as a result of the shale gas boom, new, lower-cost LNG supplies will reach Asia from the United States around 2016. However, this arrangement will require significant changes to existing U.S. export policies and infrastructure. Currently, the United States requires that countries not covered by a U.S. free trade agreement must receive explicit government approval for LNG exports—meaning that countries such as Japan would the U.S. side, there is growing political resistance to expanding gas exports among gas-consuming industries that want to keep domestic prices low. Significant investments would also need to be made in U.S. infrastructure to enable such exports, which will require greater clarity on export policies. Asian LNG importers, namely Japan, are hoping that Washington will largely let the market work to drive lower-cost LNG supplies to Asia in the future. But it is clear that U.S. politics will play an important role in potentially limiting new supplies for Asia.

In conclusion, shifting patterns of global oil and gas demand from west to east are presenting new challenges to the major Asian oil importers and fundamentally reshaping the traditional calculus of global energy geopolitics. China is reluctantly but inexorably being drawn into the gulf region as a new diplomatic player, while Japan, South Korea, and India also play significant roles on the global stage. The United States increasingly will need cooperation from the Asian powers to secure its traditional goals of stability and open sea lanes. Washington also needs to avoid getting distracted by misperceptions that Asia’s NOCs are undermining U.S. energy security. Additionally, LNG is now an important strategic and energy-security issue for the United States to address carefully. In all, this year’s program reinforces how important it is for the United States and Asian governments to work together to identify collaborative rather than competitive strategies to increase energy security.