Energy Restrictions and the Development of the Asian Economy

No.203
August 2004
Senior Fellow Reiji Takeishi

1. The Supply and Demand of Energy in AsiaEnergy consumption in Asian countries is in the middle of a steep ascent. In China, the leading country, the amount of electric power consumption grows at a rate of over 10 per cent each year, and as 90 per cent of their electric energy consumption is dependent upon coal, it has become a great concern whether the industry will be able to keep up with the increasing demand. Demand for petroleum products, mostly centered around the transportation industry, has also risen steeply. Finally, with Indonesia having become a net importer of oil, it will be impossible for Asian countries to avoid becoming more and more dependent upon importation from the Middle East.
2. Future Outlook on Supply and Demand of Energy in AsiaProjecting through to the year 2020, while the growth rate of Japan's annual consumption should hold at about the 1 per cent level, it is expected that other Asian countries will continue to grow at a rate of 2 to 3 per cent a year. At this rate, the total amount of energy consumed by Asian countries in 2020 will be double the amount it was in 2000.
3. The Debate on Oil ReservesThough the debate concerning oil reserves has, until now, been focused on the reserve production ratio (R/P), it is necessary going forward to put an emphasis on the peak oil way of thinking. Though countries in the Middle East may boast abundant oil reserves, the more production volume increases the sooner peak oil is reached. Once peak oil and peak production is exceeded, production volume will begin to fall off, and production costs will swell.
4. The Debate on Oil Refinement and Petroleum ProductsIn response to the sharp increase in oil demand, there has been a steady build up of refinement facilities in the Asian region. However, the secondary treatment facilities needed to refine Middle Eastern oil are still insufficiently established, particularly in China, and will requires more capital investment. In addition, it is important to foster an Asian market in which the increasing amount of petroleum products can be traded freely throughout the region.
5. Future Outlook and a Corporate Plan for Action
   (1) The Potential for a Win-Win Situation in Asia A sharp rise in the demand for petrochemical products can be expected in China as well as in other Asian countries. Thus, although the demand for petrochemical products in Japan is declining, it is possible to gear existing plants toward exportation. In such a way, Japan, China and other Asian countries can forge a win-win relationship in the context of the expanding petrochemical market. Just the same with other material types (iron, steel and other petroleum products), the circumstances are emerging in which the Asian region can enter into a positive growth circle.
   (2) The Increasing Dependency on Middle Eastern OilThe idea that Japan must invest in Middle Eastern oil development so as to secure its oil supply is an impulsive notion. The terms and conditions of oil development contracts with oil rich regions are exceedingly strict, severe enough even to give pause to private corporations who are eager to invest. Rather, with the understanding that Japan, China and Korea have interests held in common, the governments of these respective countries should deepen their information exchange networks, and go to the negotiating table with the Middle East together as a unified region. The mechanisms for this much are already in place.
   (3) The Deregulation of the Energy Industry Asian countries are proceeding with oil industry deregulation much faster than Japan. If Japan does not catch up and start gaining know-how in an unbundled industry, it will find itself behind the trend, and will quickly lose, for instance, its market for operation maintenance products. Beginning with the Japanese oil sector, many measures must be taken to accelerate the deregulation process in Japanese industry.
   (4) Foreign Manufacturing and The Implications of the Energy Price Gap While the price of electric power in Japan, for either industrial or consumer use, is higher than that of most countries in the world, when re-calculated according to purchasing power parity, the energy prices of countries like China, Thailand, India, and Indonesia are also significantly high. This means that in many Asian countries, the people are unable to purchase the foreign products they manufacture and the products must be altered or re-outsourced if they are to suit their domestic market. Thus, in terms of manufacturing, whether the outsourced product is export oriented or directed toward the local market, it is important to think about the manufacturing location and the contents of the products in terms of the purchasing power of the intended buyers. Finally, despite the difference in energy costs, the Japanese claim to high level technological output and know-how makes it unnecessary to fear that outsourcing will clean out the Japanese manufacturing industry.
6. Summary and Policy IssuesAs elaborated in 5(1) to (4), it is necessary for Japanese corporations, in furthering the industrial development of Asian countries, to follow a policy of choosing the most suitable location for production, and to actively acquire market shares in that economy; the situation is such that this is now possible. A shift in government policy is necessary as private corporations diversify their activities. As the entire Asian region continues to relax its restrictions, it is necessary for Japan to shift from the system of government regulations, the current system established to guarantee absolute safety, to a risk based system, a system in which risks are weighed against benefits.It is important to construct a cooperative framework with other Asian nations, to guide the profit comes first motivations that deregulation will unleash, and finally, to form a multinational agreement on ways to establish collective policies for environmental friendliness.

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