ABSTRACT

The purpose of this paper is threefold: to provide the most up-to-date analysis of China's energy situation; to argue that China's global quest for energy is primarily driven by its rapid economic growth in recent years, out of insecurity rather than a master plan to dominate the world; and thirdly, that China's energy security issues have multiple implications beyond simple economic concerns. The paper seeks to recommend a forward-looking engagement policy to be adopted by other countries, especially OPEC states, Canada, and the United States, in dealing with China's growing energy demands.

INTRODUCTION

When China began to experience energy shortages early in this decade, many Chinese military strategists were concerned about the security of the country's energy supply. A recent book entitled Liberating Taiwan, published by the Chinese Military Publishing House, portrayed a hypothetical conflict scenario set around 2010. The arena is the vast West Pacific region. To break the U.S.- Japan-Taiwan military containment of China, the combined air, naval, and armed forces of the People's Liberation Army (PLA), equipped with newly established carrier battle groups, have destroyed all U.S. military bases in the region, taken control of all strategic sea routes from the Strait of Malacca to the Persian Gulf, and imposed an oil embargo to choke the United States, Japan, Taiwan, and their allies.

The attention paid to strategic oil routes only highlights the fact that energy security is closely linked to China's national security and the nation's future. This paper analyses the relationship between China's economic growth and its energy security concerns, the latest developments in China's energy demands, major policy shifts, and the implications for the rest of the world. In view of the global recession since the second half of 2008, it will also examine the latest Chinese policies in responding to changes in oil prices, and how the latest round of Chinese energy and resources acquisitions, for instance in Africa, are a part of China's overall strategy to strengthen its global financial position while securing further energy supplies.

ABSTRACT

Energy security is an issue of particular significance to ASEAN states as well as other regional states such as India, China, Korea, and Japan. Given the possibility of high oil prices, diminishing oil supplies and increased competition for resources, disputes over territories, and the strategic importance of sea lanes passing through Southeast Asia, there is much scope for competition as well as opportunities for cooperation. The paper discussed two key questions: What is the energy problem in the region and what have its consequences been?

INTRODUCTION

Eleven years ago in 1998, Ji Guoxing wrote presciently in the Korean Journal of Defence Analysis that “energy security is of particular importance in the Asia Pacific owing to its physical unavailability to meet demand, and energy security is now becoming a fundamental cornerstone of economic policy for the Asian Pacific economies”. He cited a report in the Los Angeles Times, which predicted that “some time in the next twenty years or less, global petroleum output may begin a permanent decline, even as world oil demand continues to rise … though market forces and improved oil production technology should keep petroleum flowing well into the twenty-first century, the peak of the Oil Age may come far earlier than conventional thinking now assumes”. Ji therefore concluded that world oil production would begin to decline around 2010, and oil prices would rise in real terms.

Yet, the concentration of two-thirds of the world's proven oil reserves in the Persian Gulf area means that Asia's dependence on imported Middle Eastern oil would increase. The problem, however, is that “these supplies remain potentially vulnerable to military or political events that have nothing to do with markets, but which can have an enormous impact on oil and gas”. Moreover, the fact that these oil supplies must traverse vast oceans, through long and vulnerable sea lines of communications (SLOCs) that pass through the narrow and troubled Gulf of Hormuz as well as the narrow, strategic Straits of Malacca on their way to lucrative Asian markets to fuel their explosive economic growth, has resulted in much greater vulnerabilities to any disruption.

This book is volume two of the ISEAS Energy Perspectives on the Region. It comprises papers based on the seminars delivered by speakers at the ISEAS Energy Forum as well as invited contributions from various experts on energy issues. This book serves to educate the general public on energy issues as well as to raise awareness in Singapore and the wider region about energy issues — both aims of the ISEAS Energy Forum.

The range of topics is wide in scope as well as touching on a number of countries, such as the United States, Japan, China, India, and Southeast Asia. It is also timely as some papers discuss the Spratlys, renewable energy, nuclear energy, and biofuels such as Jatropha. They are written by eminent experts who have kindly and graciously agreed to share their knowledge with the public. In an interesting departure, some papers are written by senior executives from the private sector who make their case for biofuels, solar energy, electric vehicles, and nuclear energy.

Energy issues continue to remain important to the world at large, intimately linked as they are to climate change and the environment, as well as to sustainable economic development. The price of oil has now crept inexorably upwards as the world economy slowly stabilizes and resumes growth from the global recession of 2008–09. Without adequate investments in new oil and gas resources, the price of energy in 2010 can be expected to rise in step with the global economic recovery. Thus continuous attention and effort must be paid to issues such as energy efficiency and conservation. Both the United States and Singapore, as well as other countries, have in 2009 launched sustainable development programmes, emphasizing green or clean technology and energy efficiency.

We hope this volume will help to inform readers about topical energy issues that remain high on the international agenda.

How energy needs can be met will be the greatest global challenge in the coming decade.

Up to the point before the financial tsunami lashed upon all our shores, the relentless increase in the demand for energy to feed burgeoning global economic growth had led to a US$150/barrel oil. The impact of this high oil price alone on food, competition for resources and ultimately on costs of living was cause for significant concern.

Implicit in this was the element of security of food, energy and resources needed for economic growth.

Notwithstanding the current recession, these concerns have not gone away. Before the recession, producers were preparing to increase production to meet demand. Many of these projects were deferred later due to the ensuing fall in demand. Without these investments to increase production capacity, another supply crunch and high oil price may arise when economic recovery begins.

While high oil price is bad for the economy and cost of living, it is perversely good for other reasons. There were many anecdotes of consumers around the world and in Singapore adjusting their purchases and consumption habits to minimise waste and ensure energy is used efficiently.

The world will enter into the Copenhagen round of talks at the end of 2009 to hammer out an agreement to curb climate change. Central to the agreement will be how much reduction in the emission of greenhouse gases such as carbon dioxide each country can offer to make.

The global economy is still fuelled primarily by carbon fuels and this is not likely to change in the foreseeable future unless there is a new technology that can curtail carbon dioxide emissions. The challenge will be how economic growth can be secured with less fuel to feed it. Much can be done before that point is reached.

Singapore has switched from oil to gas for power generation and this has significantly reduced Singapore's carbon dioxide footprint. The Singapore Government has also been promoting energy efficiency on several fronts.

ABSTRACT

Being rich in resources seems to breed complacency and suppress the urge for progress. What countries like Singapore have to rely on instead is human ingenuity — it is our key resource and our main competitive advantage. We turned the threat of water shortage to our advantage, using it to spur innovation and set the goal of self-sufficiency in water. With energy, however, our story is much more mediocre. Although energy prices have been on the rise, as a nation we still behave like irredeemable energy addicts. Singapore's electricity consumption exhibits the same pattern as our car purchases. Per capita electricity consumption has more than doubled since 1986. Nearly half of that demand comes from the buildings we live and work in, while 44 per cent is from industry. Our combined roof space, exposed façades, and open expressways add up to around 100 square kilometres. If we covered all that with solar photovoltaic (PV) panels, we could generate around one-third of our current electricity consumption. Energy efficiency is a vital prerequisite to self-sufficiency. Air-conditioning, combined with sloppy building design, has much to answer for in terms of squandered electricity. How can we replicate our success with water treatment in the field of solar energy? We must aim for world-leading capabilities that we can export internationally. So far, the leaders (Japan, Germany, the United States, Spain, and Korea) are all in temperate climates. Singapore can pioneer tropical applications for PV.

INTRODUCTION

As many have pointed out, we in Singapore live on a small island — christened by our southern neighbours as “a little red dot”. We have no conventional natural resources to speak of. Many might consider that a disadvantage. But actually we are lucky not to have been cursed with abundant natural resources, such as exist in Indonesia, Africa, or even Australia. For being rich in resources seems to breed complacency and suppress the urge for progress. What countries like ours have to rely on instead is human ingenuity — it is our key resource and our main competitive advantage.

ABSTRACT

How can countries in Asia avoid the pitfalls faced by the United States, with its oil problems? This chapter argues that policy-makers have a wide variety of options available to them, drawing mostly on techniques promoted (but seldom implemented) in the United States and Europe to help reduce dependence on foreign sources of oil. Starting with an evaluation of “demand- side” options before moving to “supply-side” options, it will then focus indepth on the benefits of plug-in hybrid electric vehicles (PHEVs) before offering general conclusions about energy policy.

INTRODUCTION

While Singapore, Southeast Asia, and Asia at large face numerous energy challenges, perhaps none is more significant than the growing dependence on foreign sources of fuel for transportation. The International Energy Agency (IEA), for instance, expects India and China to increase their imports of crude oil from 50 per cent today to 80 per cent by 2020. Singapore already imports more than 99 per cent of its own consumption of energy.

The problem arises because the skewed distribution of oil resources allows a small number of states to supply a very significant share of the world market for transportation fuels. Around ninety countries produce oil, yet only a few producers dominate world output. The members of the Organization of Petroleum Exporting Countries (OPEC) — Algeria, Iran, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela — account for approximately 75 per cent of the world's proven conventional oil reserves and 40 per cent of world oil production. The Persian Gulf contains an estimated 674 billion barrels of proven reserves, which represent around 67 per cent of the world total. In 2006, the region maintained 32 per cent of the world's total oil production capacity (about 23 million barrels per day).

While market supply and demand conditions for the past two decades would not support the assertion that OPEC members have been in complete control of the oil market, its members have historically been able to exert considerable influence.

From 2004 to the middle of 2007, the world economy was growing strongly, world trade was burgeoning, inflation was low, liquidity in capital markets was abundant, the financial sector was providing remarkable returns, profitability was high, and asset prices were rising.

Yet, there were a few things that were disregarded by economists and financial experts. First, the real estate prices were rising astronomically, particularly in the United States, and a growing securitization business was facilitating a huge growth in credit. At the same time a major imbalance was surfacing. While one group of countries (Japan, China, and the oil-exporting countries) was saving too much, there were others like the United States, and Europe who were borrowing to finance consumption and investment. These developments were unsustainable and needed a very minor catalyst to cause havoc in the financial markets and the world economy.

In the end, it was the booming U.S. housing market which proved to be the nemesis. Low interest rates and abundant liquidity in the system encouraged banks and financial institutions, particularly in the United States, to lend to sub-prime borrowers. When the interest rates started to rise, a large proportion of borrowers began to default resulting in failure or huge losses by several large financial institutions. The U.S. crisis thereafter spread to other financial markets and spilled over to the real economy by end 2008, leading to recession in several economies across the globe.

Governments around the world were forced to act swiftly to avert the failure of their financial systems and arrest the decline of economic growth. Unprecedented steps in conducting monetary and fiscal policy were taken to fix the financial dislocation and the weakness in the economic system. Initially, central banks focused their attention on easing liquidity to alleviate tensions in the financial markets. They loosened the terms and availability of existing central bank facilities. Policy interest rates were cut by almost all countries.

For Singapore, the recession came mainly through the fall in non-oil exports and output. The monetary and financial systems for the city state largely remained unscathed. The financial shocks were mostly felt through drying up of credit and capital flows due to heightened risk aversion. But, apart from these initial stresses, there were no severe financial dislocations. Inflation and exchange rates remained stable. This was also enunciated by Finance Minister Tharman Shanmugaratnam in his speech while presenting the 2009 budget in Parliament on 22 January 2009. He stated that the key risk facing Singapore was the scale of the recession and loss of jobs rather than inflation.

Hence Singapore carved out policies that could cushion businesses and households from the impact of the economic downturn, maintain confidence in the financial market, and support economic recovery in the long-run.

Policymakers' Objective

The success of Singapore coming out of the crisis depended on the country's policy responses at both the domestic and regional levels. Being a small open economy, the conventional fiscal and monetary policies to boost domestic demand were not very effective. The city state's private consumption and investment have been highly dependent on export demand. Hence, the MAS used the exchange rate mechanism to gradually respond to the external demand shocks that confronted the economy during the intense phase of the crisis. The central bank also aimed for a low inflationary environment and ensured that the Singapore dollar remained an anchor of stability.

Similarly, the FY2009 budget aimed at the supply side of the economy, more particularly in keeping jobs. This was mainly due to Singapore being a significant consumer of imports (import to GDP ratio was more than 200 per cent in 2007 vis-à-vis an average of 81 per cent in Asia), so demand-boosting stimulus measures would be challenged by import leakages.

The policymakers also worked cautiously in tandem with other regional initiatives to preserve confidence in the financial system, which had been wrecked by the huge losses suffered by some of the biggest banks in the United States and the European Union.

The global financial turmoil surfaced in the middle of 2007 as a result of defaults of sub-prime mortgage loans in the United States. It was blown into an unprecedented financial crisis in 2008 when a series of major financial institutions in the United States and Europe started to fail. Around the world stock markets fell, financial institutions were bought out, and massive coordinated actions by the authorities were taken to inject liquidity into money markets and restore confidence in the financial systems. Strong calls were made at the Group of Twenty (G-20) level for a new financial system to prevent future financial crises and to maintain global financial stability.

As the U.S. sub-prime mortgage crisis spread to the rest of the U.S. financial system and other industrialized- country financial markets, a significant slowdown was observed in economic growth of the U.S., Europe, and Japan. The financial sector crisis subsequently moved to the real economy. Although Asian financial institutions' exposure to sub-prime-related products was limited, the impact was felt through capital flow and trade channels.

Accordingly, the IMF in its World Economic Outlook (WEO) Update publication (January 2010) placed global growth at 3.0 per cent in 2008 and a contraction of –0.8 per cent in 2009. This represented a significant slide from an economic growth of 5.0 per cent observed in 2006–7. The advanced economies were in or close to recession in the second half of 2008 and early 2009, and showed some signs of recovery later in 2009. Growth in most emerging and developing economies was below trend, although key emerging economies in Asia, like China and India, showed higher resiliency.

Genesis of the Global Financial Crisis

The global financial crisis was triggered in August 2007 when the U.S. sub-prime loan defaults began to rise and foreclosures increased. At a fundamental level, however, the crisis could be attributable to the persistence of large global imbalances, which in turn was a result of a long period of loose monetary policy in the U.S. economy.