Asia's emerging markets, revelling in unprecedented rates of sustained economic growth, are battling to address the region's self-diagnosed Achilles heel: a dependence on imported energy. China has earned the headlines, as its energy-guzzling industry is singled out for fuelling record oil prices, but throughout the region, from Japan through Thailand to India, economies are reliant on imports to sustain industrial development.
Apec energy ministers, whose nations account for more than half the world's energy consumption, vowed at a meeting last October to respond to growing concern about oil prices with concerted efforts across a range of areas to manage their energy needs better.
All countries are vulnerable; in Apec, energy strategy is a big concern, Yonghun Jung, vice-president of the inter-governmental Asia Pacific Energy Research Centre told Emerging Markets.
Establishing a comprehensive network of oil stocks, more investment in existing resources, diversification of supply and fostering of alternative energy sources are all topics for consideration.
Oil
In the near term, oil is the biggest issue. With the Middle East and Russia holding a near complete dominance over AsiaÕs imports, and few viable fuel alternatives for the booming transport sector, governments are finally trying to put into practice lessons from the crippling oil shocks of the 1970s.
China is following Japan and Korea, which already have stocks of crude to last between 90 and 140 days. Other nations including Thailand are keen to follow suit. China, where car ownership is rising 15% a year, has also led the way in efforts to diversify the origins of its imported oil.
Deals with Hugo ChavezÕs Venezuela, and perhaps more importantly African nations like Sudan and Nigeria are successful results of an overseas policy that most famously saw Washington thwart a bid by the state-owned China National Offshore Oil Corporation for CaliforniaÕs Unocal. India has also been conspicuous in the hunt for overseas reserves after watching its self sufficiency in oil slide from almost two-thirds in 1990 to less than a third a decade later.
Oil and Natural Gas Corporation, IndiaÕs biggest oil business, has amassed stakes in Myanmar, Brazil and Russia, earning much encouragement from the government along the way.
The broadening of geographical supply is a short-term effort to ease dependence. A longer term solution involves investment in domestic resources, whether that be an exploitation of oil reserves in Indonesia, development of ethanol from sugar
produced in Vietnam, or harnessing hydropower in China.
Obstructions
Such projects are held back in many emerging countries by a lack of regulation, the bureaucratic workings of state enterprises and conflicts of interest.
A typical example, according to Stephen Lewis, a research fellow at the Baker Institute for Public Policies, is ChinaÕs development of its oil reserves. Past mismanagement has meant an absence of suitable infrastructure to access remaining pockets of fuel, and investors are wary of taking on projects without legal certainty over who will be responsible for long-term issues, including the costs of clear-up, he says.
Further disincentives are the absence of a transparent system of royalties, and the role of local governments who must shoulder the environmental and social costs of oil development without profiting from the resource. In addition, state-owned energy companies, constrained by price caps, arenÕt rushing to bring more production on line, says Lewis.
Petroleum prices in China are as much as 40% below the global market price. IndiaÕs refiners are taking a margin hit to keep prices 28% below international levels, and the Malaysian and Indonesian governments both provide subsidies to push down domestic fuel costs by about a quarter.
ÒThe adjustment of the economies becomes very slow,Ó notes Sailesh Jha, an economist at Credit Suisse. The price frameworks in place make emerging Asian economies more vulnerable than their peers to oil shocks, he says.
More important than measures to increase supply is action to address demand. Only through reducing consumption can countries tackle two mounting pressures: those of price and pollution.
AsiaÕs economies, along with the rest of the world, seem to a large extent to have shrugged off the drags on inflation and growth from oilÕs surge to $60-$70 a barrel. ThereÕs no guarantee that prices canÕt rise further, hitting AsiaÕs markets in the US and Europe and increasing costs and prices.
Efficiency drive
The environmental impact of AsiaÕs fossil fuel use is also gaining increasing prominence. Analysts point to outmoded power stations and factories lacking equipment and expertise to maximize energy efficiency and filter waste. Developers rushing to construct new buildings on the cheap and neglecting insulation are another problem.
ÒWhat those countries need to do is they have to invest heavily in energy efficiency; thereÕs a long, long way to go in terms of making their industrial output more efficient, in terms of making their housing more efficient,Ó says David Von Hippel, a researcher at think tank the Nautilus Institute. Apec analysis estimates the adoption of more advanced energy technologies could save the region the equivalent of 500 million tons of oil by 2030.
For all the worries of political strategists, environmentalists and economists, record flows of foreign cash into the region suggest investors arenÕt too concerned about the energy situation in Asia. They argue that developing nations have more scope than their G7 counterparts to offset higher energy costs by raising productivity.
ÒI think youÕll find the impact of rising prices of fuel would cause a bigger hit to margins elsewhere than it would in Asia; the productivity gains in terms of capacity and general efficiency have meant theyÕve been able to absorb a lot of the fuel costs,Ó says Mike Hanbury-Williams, manager of F&CÕs Pacific Assets Trust Fund.
Across the world, energy security has become a burning political issue, drawing attention at the very highest level. The US is worried about oil from Venezuela while the European Union frets about gas from Russia. But Jonathan Stern at the Oxford Institute for Energy Studies warns that such discussions quickly become unfocused and sometimes counterproductive. He notes that most crises in the supply of energy and other commodities have their origins in domestic distribution rather than import disruption Ð IndiaÕs electricity blackouts being a clear illustration. AsiaÕs emerging energy importers canÕt treat diversification of supply as a silver bullet in their energy armoury.
Development
The biggest problem is one of development; they're not rich countries, and yet they're participating in a global market with rich countries. The principal is how much they should realistically imagine they should be able to afford given their level of development, Stern told Emerging Markets.
He gives the examples of India and China, which both could have almost unique access to vast and remote gas reserves piped from the Middle East in the former case and Russia in the latter. Concerns about the reliability of these supplies have instead led the two countries to step into the globalized market for Liquid Natural Gas.
Mostly OECD countries have made the wrong choices in the past, and there's no reason to think people will make better choices in future, Stern warns.
Energy use is fundamental to development, and from air-conditioning units to car plants, demand is soaring. The debate about what fuels power Asia's economies and where those fuels come from will rise in volume as oil prices rise and reserves dwindle. There's no simple answer.
For the developing countries it's really an uphill battle, and there's no successful case in history to follow, says Jung, of the Asia Pacific Energy Research Centre.