Fueling Asia’s Recovery

Daniel Yergin, Dennis Eklof, Jefferson Edwards. Foreign Affairs. Volume 77, Issue 2. March/April 1998.

Will Energy Spoil It?

The financial contagion sweeping through Asia is forcing a reassessment of the continent’s future, including assumptions about energy-the lifeblood of economics and a critical factor in the geopolitics of the region. In recent decades, Asia’s rapid economic growth has meant even more rapid increases in the consumption of energy. A failure to satisfy its enormous needs, it was thought, would undermine the Asian economic miracle. But now that miracle is on hold, further complicating the already tangled interaction between energy, economics, and politics. While the recent economic downturn may alleviate some of these demand pressures for now, an inability to satisfy Asia’s hunger for energy over the longer term will raise new risks and even dangers. But the solution to its potential energy insecurity is not simply a matter of applying the traditional government-based solutions-resource management and diplomacy. This problem can only be solved by accelerating the trend toward market-based energy strategies.

Supplying energy to Asia has never been a simple task. Indeed, the phenomenal economic growth most East and Southeast Asian countries experienced over the recent decades has been doubly miraculous since it occurred despite severely limited energy resources in some of the fastest-growing economies. Japan, South Korea, Taiwan, and Hong Kong all built powerful, dynamic economies without much domestic oil or natural gas. Though some countries in Asia-Indonesia and China, for example-blessed with an abundance of natural resources, have thus far avoided dependence on foreign energy supplies, in the coming years virtually all Asian countries will become net importers of oil. In fact, in 1993 China moved from being a net exporter of oil to a net importer, representing a fundamental change in Asia’s energy balance. Even if the current economic crisis reduces growth in Asia’s oil demand to just one percent in each of the next three years, compared with an average 5.2 percent from 199o to 1995, demand would still be 9 million barrels of oil per day higher in 2010 than in 1996-an increase greater than the entire current output of Saudi Arabia. Demand for electric power supported by rural electrification programs, increasing urbanization, and the rapid growth of the independent power industry in the past decade-will more than double by 200, despite the current crisis.

The crisis has two immediate consequences for energy in Asia. The first is an oil price shock for the affected countries similar to that which the world experienced in the 1970s. The rapid devaluation of Asian currencies means that for some countries the dollar price of oil imports is two or three times higher than it was a year ago. These price increases have already become a lightning rod for protest in countries whose politics and underlying social contracts are now so unsettled. In the Philippines and Indonesia, in particular, fuel price hikes have led to social unrest in recent months. The second consequence is that growth in energy demand will slow temporarily, taking the pressure off the supply system, and in the process undermining one of the main premises in energy planning around the world.

However, after what will most likely be a temporary pause, Asian energy consumption will again rise sharply in two or three years. The reason is that there really was an Asian economic miracle, and the conditions for high growth-discipline, flexibility, high savings, rapid absorption of technology, an embrace of international markets, and strong entrepreneurial networks-are still in place. The source of the economic crisis is in the badly regulated private financial sector. Solutions exist to remedy these financial problems-assuming that the affected countries take appropriate measures to prevent the kind of long slump that Japan has experienced since the beginning of the decade. Once Asia begins to recover, meeting the region’s energy needs will again become a preoccupation-and an anxiety. The specter of increased demand for energy producing tensions, competition, and outright conflict between the region’s important countries will then reemerge. Increased energy consumption will inevitably clash with limited regional supplies, particularly of oil. But the gloomy scenarios of conflict are unlikely to materialize because of a sea change in the approaches to economics and conflict around the world.

Confrontation or Cooperation?

Solutions to the problem of increased demand for energy in Asia are a mix of old imperatives-diversification of supply, development of strategic reserves, and an ongoing search for new domestic sources and innovative new commercial approaches to overcoming resource constraints. This mix of old and new is especially perplexing when it comes to China. The outlook for China’s future energy demand is sometimes taken as the starting and ending point of analysis. Its energy needs are growing so rapidly that many describe Beijing’s policy options in ways that come perilously close to the shortage-equals-security-threat scenarios of the 1970s. Certainly one area, the South China Sea, stands out as a potential arena for competition and confrontation, and there are scenarios that point to a struggle over resources that could shake the entire region.

But there is a contrasting view, based on cooperation, integration, and cross-border investment. In this view, stresses will be resolved not through massive armies and blue-water navies, but through markets and investment within the ever-denser web of international commerce. The end of the Cold War and rapid technological change have accelerated the move toward a truly global economy, a change from an era in which states sought to dominate the commanding heights of their economies to a world in which the ideas of markets, commercialization, deregulation, and privatization have captured the commanding heights of world economic thinking.

An important source of increasing market integration will be natural gas, a key alternative to oil. The potential for new gas resources and markets within Asia is much greater than recently believed. But realizing the potential of abundant gas supplies, particularly in Central and Southeast Asia, will require bilateral and multilateral cooperation in order to move the gas from often remote reserves to urban markets. Building pipelines and other infrastructure will be necessary, and will require a new level of international cooperation and investor confidence. Cooperation and integration, not elbow-jabbing neomercantilist rivalry, are the keys to bringing additional supplies of Asian natural gas to market.

Some countries, including Japan, Thailand, and the Philippines, are moving away from the traditional security strategies of the i97os and 1980s and looking instead to privatization, competition, and open markets to supply energy, capital, and infrastructure. This change is taking place partly out of conviction and experience and partly out of necessity. The pressing financial needs of some countries in the region may hasten the move toward marketbased solutions to energy supply, which include the privatization of publicly owned national corporations, the opening of energy supplies to international businesses, the development of regional markets, the opening of borders, and the emergence of entrepreneurial international developers-whether from the oil, gas, or power-generating business. Indeed, the rapid growth of the independent power industry across Asia may be one of the most powerful symbols of these countries’ opening toward market-based solutions to meet growing energy needs. In 1996 alone, financial closing was achieved for privately invested power projects in Asia that represented more than $io billion of investment.

While markets will resolve more and more energy issues, there are some areas in which diplomatic efforts are still needed. Traditional anxieties related to the exploitation of resources, such as who is sovereign over a particular piece of land or seabed, guarantee the persistence of old-fashioned diplomacy. Ensuring safe passage for crude oil, refined products, and liquefied natural gas through contested waters particularly in the South China Sea-stands at the top of the list of such concerns. Yet energy security does not now mean a preparation for conflict, but rather for competition, an approach that comes with achieving security of trade and financial flows across borders by competitive liberalization. The starting point for the discussion, however, must be the fundamentals of the marketplace.

When Growth Returns

Despite a slowdown in energy demand growth across East Asia that has accompanied the current financial crisis, the region will still account for much of the growth in world energy demand. Asia’s export-driven industrialization, its dramatic expansion in the use of cars and other fossil fuel-powered transportation, its rapid urbanization, and its (politically crucial) electrification programs will combine to increase primary energy demand at an annual rate of between 4 and 5 percent through 2010, in contrast to an annual global rise of about 2 percent.

Some of Asia’s developing economies may soon see significantly slower energy demand growth, but it should rebound after 2000. Between now and 20o, growing by 4 percent each year, Asia’s oil demand will account for more than 50 percent of the global increase. As economic growth returns to the countries of the Association of Southeast Asian Nations (ASEAN), oil demand growth should accelerate again to 6 percent annually. Transportation fuel consumption will rise even more quickly, as will growth in electricity demand, which will measure 6.5 to 7 percent per year, while in some countries it will be as much as lo percent per year. Meeting the growing demand for electricity-rather than for personal transportationis the critical energy issue across Asia. The biggest concern is not angry motorists, but rather brownouts and blackouts that disrupt hospitals, schools, and factories and whose impact can be measured in terms of lost GDP.

Thus Asia will again be looking at rapid demand growth, but where will the supply come from? The challenge will be to deliver the equivalent of as much as 40 million additional barrels of oil per day between 1996 and 2010. Those concerned by a perceived demand supply gap with pressing security overtones have focused on Asian crude oil production-with good reason. Total oil productive capacity is projected to peak at approximately 8 million barrels per day in the Far East between 2000 and 2005. Self-sufficiency in coal and increased use of natural gas may shift dependence away from oil over the long term, but the net increase in oil imports from 1996 to 2010 will still be 9 million barrels per day or more.

Even at the reduced rates of oil demand growth forecast for the next few years, and in the absence of major new supplies, Indonesia, Malaysia, and possibly even Vietnam will join China as net importers of oil over the next decade. This has especially significant implications for Indonesia, which is now a member of the Organization of Petroleum Exporting Countries (OPEC). Indonesia now provides approximately zo percent of Asia’s total oil production. Within as little as 7 years Indonesia’s current net oil exports of o.6 million barrels per day may disappear due to rapidly increasing domestic demand and declining production. It is possible, however, that advanced technology and more favorable terms for foreign investors might stave off Indonesia’s march toward import dependence, especially as the country searches for increased export revenues to help it overcome its economic straits.

In sum, the prospects for Asia’s oil supply look decidedly grim. By 2010, productive capacity will have declined 6 percent from its 2005 peak, with new oil field developments unable to compensate for the declining production of maturing Indonesian, Malaysian, and Australian fields. So regardless of exploration, Asia is destined to import more than 20 million barrels of oil per day by 2010, compared with approximately 11 million today.

Most analysts concentrate on crude oil production. But it is important to consider the impact of coal in terms of its efficiency and cleanliness. Both Indonesia and Australia have begun to promote it as an export. The result, however, will be much stiffer competition between fuels, since coal is cheaper than oil. Prospects are also good for both increased production and power generation use of natural gas. Gas demand will grow even more rapidly than the current 8 percent per year. With advances in exploration technology, more gas is being found in Southeast Asia; with each boost to reserves, the producers have become more persuasive about long-term supply prospects in the region. But getting the natural gas to its end users means providing a greater level of infrastructure investment than for oil or coal. Getting gas to the market, whether for domestic consumption or export, means building pipelines and liquefaction facilities. Vast sums of capital must go into fixed infrastructure that entails long commitments to justify the investment. Cost estimates for major pipeline projects designed to bring gas into East Asian markets quickly run into the billions of dollars.

China Turns to the Market

China’s traditionally strong resource position in both oil and coal has meant that it is just emerging as a driver of energy trends entirely in its own right; its impact on world energy markets will no doubt grow in the coming years. China’s current economic growth rate, even if it is halved over the next decade, points to increasing dependence on imported oil and gas. Its energy demand should grow at about 4.5 percent per year through 2010. At the same time, oil and gas exploration in the country has been disappointing, and its insatiable demand for electricity means bumping up against capacity constraints. But too much emphasis is being placed on these deficits and Beijing’s growing ability to procure weapons that will enable it to project military power over the horizon. Such analysis assumes that China’s energy insecurity will cause it to threaten its neighbors and, by extension, American and Japanese interests.

Another widely discussed dimension of China’s energy situation lies in its increased reliance on indigenous energy sources-most notably coal. This perspective converts energy insecurity into environmental insecurity, for the Chinese people themselves; for countries adjacent to China, such as Japan with its acid rain-diminished forests; and for the world at large, fated to suffer significant increases in greenhouse gas emissions. Although natural gas demand in China may more than triple by 2010, coal, which now accounts for more than 70 percent of China’s energy, will remain the dominant fuel. In keeping with two other large emerging markets in Asia with large coal reserves Indonesia and India-demand for coal in China will only grow. In China this demand should increase about 5 percent per year, despite improvements in combustion and conversion efficiencies. Concern over the environmental impact of increased Chinese coal consumption may strain China’s relations with its neighbors.

But missing from projections of future conflict is the marketplace. The global open market provides China with mechanisms that are already in use to mitigate the effect of its dependence on outside energy supplies. China’s two major upstream oil companies recently committed themselves to a variety of oil exploration and production ventures beyond its borders. The deals include a planned $4.3 billion investment by the China National Petroleum Corporation to take a 60 percent stake in Kazakstan’s main oil company, Aktyubinskmunaigaz, to help develop that country’s oil fields, and build a 1,900-mile pipeline to China’s Xinjiang province. The company has made a successful bid for the right to develop and operate two oil fields in Venezuela. It recently committed to invest $1.2 billion to develop the Al-Ahdab oil field in southern Iraq. It reached an agreement to form a joint venture with the National Iranian Oil Company to explore for offshore reserves in Iran, China, and other countries. And it has announced an expanded supply agreement with Saudi Arabia, from which China now imports around a modest 30,000 barrels per day. China National Offshore Oil Company has also taken a 40 percent stake in an Indonesian field in the Strait of Malacca.

The China National Petroleum Corporation’s oil deal with a major Kazak oil company, in particular, combines the corporate ambitions of China’s national oil companies and the national security concerns of China’s political and military leadership. For the Kazaks, the project provides welcome economic diversification that goes to the heart of its new independence.

In addition to its international investments, China is taking other steps to secure its energy needs. Its leaders have become more sensitive to concerns about energy security, hence the top-level push to import natural gas from Siberia and the Russian Far East, the long-term use of which may reduce disagreements with Japan over the environmental impacts of coal-fired power generation in northeast China. Government initiatives to increase fuel efficiency have also begun to make some headway. Grasping the reality of its limited oil supply, China is establishing a strategic petroleum reserve to reduce the effect of oil price fluctuations.

But the immediate problem remains: demand for oil has outpaced oil production levels in China, currently the world’s seventh-largest crude oil producer. Offshore developments and Tarim Basin oil exploration have proven disappointing. The question is, how can China reduce dependence on imported oil and supply risk? In 1996, China imported almost o.5 million barrels per day; this figure could reach 1 million by 2000 and as much as 3 million by 2010, that is, almost 50 percent of its total oil demand. Given the limited outlook for new regional supplies, this oil must come from the Middle East or Central Asia.

The drive by its national oil companies to internationalize operations is a sign of China’s desire to gain access to foreign supplies, acquire experience in international operations, and export its own know-how and experience. Commercialization of the operations of state-owned enterprises was emphasized in last year’s Fifteenth Party Congress. One of Deng Xiaoping’s legacies was the concept of “socialism with Chinese characteristics.” In a variation, Chinese oil companies could become “international oil companies with Chinese characteristics.” Commercialization and internationalization will allow China’s oil and gas companies to learn at an accelerated pace through exposure to advanced exploration and production technologies and financial risk-management techniques. At the same time, indigenously produced Chinese technology, although perhaps less advanced than some Western technologies, is also less expensive. Chinese technology may in some cases be financially and technically more appropriate for developing countries, which would create new export opportunities for China.

Beyond that, China faces another risk-this one domestic and the result of its economic success. In the years ahead, China’s citizens will likely develop the same appetites and, on the coast at least, the same purchasing power as the burgeoning middle classes in Southeast Asia and Taiwan. Consumer electricity, far more than increases in transportation fuel consumption, will drive energy policies and needs. Growth in private transportation, however, is an indicator of improved living standards in every high-growth Asian economy. Ensuring supplies for both, given China’s current infrastructure and supply constraints, will be a challenge over the next decade.

Drawing Together: Asia and the Middle East

Any discussion of Asian energy security inevitably leads westward to the Middle East. And so it should-in the coming years, the relationship between Asian consumers and Middle Eastern producers will deepen. The share that OPEC countries have of global crude oil production will probably rise from its current 41 percent to about 50 percent by 2010. The Middle East, overwhelmingly predominant within OPEC, will provide not only physical supply but also spare capacity, a security margin available in times of unanticipated supply reductions, as occurred when Iraqi crude disappeared from global markets in 1990.

Ever-increasing dependence on the Middle East is a recurring theme in the Asian energy picture. In 1975 Asia imported 7.7 million of the 9.3 million barrels of oil it consumed per day. By the 1980s, imports from the Middle East had fallen significantly in response to northeast Asian conservation measures and deliberate diversification policies aimed at coal, liquid natural gas, and nuclear power. Only in 1991 did Middle Eastern oil exports to East Asia again begin to reach the volumes seen in the 1970s, a journey taking Asian oil dependence full circle. By 1995 Middle Eastern imports were back up to more than 6 million barrels per day.

In northeast Asia, Middle Eastern crude now provides more than 70 percent of the oil going into refineries. In Singapore’s huge refining complex, Middle East oil provides more than 8o percent of supplies. And crude oil procurement decisions by new refineries recently coming online elsewhere in the Asian region show a preference for supply deals favoring Middle Eastern producers. When Asia’s imports of refined products are considered, the degree of Middle Eastern oil dependence has risen even more than the net crude import figures would suggest.

Yet the simple numbers showing Asian dependence upon the Middle East overlook three important considerations. First is the transformation of the global energy market, with prices and supplies now far less subject to government control and more transparent at every level of the value chain. This shift has enabled the evolution of a wider spot market and a more open trading environment than existed two decades ago, making possible the arbitrage now taking place. Second, Middle Eastern oil producers will increasingly depend on Asia for their volume growth. This growing interdependence is why the Saudi Arabian national oil company, Aramco, obtained partial ownership of refineries in the Philippines and South Korea. Other Middle Eastern producers are seeking similar arrangements. For these producers, what counts is continued demand. Third, new supply sources may emerge in the former Soviet Union to compete with Middle East producers for the Asian market. The growing East Asian-Middle East energy interdependence will increasingly expose countries such as China to the same energy security risks facing large Western consuming nations, given concerns over the possibility of political instability in the Middle East.

From Marx and Lenin To Oil and Gas

A decade ago, the Soviet Union was the world’s biggest oil producer. In the years since, Russian output has plummeted by a volume that approximates the entire current output of the North Sea. Meanwhile, out of the turbulence of the collapse of the U.S.S.R., a number of large, partly privatized Russian oil companies are emerging. Russia continues to be the world’s largest gas exporter; the former Soviet Union has been called the Saudi Arabia of natural gas. Under a SinoRussian agreement signed last year, Russian natural gas could become a major source of energy for the Chinese, Korean, and Japanese markets through a proposed network of pipelines linking Siberia with northeast Asia. Additional projects are under way to link gas supplies from the Russian Far East to markets in Japan.

At the same time, perhaps the hottest development spot in the entire oil and gas industry is the Caspian Sea region-Azerbaijan, Kazakstan, Turkmenistan, and the waters of the Caspian itself. The region may hold oil and gas reserves second only to those of the Middle East. Conservative estimates run as high as loo billion barrels almost ten times Alaska’s reserves-and that could increase as exploration moves into deeper waters. By 2015 the Caspian Sea could produce as much oil as the North Sea does today, making it one of the world’s main production centers. The region could also become a major supplier of natural gas. Turkmenistan alone is estimated to have as much gas as the United States. There is an inherent and-if old and new rivalries do not get in the way-almost inevitable logic to joining the huge supplies of the former Soviet Union with the huge and growing Asian market. Much of the focus on the Caspian to date, understandably, has been on moving its oil west into the Black Sea and then on to Europe. But increasing amounts of oil and gas from the former Soviet Union will move east into the Asian markets, requiring great amounts of investment.

Transporting this gas, which will go largely toward electric power generation, will involve some combination of long-distance pipelines. Already the first signs of reorientation and focus are there. Japanese companies are becoming members of Caspian consortia. China’s deal with Kazakstan is a bellwether. Increasing volumes of Kazak oil are already ingeniously finding their way into Chinese markets. In addition to China National Petroleum Corporation’s plan, projects are under discussion to bring oil from Central Asia to East Asia via pipelines through Iran or Afghanistan and Pakistan into India. There are parallel plans to bring natural gas from Central Asia through Afghanistan into Pakistan and India. These are harbingers of how energy security pressures may be relieved through commercial deals requiring cooperation and integration. In the future, the Russia-China relationship will no longer be based on Marx and Lenin, but increasingly on oil and gas.

The South China Sea: How Deep the Controversy?

One energy-related matter in East Asia, however, involves traditional areas of diplomacy. The maritime dispute in the South China Sea, with its potential to disrupt regional confidence, ranks as a priority issue in Southeast Asia. Competing claims pit China against Vietnam, the Philippines, Malaysia, Thailand, Brunei, and Taiwan. China has several other maritime disputes with the South Koreans and Japanese in the Yellow and East China Seas, with Japan over the Senkaku Islands in the East China Sea, and with Vietnam in the Gulf of Tonkin. But the claims in the Spratly Islands in the South China Sea have garnered the most attention because of the extent of the natural resource riches that some believe exist under the disputed waters, and the broad expanse of territory covered by the Chinese claim. Estimates of the resources of the South China Sea range widely-from 6 billion barrels of oil equivalent to more than 105 billion barrels. But oil exploration in the region has been disappointing so far.

The South China Sea area is believed to hold 65 trillion cubic feet of natural gas, with the potential for 25 to 50 trillion more. If the experience in the Natuna field is a guide, however, gas resources in the disputed areas would be difficult and expensive to commercialize. Natuna, a huge gas field in Indonesian waters, has been under study for more than ten years, and estimated total development costs exceed $40 billion. The technical difficulties and huge cost of developing the field required the creation of an international consortium to spread investment risks and provide technical expertise. Exploitation of a sizable field in the nearby Spratly Islands would also likely require extensive international cooperation. 5uch cooperation would prove difficult to marshal if jurisdictional issues are not clarified.

Chinese officials have repeatedly asserted their willingness to develop resources in the South China Sea on a bilateral basis. Despite the success of joint development programs in other Southeast Asian offshore areas, Vietnam, Malaysia, and the Philippines have so far resisted, fearing that cooperation would constitute tacit acceptance of China’s historically based claims to the region. As they see it, the Chinese claim, if accepted, would extend Chinese sovereignty more than 5oo miles off China’s mainland coastline.

Regardless of the actual reserves underlying the waters of the South China Sea, the region will remain vitally important to northeast Asian energy security. The disputed waters lie astride strategic sea-lanes on which more than 70 percent of the crude oil and liquid natural gas supplies bound for Japan, Taiwan, and South Korea are transported. Equally important, manufactured goods bound outward from northeast Asia for markets in southeastern and western Asia also pass through these waters. Overall maritime traffic on the South China Sea will likely triple by 2010. The sea-lanes are also the strategic passageways for the U.S. Navy from the Pacific to the Indian Ocean. The U.S. strategic relationship with Japan and South Korea is in no small part invested in the U.S. role as guarantor of energy security to these key Asian allies.

Although some have viewed the South China Sea as a source of almost inevitable conflict, another possibility asserts itself. The huge costs and high technical requirements of resource development and the increasing reliance of East Asian countries, including China, on the security of energy and merchandise flows suggest a growing mutuality of interest. One of the most important outcomes of the current economic downturn will be a reassessment of risks economic, financial, and political-associated with investment in East Asia. Perceptions of higher risk mean higher costs, whether for financing energy projects or for insuring or rerouting crude oil or liquid natural gas cargoes. The most economical path for all parties involved-several of whom have slashed military budgets in the wake of the economic downturn-may well be negotiation of the competing claims rather than military buildup and confrontation. As China becomes increasingly entwined in the international economy, the costs and risks of a confrontation increasingly outweigh the value of questionable resources.

Deregulating Markets

All of these factors-the effects of market prices, the flow of resources across borders, trade liberalization, a focus on national competitiveness, the need to attract investment into the energy sector-have led to the deregulation of national energy sectors throughout the region. Japan, South Korea, the Philippines, and Thailand are in various stages of liberalizing their oil industries, ultimately leading to market-driven prices for oil products in those countries. Several countries, including Japan, Thailand, and the Philippines, have begun restructuring and opening their electric power industries as well. Thailand and Malaysia have also begun liberalizing their respective gas industries.

The primary motivation for deregulation differs across countries, as a result of differing economic structures and stages of development. For some, such as Japan and South Korea, the drive for international competitiveness has been the overarching motivation. For others, such as the Philippines and India, it has been the need to attract capital. In any case, the opening of energy markets means that energy security is increasingly based on market competition rather than government mandate. Supported by a stable political environment and motivated by the internationalization of their economies, these countries are moving away from the dirigiste strategies of supply security that emerged after the oil shocks of the 197os and toward market mechanisms for allocating risk. Japan, for instance, is considering phasing out the last vestiges of its oil market regulations by 2001 This policy marks a dramatic shift in thinking about energy security. As Ryozo Hayashi, director general for petroleum of Japan’s Ministry for International Trade and Industry, said last year, “Adjustment in supply and demand can be achieved much more efficiently through market mechanisms than through government intervention.”

At least until the massive currency devaluations of recent months, the domestic political fallout from potential supply and price shocks was perceived as less of a concern than the long-term economic distortions associated with state intervention in the energy sector. The rapid increases in local currency prices of oil over the last few months may test that perspective, but the move toward market pricing is unlikely to be reversed. Indeed, the International Monetary Fund’s mandates in South Korea, Indonesia, and Thailand will accelerate liberalization and economic opening. As competition for export markets heats up between the developing economies of Southeast Asia and China, planners are seeking to increase national competitiveness through more than just low wages. Reducing energy and other utility input costs is one strategy for boosting national productivity growth, and that means further deregulation.

Earning Their Way

Asia Is in the middle of a transition from traditional notions of control over energy resources (with its usual tensions) toward a diversified reliance on free markets, cross-border energy trade, and cooperation with Middle Eastern producers. Of course, many among Asian political elites dislike the idea of being dependent. The temptation toward government control over resources remains strong. The appeal of G70s-style oil diplomacy has not vanished. However, the argument against dependence has dissipated, as the success of the resource-poor countries in the region demonstrates. The steadiness of the market, its ability to meet new consumer and product demands, its growing size and transactional complexity, all reinforce the argument that security now comes in the guise of diversified reliance on open markets.

The double miracle of Asia-high economic growth with limited energy resources-occurred because these countries adapted themselves to competing successfully in the international economy. They paid their own way. They made up for their lack of physical resources through their human resources, their capacity to innovate and to produce, and their capability to sell the fruits of their labor in the global marketplace. That gave them the wherewithal to finance their energy needs.

The energy challenges facing Asia in the future are momentous, complex, and expensive. But the formula that served some countries so well in the past is well suited to them for the future-all the more so as they place greater confidence in the markets and rely less on government ownership and control. Thus, perhaps the true solution to the future energy needs of Asia will be found in the strengths that lie beneath the current economic crisis-how well Asian nations continue to adapt to the changing global marketplace and the rigors of international competition, and how successfully they renew their astonishing record of earning their way in the world.