Geopolitical Issues of Energy Security | Energy Management

Both China and India are scouring the globe to secure better access to oil and gas supplies and are building broader diplomatic and trade ties that serve to strengthen these energy links. While they are ranging widely around the globe, their most important efforts have been focused largely on three key petroleum rich regions where growing energy ties are likely to have a significant impact on future geopolitical developments.

Not surprisingly, the primary area of focus for both China and India is the Persian Gulf. The region holds two-thirds of the world’s proven oil reserves and already accounts for two- thirds of India oil imports and more than one-half of China’s. In the longer run, the Gulf is likely to account for 80% of each country’s oil imports and 50% of their natural gas imports.

Both countries are building long-term energy ties but also are rapidly building diplomatic, trade, and military ties in the region. The main focus so far has been on Iran and, to a lesser extent, Saudi Arabia. The rapid development of ties between China and India and the Persian Gulf also is a two-way street and both countries are taking on great importance from the Gulf oil and gas exporters’ perspective.

Currently, nearly two-thirds of the Gulf’s oil exports go to Asia and this will grow sharply in the future. The growing nexus of diplomatic, trade, and military ties with China and India appeals to the Gulf producers who are looking to diversify their economic and geopolitical base beyond traditional dependence on the US and European markets and diplomatic relationships. All these trends suggest that energy will propel China and India into becoming major players in the Persian Gulf and the broader Middle East in the future.

Russia is the second key area where the China and India are jockeying for position and where energy will have important geopolitical implications. The natural complementarity between Russia’s huge surplus supplies of oil and gas with China, and India’s huge deficit contains the seeds of a growing set of energy, trade, and geopolitical relationships.

Russia’s importance to China and India arises from its potential to atleast partly offset reliance on the Persian Gulf and other tanker supplies that must transit a vulnerable series of maritime choke points. The ability to diversify supply sources, as well as diversifying transport routes is vitally important in their respective energy security calculations.

India has a big position in the Sakhalin 2 oil and LNG project, while China is deeply involved in proposals to bring East Siberia oil and gas supplies to China. Both are busy upgrading and broadening their political ties with Russia to support future energy ties. This complementarity extends to the Russian side as well.

Vladimir Putin and the Kremlin would like to diversify Russia’s growing energy export base away from total dependence on European markets for both oil and gas exports. The Kremlin has become quite explicit under Putin’s newly statist orientation toward the energy export sector about their desire to use oil and gas as strategic diplomatic and commercial tools to return to becoming a major player in East Asia. Interestingly, China and India’s heavily mercantilist approach to energy security concerns matches well with Putin’s increasingly mercantilist objectives for Russia’s energy sector.

The third key area of energy resource competition and growing ties and where the geopolitical overlay is likely to take on increasing importance is in the Central Asia and Caspian Sea region. The attraction of diversifying imports away from the Persian Gulf and toward overland pipeline supplies is irresistible.

China is in the best geographical position to benefit and is moving to make Kazakhstan a key oil supply source for the future through its growing equity investments in oil fields in western Kazakhstan and promises to build a long-distance pipeline to western China.

A pipeline would also give the Kazakhstan government stronger incentives to help stabilise the potentially restive Islamic region along China’s border, something that China is increasingly concerned about in the wake of growing Islamic unrest on the Chinese side of the border.

As part of this effort, China has been active in developing broader diplomatic alliances with Kazakhstan and in the broader region. The Shanghai Cooperation Organisation, which China has spearheaded to build broader ties with Central Asia and Russia clearly also is aimed at boosting energy cooperation.

India has fewer options to access Central Asian resources due to geographical limitations, although they have been involved in long-running proposals to bring oil and gas from Central Asia via pipelines across Afghanistan and Pakistan.

Geopolitical and Energy Market Implications for the US:

China and India’s responses to their deepening energy insecurity have a range of important implications for the region and for the US across a broad swath of geopolitical, energy, and environmental issues.

First, as the key stabilising and balancing force in Asia, the US has a vital stake in how energy insecurity impacts future relations between China and India, whether energy issues aggravate and reinforce Sino-Indian rivalries or provide a basis for greater cooperation.

The Sino-Indian relationship is one of the most critical dimensions in Asia’s future geopolitical architecture. The marked inclination toward a relatively narrow, zero-sum, neo-mercantilist approach to energy security by both China and India clearly holds the risk that energy could become a major source of future tension between the two countries.

There have been several cases of direct competition for the same oilfield assets, for example in Angola, that have provoked a sense of direct competition between the two. India has been very vocal recently about having to compete with China for oil and gas resources and has atleast publicly, appealed to China for discussions to promote greater bilateral cooperation on energy.

Moreover, both China and India are relying on bilateral approaches that link energy, trade, strategic, and often military cooperation rather than multilateral and regional approaches to linking energy and security interests. Bilateral approaches clearly risk reinforcing the potential for competitive outcomes.

Also, zero-sum approaches to energy security increase the risk of spillover into competition over maritime energy transport routes in the India, Ocean and Straits of Malacca. China is increasingly wary of India’s naval capabilities.in the Indian Ocean and its ability to interdict tanker traffic headed for China.

This has been heightened recently by India’s improving naval cooperation with the Southeast Asian states and the US. India, on the other hand, is increasingly wary of China’s growing efforts to acquire port access along the Indian Ocean coast, with new port access arrangements in Pakistan, Bangladesh and Myanmar.

A second set of issues for the US concerns the impact of the growing long-term role of China and India in key oil and gas exporting regions. Their role will inevitably grow in these regions; the only question is what and how this could impact US interests and policies. Foremost here is the Persian Gulf and Middle East.

On one hand, China and India’s growing dependence on Persian Gulf oil suggests that their growing interests in Persian Gulf stability will converge with our own. Consequently, it would seem unlikely that China or India would see it in their interest to do things likely to seriously destabilise the region, such as stepping up arms and missile sales or contributing to nuclear proliferation, and would be more likely to free ride on US efforts to maintain stability in the region.

Moreover, while the conservative Persian Gulf states may welcome the opportunity to diversify their strategic, energy, and trade relationships with the growing presence of the Asian players, only the US can provide the military and strategic umbrella to protect them in this very volatile region and provide the strategic naval and air power projection to protect vital tanker routes and chokepoints like the Straits of Hormuz. From this perspective, it seems unlikely that the US will see a wholesale challenge to its traditional military hegemony in the Persian Gulf.

However, conflicting visions among China and India, on the one hand/arid the US on the other, over the conditions that are conducive to long-term stability in the Gulf and Middle East are likely to introduce a more complex and challenging situation for the US One telling example is the willingness of both China and India to become deeply engaged with Iran in energy and broader economic and diplomatic ties despite the US embargo and the US contention that Iran is a major source of regional terrorism, nuclear weapons development, and a threat to its neighbours.

China has seen it in its interest to be a major arms supplier to Iran consistently over the past decade, frequently including potentially very destabilising missile sales, much to the chagrin of the US. Neither has supported the US war in Iraq, which was strongly opposed by China.

Depending on how the Iraq post-war transition goes, there may be new and potentially divisive issues regarding how to deal with an unstable and potentially fractured Iraq as China and India step up their efforts to access Iraqi oil supplies. Asia has not been particularly supportive of US policy on the Palestinian-Israeli conflict historically.

So, as the Sino-Indian-Middle East nexus grows rapidly over the next two decades, it seems inevitable that the range of potentially significant disagreements over how to ensure the stability of the Gulf region will grow and with it will grow the complications for US policy in the region.

There is a potential for some of the same issues regarding US energy diplomacy and influence in the Caspian Sea/Central Asia region but they do not look to be as pointed at is the case in the Persian Gulf. In many ways, US, Chinese and Indian energy interests in the region converge somewhat more closely.

The US has reason to support pipeline proposals to move Central Asian oil and gas to China and India to promote the Eurasian states’ independence from Russian control and to promote regional energy cooperation. The one potential source of problems from this perspective is the US effort to isolate Iran. The most commercially viable means to get Caspian and Central Asian oil and natural gas to India and the rest of Asia is by pipeline south through Iran.

For both China and India, Central Asian/Caspian oil represents a potentially important alternative to Persian Gulf oil, whether it moves by pipeline or by tanker. Infact, China has already been instrumental in building pipeline infrastructure that currently allows oil swaps to occur between Turkmenistan and Iran that effectively allow exports through Iran.

US opposition to Indian proposals for a major natural gas pipeline from Iran across Pakistan to India is already a source of friction in US-Indian relations. Similarly, Indian proposals to build a gas pipeline from Burma to India would create problems for US efforts to isolate Burma.

China is concerned about the increased US presence and power in Central and South-Central Asia in the wake of the Afghan war because it aggravates their broader worries about security along a key border region in Central Asia.

This is part of the thrust behind the Shanghai Cooperation Organisation to re-organise its security space to the west in the post-Cold War era. Clearly China desires to get the US to leave the region as soon as possible but it is not clear how and whether this could affect their policies toward energy development in the region.

Another set of future issues are related to how growing energy ties with China and India could feed Russia’s re- emergence as a major player in Northeast Asian geopolitics. On the one hand, there is a strong argument that development of an extensive regional network of oil and gas pipelines and energy trade linking Russia with the major powers in the region could expand all the players’ interests in broader regional cooperation and stability.

It could also help support Russian economic development in this thinly populated part of Russia and reduce the Kremlin’s fears of eastern Russia being overrun by dynamic economic and trade forces and population momentum emanating from China.

However, the Kremlin is also trying to use energy as a key instrument of diplomacy and influence with China and India. The impact of Russia’s growing energy role will depend heavily on how Russia, China, and India manage their energy ties, either fuelling competition or cooperation.

Another area of concern involves a range of impacts of China and India’s booming oil demand as well as the impact of their implied strategy of ‘locking up’ national control of certain oil supplies to fuel their own economies, in effect, ‘taking oil off the market’.

Both countries clearly aim to lock up their own national oil supplies with many of their investments in places like Sudan and this practice is likely to contribute to higher oil prices and price volatility by reducing global market flexibility to handle tight markets, shortages, and supply disruptions.

The recent controversy over CNOOC’s bid to acquire Unocal is partly driven by concerns among many US politicians that China is attempting to “steal” US oil supplies to send to China. Secondly, many in the US feel that China and India are “competing” in open global oil markets with the US for scarce global oil supplies and driving up world prices. Nevertheless, the fact is that growing US demand for imported oil has been as important in driving global prices as China or India.

A more important problem revolves around Asia’s lack of regional institutions to manage supply crises on a regional cooperative basis and key buyers in the region are prone to panic buying during crises, fuelling market instability.

Both China and India were key factors in panic buying globally in the run-up to the Iraq war in January and February of 2003. The lack of effective demand policies or policies to manage supply disruptions makes the combined demand impact of the two a growing potential source of instability in global oil markets.

It is also quite apparent that China and India’s growing consumption of coal and the air quality impact of booming transportation consumption have grave environmental implications regionally in terms of air quality and health, and globally in terms of raising the risks that carbon emissions could be fuelling global warming. Concerns over long-term global carbon emissions simply cannot be effectively addressed without greater involvement from China and India.

This needs to be addressed both on the demand side, by slowing the rise in electricity demand growth in Asia, as well as improvements in clean coal technology and government policies regarding the preparation, handling, and transportation of coal.

A final serious and obvious area for concern is the growing role for nuclear energy in both China and India and the resulting risks of nuclear proliferation and safety problems. This will create strong pressures for improving the global regime to contain proliferation pressures and research on improving safety and disposal technology.

The recent agreement between the US and India on nuclear technology and proliferation shows the importance of these issues. As in the case of coal, there is vital need to improve electricity demand side and pricing reforms to slow the rate of growth in electricity demand.