US Foreign Policy
Commentary

What the Rise of Asia Means for the Persian Gulf

in Program

The geopolitical importance of oil cannot be understated: the price, availability and accessibility of oil do not conform to pure market forces, but rather they are dependent on political stability and economic needs and forecasts. Financial markets best reflect this complexity: on the futures market, the price of oil reflects the fears and expectations of the market more than the immediate availability of this key commodity. The ever-present anxiety about access to oil, especially in the Persian Gulf, only highlights the growing concerns about the increase in energy demand. The rise of Asia’s economic giants is creating new dynamics in global energy markets and has broader security implications.

Because oil is the primary source of economic growth and because the Persian Gulf holds 65 percent of the world’s oil reserves, it remains the most vital region for the global economy, and for its most important beneficiary, the United States. Gulf oil abundance explains US involvement in the region’s security during the past half century. The Persian Gulf has been plagued by wars, political and religious tensions, military build-ups and sustained authoritarianism. Since the first Gulf War, the United States has assured its role as the security guarantor and privileged partner of the Gulf Arab states. However, the rise of Asia and the recent estranged relations between the United States and the Arab world might precipitate a change of great geopolitical consequence. Asia’s growing role in the global economy and energy markets in the past decade will likely influence the long-term political economy of the Persian Gulf.

China and India’s quest for secure energy supplies is likely to shape international relations in the coming decades. While the economic consequences are already felt in the global market, the political ramifications will not be fully understood for many years to come, producing powerful and controversial changes in the geopolitics of energy. The upsurge of Asian energy demand is primarily the result of China’s thirst for oil, especially in sustaining its booming manufacturing and transportation sectors. For its part, India’s energy strategy seeks greater access to natural gas supplies, partly because its economic growth is more dependent on services than industrial goods. The unprecedented and simultaneous growth in energy demand of China and India, the two most populous countries in the world, requires a close look at their profound economic and political implications.

Although China has its own oil fields, its oil production was nowhere near its demand of 5.6 million barrels a day in 2003. India, Japan and South Korea’s own energy reserves are very small. Because access to oil is so important for their economic growth and political stability, these countries have embarked on a quest for secure energy supply. Traditionally, oil and gas companies in these countries have been state-owned. In market-driven economies like the United States, the government provides economic incentives for energy companies to invest in research, development, and acquisition, whereas quasi-mercantilist economies, such as in Asia, prioritize state policy over economic rationale. In turn, energy economics is intimately intertwined with and controlled by state energy policies. While creating a national petroleum reserve and promoting the search for new reserves are at the forefront of most energy policies, Asian policies seek to go a step further. The urgency of acquiring energy supplies has recently been reflected by attempts to purchase companies with significant reserves (including the Chinese bid on US oil firm Unocal) as well as the signing long-term, billion-dollar supply contracts with energy-producing countries such as Iran, Oman, and Sudan. These bold and ambitious actions herald and accompany more aggressive, forward looking foreign policies by rising actors with agendas at odds with Western priorities.

The eruption of China as a key energy player is already affecting security in the Persian Gulf. In the backdrop of the crisis over Iran’s nuclear ambitions, and despite US concerns, China is developing stronger ties to Tehran. China’s second largest oil company, Sinopec, has recently signed a deal worth $100 billion with Iran to develop the giant Yadavaran gas field. Almost simultaneously, the Bush administration has imposed sanctions on eight Chinese companies suspected of having sold ballistic missile-related technology to Iran. These developments can obstruct US and European diplomatic efforts to prevent Iran from going nuclear since China is a permanent member of the UN Security Council. They also suggest that the new actors in the global economy will be courted by energy-producing countries to offset pressure from the United States or the West.

These developments require closer scrutiny of China’s energy policy and how it fits into its grand strategy. How do China’s energy needs affect other global strategic concerns, such as WMD proliferation in the Middle East? Does China have ambitions in the Middle East beyond energy? From the Middle Eastern side, with the US distrusted in many Arab states, oil-producing countries might consider strengthening their ties to new actors who can provide significant political and economic benefits in exchange for energy relations. In this context, how Middle East countries perceive and respond to the rise of China and its new role in the region will affect global energy security.

India, Japan, and South Korea are also actively present in or have recently signed contracts with Iran’s state-owned oil and natural gas companies. Many of these contracts, with durations of fifteen to twenty-five years, bring not just economic benefits, but also mutual political, diplomatic, and educational opportunities towards greater cooperation with Iran.

Additionally, these countries have diversified the nature and expanded the reach of their interactions with GCC states beyond the purchase of crude oil. They have invested in upstream or downstream energy ventures, are clients of Gulf petrochemical products, and see the Persian Gulf countries as markets for their own goods and services. Also, the importance of liquefied natural gas (LNG) in both the Gulf and Asia has been increasing, as LNG proves a reliable way to pursue energy diversification. In fact, the LNG sector goes beyond the producer-consumer relationship in these regions. China may soon be become the top constructer of LNG tankers, a sign of the high importance given to alternative sources of energy. The ramifications of energy integration into each country’s internal market thus go beyond energy consumption.

The greatest dangers of world energy trade lie in both the Gulf and the sea-lanes of Asia. Inter-state tensions in the Persian Gulf, including a showdown with Iran, or a major terrorism event, could significantly hamper the production and exportation of oil and LNG and affect foreign investment. Additionally, the Strait of Hormuz, the Malacca Straits, and the South China Sea all represent potential flashpoints where terrorism and piracy can strike at the heart of the global economy. It is thus imperative for oil-importing countries to formulate a national energy policy, but also coordinate regional effort to secure supplies. Providing security to ships, sharing intelligence and combating transnational networks will be critical in that regard and might bring about greater security cooperation between the economic giants of Asia.

Asian reliance on Gulf producers will endure for reasons of geographical location, delivery speed, and lack of substitutes. This reliance will likely translate into a greater role of Asian powers and a lesser role for the United States as the key economic partner of Gulf states. The rise in trade, diplomatic, and educational ties between Asian states and the Gulf will translate into greater interest in the internal and regional security of the Persian Gulf. But whether Asian countries can offer the significant security benefits that the United States provides to the Gulf states is uncertain, nor is their willingness to challenge the United States or step into its role.

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