Why Russia is a Key Player in East Asian Energy Markets and Why It Matters
RUSSIA’S ROLE IN EAST ASIAN ENERGY MARKETS IS LIKELY TO INCREASE IN THE FORESEEABLE FUTURE. HERE IS WHY.
When it comes to energy consumption, East Asian nations are growing by leaps and bounds. This is new, but not unprecedented, as we have seen similar developments during the industrial revolution that engulfed Western Europe in the late 19th century. Its scale puts Europe’s industrial revolution in second place, partly because East Asia can leverage its existing business relations with other industrialized nations around the world.
The story of the industrial revolution is the story of great inventions, and further details how new technologies were put to work at the beginning of the 19th century. Sometimes it feels as if the focus is almost exclusively on these technical developments. If we take a closer look, we can see that it was a combination of different factors that eventually led to Europe’s rapid rise during that period. Energy was the underlying factor that fueled the rapid ascent of industry.
In this new environment, Russian energy resources come in handy, providing much needed energy to fuel the East Asian miracle economy. This gives Russia considerable leverage in East Asia. And will effect Europe’s energy prospects long-term.
1. THE FIRST INDUSTRIAL REVOLUTION ILLUSTRATES THE TIGHT-KNIT RELATIONSHIP BETWEEN ENERGY AND INDUSTRY
England’s favorable location in the North Atlantic pretty much ensures easy access to global trade networks and nodes of communication. In the past, it was relatively cheap to transport coal from English coal mines to English manufacturing hubs (at least by global standards). England has a very long coast line for a country of its size. Another advantage was that England is an island nation separate from mainland Europe yet in close proximity to the continental landmass. This ensured that England had a huge market to export its wares to. Western Europe was easy to reach, reducing logistics costs (which can be a breaking point when it comes to trade in general and energy exports in particular).
On the other side of the English Channel, and in close proximity to the Essex Estuary and Surrey, we have the Netherlands and Northwestern Europe. Goods flowed into Canary Wharf from across the world, and were distributed and send into Europe. From the Thames goods were transported across the North Sea into the Netherlands. From there, manufactured goods could be transported further up inland, were brought into Germany along Rhine, Ruhr, Main, Elbe and Havel, along a dense river network.
The steam engine was the icing on the cake. Point number one, its success relied on existing commercial relations within and without the British Empire. Secondly, England did have some of the largest coal reserves on the planet, located right beneath its feet. These coal reserves were easily accessible, and exploitable at low cost. The business environment was ideal to introduce the steam engine and to scale up production fairly rapidly.
The introduction of the steam engine would not have become a success without a scalable, functional, robust economy in 19th century England. England relied on its trading partners to a great extent and upon mutually beneficial economic relations. In some ways, England greatly benefited from a multiplier effect. What I mean by this is that England was the hub of the British Empire, near the European mainland. It could export goods to the United States, due to its advantegeous location in the North Atlantic.
England’s size also allows for a sizable population, that is big enough to develop a solid manufacturing sector. Without it, England would not have been able to export goods and import commodities needed to build up industry and commerce. England’s industrial development tied up Western economies in trade and commerce, furthering their own development.
To keep this engine churning, more energy was needed, which meant Britain had to import more commodities. This was a self-perpetuating process by which more and more Western countries came into the fold of a renewed self-perpetuating process of economic development that required more and more energy to fuel the engine.
2. NOW EAST ASIA HAS BECOME THE ENERGY HUB AND NODE POINT OF THE WORLD. IN A SELF–PERPETUATING CYCLE, EAST ASIA IS ATTRACTING ENERGZ SUPPLIES FROM RUSSIA AND FROM AROUND THE WORLD.
East Asia has become the cornerstone of industrial development in the 21st century. East Asia has increased its share of global energy consumption for decades. The countries located within this region require energy to further their economic development, including coal, oil and natural gas. Once insolated Asian nations depend on international commerce, as industrial supply chains are spread throughout East Asia. They are not just found in one East Asian country, they can be found in many countries. To keep the engine churning, more energy is needed, and more countries are brought into the fold.
It is a self-perpetuating process that, conceptually, is similar to the one that we saw during the industrial revolution in Europe, and it implants East Asia and China as the center of the new energy world (and new energy paradigm). It creates a new nexus of economic relations, tying up countries located along the geographic parameters of East Asia to the center of production. This huge energy exchange allows these nations to lower energy costs per person, which allows them to focus on industrial development.
3. EAST ASIA HAS BECOME THE NEW ENERGY NEXUS OF THE WORLD. THE REGION IS THE FOCAL POINT OF THE GLOBAL ENERGZ SUPPLY CHAIN.
We will call it the new energy nexus. This new energy sphere also consists of energy exporters supplying energy commodities to manufacturing hubs in East Asia. East Asia’s industrialization is unique and in many ways quite different from the European experience. Europe’s industrial experience was firmly planted on an pre-existing economic structure that supported the adaption, innovation and development of steam engines. Wheras in East Asia’s case, technology was adopted from the West, and then superimposed on an economy that had to be developed.
In East Asia, economic growth is of a different magnitude. What I mean by this is that Europe’s industrial revolution was gradual, and change was incremental. East Asia’s industrial growth is not incremental, because the economic trajectory of East Asian economies really did change that fast.
4. Russia Has Become The Key Supplier Of Energy Commodities To East Asian Economies
Within East Asia’s own geographic parameter, Russia is the country that possesses most of the energy commodities in the northern part of the Eurasian landmass, and is rich in coal, oil, natural gas and uranium, mainly located in Siberia and the Far East. If we take all the discovered and discoverable energy resources into account, Siberia can claim the title of energy hub of the northern part of the Eurasian landmass.
Russia also possesses huge untapped oil and natural gas reserves located in the Arctic territories. In fact, most untapped oil and natural gas reserves in the Arctic are presumed to be within the Russian Exclusive Economic Zone. This matters a great deal. It is far more likely oil and gas resources are found on a continental shelf then they are on an ocean plate. That has to do with the fact that sediments compress and then conserve organic matter on a continental shelf.
Consider the sheer size of Russia’s Arctic shelf, and it becomes clear that Russia has a leg up on any Arctic competitors when it comes to recoverable oil and gas reserves yet to be found in the Arctic. These projects are very capital-intensive. This is one reason why Russia is willing to open up its Arctic region, to varying degrees, to foreign investment in offshore drilling sites.
To foster growth of natural gas and of oil production from the Arctic region, Russia has discussed with some Asian nations their willingness to import. More recently, India has shown an interest to take some of the Russian oil and gas supplies from the far north. This is part of India’s strategy to diversify its energy policy outside its traditional sphere of influence, which extends from the Indian Ocean to the Strait of Malacca. This might be an option, but we should keep in mind that the overall distance is considerable.
It appears that the Russian Arctic region contains vast coal reserves, including bituminous coal, which may well be suited for export. Even if many European countries have shrug off coal as an energy fuel of the past, Russia is in no such hurry to do so. Quite the opposite, it appears Russia will increase its current production rate. Maybe coal is reminiscent of the industrial age.
6. Russia’s Huge Natural Gas Export Potential
By now, all of the East Asian economies are looking to diversify their energy supplies, and basically all of the commodities I have mentioned above are of great interest to East Asian countries. And Russian natural gas can fill the void. There are huge natural gas reserves found in Siberia, much of it is located east of the Ural mountains. As economic growth gathers pace, more and more economies in East Asia are drawn into the East Asian energy nexus.
Russia has a bright future as the country that holds the largest natural gas reserves in the world. Much of it remains undiscovered.
7. Conclusion: Why Do Russia’s Energy Exports To East Asia Matter?
As demand in East Asian economies for Russian energy exports continues to grow further, energy supply chains will shift to East Asia, away from Europe. This is where Russia will make new investments in infrastructure and in processing facilities. This will negatively impact on companies in Europe importing natural gas and oil from Russia. This happens at a critical juncture in time, where Europe needs more Russian natural gas to replace diminishing natural gas production levels in the North Sea. Because the energy nexus will shift to East Asia, it might become more difficult for European nations to leverage or bargain for energy supplies.
The collective bargaining position of European nations may not be as good as that of some East Asian nations. We have to keep in mind that the infrastructure must be developed to deliver the fuel to its final destination. This is a costly endeavor, and investment horizons must be taken into account. This is why forecasts matter, where is global demand concentrated? The more fuel suppliers are send to East Asia, the more difficult the bargaining position of European nations. Domestic supplies of natural gas and oil may become pricier, and the quality of the fuel may not be as good, and require more short-term investments to further refine the fuel. Other alternatives such as LNG must be considered, but they come at considerable cost.
Many thanks for the shared interest in the energy world!
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