Why Russia is a Key Player in East Asian Energy Markets and Why It Matters

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.

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.

Russia Has Become The Key Supplier Of Energy Commodities To East Asian Economies

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 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.

Russia’s Huge Natural Gas Export Potential

Russia has a bright future as the country that holds the largest natural gas reserves in the world. Much of it remains undiscovered.

Summary: 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.

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