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	Table of Contents
p. 22 of 25 BACK | NEXT Foreword, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia III. The challenge of higher oil prices Adjusting to higher oil prices: The challenge for developing Asia Why are oil prices so high? Why high oil prices matter Policy responses to higher oil prices Long-term responses Conclusions Selected references Statistical appendix

Asian Development Outlook 2005 Update : III. The challenge of higher oil prices

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Long-term responses

Asia needs energy, particularly power, to develop. The elimination of poverty and enhanced social development will depend critically on securing future supplies of energy and on ensuring that it supports investments in agriculture, basic health and sanitation, education, power, transport, and industry. For the foreseeable future, oil will remain one of--if not the--major source of energy for meeting these needs.

Over the long term, several factors will influence future oil dependency and energy efficiency in developing Asia. An important starting point is for national energy policies to make rational choices about the development of an appropriate energy mix. Such a framework needs to clearly set out strategies for ensuring efficiency in use and development, adequacy and reliability of supply, and measures to mitigate environmental impacts. Investor confidence in oil and other energy sectors benefits from a predictable and transparent framework to guide government decisions over the long run. An improved investor climate will in turn promote supply and help stabilize prices.

Within the broader framework of a national energy policy, a number of specific measures are likely to reduce susceptibility to the risks of high oil prices. However, on a broader view, promoting energy efficiency and diversity transcends the narrow boundaries of energy policy. Policies on competition and investment, transportation, technology, and even finance all have an important role to play--as well as, of course, energy pricing policies.

The development of competitive markets in oil and other energy products is also important. In many of the region's developing countries, the oil sector has long been dominated by inefficient state-owned entities. Inviting the private sector to participate in the oil and energy sector is likely to be beneficial but may require legal, institutional, and regulatory changes. Access to energy-efficient technologies and related know-how, which may be protected under intellectual property safeguards, may not be possible without market opening and foreign participation. In the past, heavy regulation of ownership has aggravated supply and capacity problems and has deterred investment.

Transport policy will play a major role in influencing future oil dependency and energy efficiency, since vehicles are the largest source of demand for oil in developing Asia, and vehicle ownership is set for explosive growth. For example, the PRC is set to become the world's second-largest automobile market within a decade. Decisions about investments in road and rail infrastructure, urban transportation systems, vehicle taxation, and user costs will all exert an important structural influence on demand for and dependence on oil. Here, too, competition should have a key role to play in making choices available to consumers and in helping ensure that resources are used efficiently. Where competition is not possible, the role of regulation should be to help mimic competitive outcomes. An important guiding principle should be that transport users, whatever the mode, should pay prices that fully internalize social costs.

There are of course many other areas where policies will have a long-term effect on oil dependency and energy efficiency. For example, failure in rural credit markets may impede investments by farmers in fuel-efficient methods for generating power. In some cases, it may make sense to subsidize or provide tax incentives for clean energy alternatives that generate significant external benefits in terms of health, time savings, or the reduced risks that follow from diversified energy sources. The case for carbon emission taxes is of course well understood and documented.

Another long-term response is illustrated in the buildup of strategic reserves of oil by the PRC and India. Strategic stocks are not intended to guard against high prices; their main objective is to ensure oil availability in the event of a physical disruption in supply. Early last year, the International Energy Agency (2004) estimated that the PRC had 35 days of crude oil reserves and that India had 15 days. Both countries have declared their intention to significantly increase strategic reserves and are investing in storage facilities. The Second ASEAN+3 Ministers Meeting on Energy, held on 13 July 2005, also affirmed the importance of strategic oil reserves as an important element of an overall "energy security" package. At this time, the ASEAN+3 Initiative aims to acquire oil stocks on a voluntary and commercial basis.

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