By Marin Katusa, Chief Energy Investment Strategist
The Senkaku Islands, also called the Diaoyu (Fishing) Islands in Chinese, are five unremarkable and uninhabited landmasses in the East China Sea to the northeast of Taiwan. The islands cover total area of only about 7 square kilometers, less than a tenth of the size of Manhattan.
Japan, China, and Taiwan all lay claim to the islands. Though heated words were often exchanged and warnings frequently issued by all sides, everyone assumed that the status quo would continue, and calmer heads would prevail…
Until now.
On September 11, 2012, Japan formally nationalized three of the five islands, setting off events that could lead all the nations in the region down a warpath.
Chinese citizens, clearly angered by Japan's provocation, began a series of anti-Japanese protests that spread across almost 200 cities. Japanese products were boycotted, cars were smashed, and stores were looted. A week after the Japanese announcement, a flotilla of a thousand Chinese ships entered Japanese waters. A week after that, China sent its strongest signal yet: the country commissioned its first-ever aircraft carrier into service.
The Taiwanese navy, not to be outdone, sent ten coast guard ships along with 75 fishing boats to the islands. When they were met by the Japanese coast guard, both sides began firing water cannons at each other.
The Americans added fuel to the fire by stating that, as the islands are under effective Japanese control, the USA would be obliged to come to Japan's aid under a 1960 security treaty if the islands were attacked. This would put the United States – the largest economy in the world – against China, which is the second-largest economy in the world.
So there you have it: the greatest threat to world security is not Iran, but possibly a collection of small islands in the Pacific.
But why are these countries willing to go to such lengths to claim these islands?
The answer is simple: OIL!!!!!
In the 1970s, evidence was found that points to significant amounts of oil and gas in the waters around these islands:
The EIA estimates that there could be roughly 100 million barrels of oil and 2 trillion cubic feet (TCF) of natural gas in the East China Sea, though Chinese sources show resource estimates of 160 billion barrels and 250 TCF of natural gas. If the Chinese sources were correct, this area would have more oil than the entirety of Iran.
Obviously, the resource estimates are probably much higher than what could be extracted out of the ground, but it demonstrates the massive potential in the region.
China and Japan both rely on imports from foreign countries to supply most of their oil and gas needs, as domestic production does not come close to satisfying rising demand from their populations. Every barrel they can produce within their own borders is a barrel they do not have to purchase from an unstable Middle East or a saber-rattling Iran.
As cheap and accessible oil runs out all over the world, countries will become increasingly desperate to secure whatever oil and gas fields they can in order to fuel their economies in the future. This constant striving for energy security means that these countries will fight tooth and nail for any large oil and gas fields, especially ones with as much potential as the Senkaku Islands.
Even if this means war.
For those investors who wish to grow their energy portfolio, they must be mindful what energy security means to their investments. Whether their money is in a large, multinational oil company or a small junior looking for its first successful well, investors must first consider whether or not the company fits into the bigger picture:
Energy, not the US dollar, is going to be the currency that world leaders trade in.
Are you going to be left behind?
Or are you going to join us as we find the best energy companies in an energy-hungry world?
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