Diversification and Energy Security Risks: The Japanese Case
This article explores the relationship between diversification and energy security risks. It uses portfolio theory to conceptualise energy security as an insurance mechanism against disruptions to energy import markets. It provides quantitative measures of systematic and specific risks associated with Japanese energy imports during the period 1970—99. It suggests that Japan's policy of diversification of energy import sources has reduced specific risks, although fundamental changes in the political and economic structure of international energy and, in particular, oil markets have also significantly reduced systematic risks. The article concludes that, despite their limitations, portfolio measures provide a much more theoretically and methodologically robust indicator of energy import security than traditional measures of dependence.
1 The author would like to thank Takashi Inoguchi, Robert Keohane, Masaru Kohno, Ken Koyama, Tatsujiro Suzuki and others at a Roundtable on International Political Economy held at the University of Tokyo in 2002 for valuable comments on a draft of this paper. He also benefited from comments from Peter Drysdale, Alexis Dudden and Javed Maswood. He acknowledges the generous assistance provided by the Japan Foundation which enabled him to spend six months as a Japan Foundation Fellow at the University of Tokyo from 2001–02. He also acknowledges the generous assistance from the Institute of Energy Economics and the Osaka School of International Public Policy, University of Osaka for extensive access to their databases during that period.