By Jaspal Singh Sindharh
Today’s popular perception is that China’s hunger for energy resources is promoting a worldwide race to secure energy resources—a competition that threatens to destabilize world energy markets and challenge American primacy. This article argues the opposite: that China has acted in moderation until now within international energy markets, which cover the largely tradable energy resources like crude oil, natural gas and liquified natural gas (LNG). As a result, there is no need for a confrontational posture toward China on this issue. But the flux in the present international system as it evolves from a unipolar to multipolar structure distorts our perceptions of China—magnifying that nation’s smaller but more apparent efforts to secure energy externally and making them appear threatening to U.S. interests, while obscuring the fact that China has undertaken larger if less visible internal steps to minimize the transfer of its rising demand for energy to external sources of energy.
This article attempts to clarify these issues and to lay down the basis for institutionalizing the U.S. relationship with China and other Asian states in this “post–post-Cold War era,” similar to the relationship forged with Western Europe after World War II. The emerging race to secure energy supplies, one of the main themes of the present world international dynamic, can provide an opportunity to create institutionalized frameworks for inter-state cooperation.
Competing for Resources
China’s emergence as a global actor is one dimension of change in an international system now in the process of accelerating transformation to a post–post-Cold War period. China has been a major factor in the shift in economic activity from the core region of North America and Western Europe to the Asia-Pacific, breaking global economic patterns established by the Industrial Revolution. China has been the growth engine in this region, and the economic activity in the Asia-Pacific is largely characterized by petroleum-importing countries, with the exception of Malaysia and Vietnam; this also has shifted the global pattern for energy demand.
The United States remains the world’s largest oil importer, at almost 12 million barrels per day, with China a distant second at about 3.5 mbpd. China in 2005 still had just 30 million cars, compared with the United States’ 300 million. And the Chinese transport sector contributed only 8.4 percent of the country’s total carbon dioxide emissions in 2005. By 2020, however, the total number of cars on Chinese roads could reach 156 million, helping to push China’s present dependence on petroleum imports from 40 to 60 percent. Expectations of sustained increases in the global demand for energy by China and other emerging economies are not matched by expectations of increasing supply, especially of “low-cost oil.” With the exception of some possible seasonal loosening of energy markets, no real breakthroughs seem likely any time soon. Most new oil discoveries—for example, in the deep waters of the Gulf of Mexico—or Saudi Arabia’s increased capacity are still many years away from commercial realization. Energy supplies have been tightened further due to “resource nationalization,” an increasingly attractive option for states in the post–post-Cold War structure of the international system.
No wonder China’s entry into international energy markets as a major importer is causing apprehension. But China has done much to open new oil fields for production in many challenging regions of the world, thus increasing the total world supply. Also, China has the crude oil exploration and extraction technology and expertise that many other emerging economies like India or oil producers like Venezuela or Angola lack. This has led to numerous cases of “situational” cooperation among major oil-importing nations centered around China as the operating partner for new oil fields. Notably, China has not attempted any investment in mature Western oil companies after its sole attempt to buy a Western oil company, Unocal, was rebuffed in 2005.
These changes are taking place at a time when the international community, since the signing of the Kyoto Agreement, has begun to grapple seriously with the issues of emissions and global warming. Rapid degradation of the global environment due to emissions from use of fossil fuels has turned the latter from a domestic issue to one of global concern. The global environment has emerged as the first truly international “public good” of the 21st century, an unprecedented phenomenon in world history and one that demands the urgent attention of all governments. It seems likely that states aspiring to global leadership, including the United States and China, henceforth will be expected to demonstrate leadership on issues related to energy and the environment where states will have to cooperate and adhere to global standards and concerns.
China’s Increasing Consumption
In historical perspective, when states industrialized at such a pace while becoming increasingly dependent on external energy sources, they proved highly destabilizing—not only for the international balance in their regions, but also for world order. A case in point is Japan’s rapid industrialization in the early 20th century, which set into motion events of calamitous consequences for China and other parts of Asia, including Japan itself. But despite massive sustained increases in gross domestic product and with higher energy intensity than the Organisation for Economic Co-operation and Development (OECD) countries, China has not proven a destabilizing force on the international energy markets. This has been due to several factors.
First, as the third-largest trading nation in the world, China is a responsible global actor firmly integrated into a web of economic interdependence with the advanced economies of the West. An economic downturn elsewhere—particularly in the United States or in other Western economies—could have a ripple effect on the Chinese economy. China’s interests lie in a stable economic environment. The Chinese government’s conduct during the aftermath of the 1998 Asian financial crisis demonstrated this when China did not devalue the renminbi, which could have been disastrous for the recovery of the Southeast Asian economies.
Second, China remains self-reliant in providing for up to 90 percent of its energy needs, as Chinese Premier Wen Jiabao has stated. This includes coal, domestic crude oil production and other sources of energy, such as hydropower and nuclear power. China was a crude oil exporting nation until 1993, almost halfway through its quarter-century of double-digit economic growth. Presently, China’s crude oil consumption of more than 7 mbpd is the second-largest in the world, even though China still meets as much as 60 percent of its needs from domestic sources. Predictions are that by 2020 China will consume up to 11 mbpd of crude oil, 60 percent of it imported. And this prospect cannot simply be wished away: China’s road system has doubled from 100,000 km in 1990 to 200,000 km in 2004, literally paving the way for an increase in petroleum consumption. Yet promotion of energy efficiency and new engine technologies, and the introduction of high taxes of 12 to 20 percent on large autos, are examples of the government’s efforts to implement policies aimed at reining in oil consumption. Third and most significantly, China, followed by India, remains heavily reliant on coal. Coal production in China during 2005 was 2.19 billion tons—more than that of the United States, Russia and India combined. Coal is the single most important energy source for power generation in China and India, providing 75 percent and 85 percent of the total, respectively. Further, coal meets 70 percent of China’s energy requirements (55 percent of India’s needs)—compared with global dependence on coal as an energy source of only 24 percent. This huge dependence on coal, a domestically produced energy source, has allowed China’s economy to grow in a setting relatively insulated from the volatility of international energy markets. The environmental impact of this dependence has been significant, however—a reason international cooperation takes a more urgent dimension for China and India. Any abrupt shift by these two nations from coal to other sources of energy, in particular to hydrocarbons, could destabilize international energy markets with today’s tight supply-demand equations.
Because coal is a principal source of energy, China, as well as India, has managed to escape the global phenomenon of the rise of “blue gold,” or natural gas. -Europe’s shift from coal to natural gas, which accelerated during the last decade of the 20th century, saw the European Union coal market shrink by half with the growing demand for natural gas as the cleaner, more environmentally friendly fuel. Also, coal had become prohibitively expensive to produce domestically in Europe. Even in the United States, the cost of energy from nuclear power at 3.5 cents/kWh was much lower during this period than that of coal at 4.2 cents/kWh, with the cost of natural gas between the two (although nuclear energy has hidden costs, such as storage of nuclear waste). Coal use, of course, carries the problems of carbon dioxide, sulfur dioxide and nitrogen oxide -emissions. For China, as for India, coal continues to be the cheapest and most competitive source of power generation. And since natural gas itself has been trading at unprecedented high prices in regional spot markets, it holds no promise as a low-cost panacea for China’s (or India’s) rising energy demands. Further, as LNG becomes more readily tradable on international energy markets, the advanced economies need to see that China and India shift their demand to LNG from coal in a phased manner.
Under various scenarios, demand for LNG in North America could increase substantially by 2020, with the United States, Canada and Mexico becoming large LNG importers. This would rival the already increasing European Union demands for natural gas and could spark renewed competition in the energy markets across the hydrocarbon spectrum.
But this can be avoided if the developed economies—particularly the United States and the EU—help China and India develop advanced coal technologies like fluidized coal technology or Integrated Gasification Combined Cycle (IGCC, a clean-coal technology that turns coal into gas) for power generation so that a significant part of world energy demand remains based on coal. This also would require institutionalizing interstate energy cooperation today rather than having a blind faith in the markets to rectify the situation later. Stabilizing Global Energy Markets
Institutionalizing international cooperation with the purpose of avoiding further intensification of competition for hydrocarbons and developing technologies to utilize different forms of energy suitable for various cost structures around the world requires the participation of the United States, China, India, Japan and other leading nations. The recent mission of the U.S. secretary of Energy to Beijing is a step toward creating such cooperation among the energy-importing nations of Asia with the United States. Once established, this cooperative framework can extend to other fields like the regulation of energy trade, emissions compliance and cross-border high-voltage electricity transmission. Institutionalized cooperation in energy would provide the ideal conditions of lengthy time horizons and reciprocity to mitigate the pitfalls of short-term gains through competition or cheating. And it could create the basis for an Asian version of the International Energy Agency with U.S. participation. Sharing data in the construction of, filling up of or release of supplies from strategic reserves—along with coordination of energy sector policies among China, the United States and other major states—would help maintain stability in the international energy markets. In addition, it would set the stage for creating new technologies through joint investments, which would provide for a sustainable global environment. This as a whole would make for a more predictable and cooperative international order in the future. Jaspal Singh Sindharh is a Ph.D. candidate in International Relations at SAIS. He was a consultant to the World Bank’s Energy Division, East Asia Region. |
