China and America Need Not Be Energy Rivals

Daniel Yergin
Daniel Yergin
Daniel Yergin Vice Chairman - IHS, Inc., Trustee - The Brookings Institution

May 20, 2007

Energy is markedly different from the other controversial matters that will be at the top of the US-Chinese Strategic Economic Dialogue, edition two, meeting this week in Washington. Trade and currencies are the now familiar issues at the centre of the economic tensions in the bilateral relationship. Energy, however, is about competition and the risks of collision around the world. At a time of tight markets and high prices, those risks can grow.

The dialogue is chaired by Henry Paulson, the US treasury secretary, who has the lead on China issues in the US government, and Wu Yi, China’s vice-premier. It is meant to provide a framework for defusing controversies and reducing the stresses in the rapidly changing relationship. The need is certainly there when it comes to energy — both to ensure that commercial competition does not turn into geostrategic rivalry, and to respond to the major environmental challenges.

For some, it is too late. In their view, the rivalry risk is already here. They see a mercantilist China single-mindedly moving to pre-empt world oil supplies. Some Chinese, for their part, fear their country being denied access to supplies and worry about the vulnerability of its lengthening supply lines.

The reality is more complex. China’s demand, while less than 10 per cent of the world total, is increasing quickly because of rapid economic growth. Its oil market is now the second largest in the world — 40 per cent larger than Japan’s — and it has gone in less than 15 years from self sufficiency to importing half its total supply.

Thus, it is not surprising that China — with a strong domestic industry on which to base a “go out” strategy — would seek to acquire and develop production assets around the world. It would be more surprising were it not to do so. For consumers in North America and Europe, it is actually much better, at a time of growing demand, that China is investing to bring additional barrels to market than not.

But perspective is required on two key points. The first is scale. For all the discussion about China’s activities, its total production outside its borders is a fraction of that of just one of the supermajors. The second is to understand the significance — and urgency — of energy security for the Chinese. For Beijing, it means ensuring that there is sufficient energy to fuel the economic growth needed for social stability and for absorbing almost 20m migrants a year into urban areas.

The real risks are not from competition in the global marketplace. Rather they would arise when oil and gas development gets caught up in larger foreign policy issues, of which those involving Iran and Sudan are currently the most obvious. What the dialogue can do is emphasise the very large common interests the two countries share as the world’s two largest petroleum consumers. The US imports 60 per cent of its oil; China 50 per cent. Between them, they account for almost 35 per cent of world consumption. Both benefit from stable markets, open to trade and investment. Here, the dialogue can help build China’s confidence in the reliability of the global market and the institutions maintaining its security. Of course, this is more challenging when anxiety about supplies and prices is so high.

China is just beginning to fill its new strategic petroleum reserve. One key question now is to develop some congruence on the purpose and management of such a reserve — and on how to co-ordinate during a major disruption.

Coal is another common interest for the US and China. They are, respectively, holders of the largest and second-largest coal reserves in the world. Half of America’s electricity is generated from coal, and three-quarters of China’s. This inevitably means that clean coal and carbon sequestration loom large on any bilateral energy agenda.

One of the most fruitful subjects is on the demand side. The emphasis around the world on energy efficiency has not been seen for decades — indeed, if ever before. It now has strong support across the US political spectrum. For its part, Beijing, contemplating a fourfold growth in its economy by 2020, has put conservation among its top priorities and is trying to shift to less energy-intensive expansion. It is not easy to do so in an economy that is swelling so fast that it has to add one or two new power plants a week. On a global basis, climate change is the new driving force for energy efficiency — as less energy usage is the biggest near-term mechanism for reducing emissions. That imperative will grow stronger. For China, there is also the immediate imperative — the all-too-evident local and regional air pollution, with direct impacts on health.

One specific “deliverable” that could emerge from the dialogue would be the removal of tariffs and barriers on trade in technology and equipment for energy efficiency and renewables. That could also become part of a broader dialogue on the knowhow for reducing energy intensity and implementing such efficiency quickly. With the way that policies and public opinion are going, that could mean building a permanent agenda out of a twice-yearly dialogue. The benefits would accrue to both countries and, at the same time, would be shared worldwide.