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Will US-China Rivalry Hasten the Energy Transition?

Public Policy

The energy world changes rapidly. Technology, social and economic patterns, emergence of new sources, and depletion of old ones can occur within a decade. But it is geopolitics that renders the energy world truly unpredictable.

Geopolitical risk is new neither to CEOs making decisions about investments in foreign markets nor to energy analysts. But because energy is a foundation of global economic and strategic power, geopolitics shapes energy in more profound ways than other commercial sectors.

In order to understand the relationship between energy and geopolitics, we must first examine the energy strategies of the current hegemon, the United States, and its challenger, China. While the United States champions both fossil fuels and renewables, it will seek to retain its dominant position in oil and gas and extend the hydrocarbon era as long as possible. China, on the other hand, is leading the world in renewables and the clean-energy transition.

These two competing energy strategies will shape the future of energy. But it is China’s challenge to U.S. hegemony that makes this energy competition viable and serves to accelerate the clean-energy transition. Without it, hydrocarbons would dominate far longer than they would without it.

Global hegemony and fossil fuels

Past energy transitions have occurred during times of intense geopolitical competition and reveal a relationship between global hegemony and dominance in the dominant energy source. In the nineteenth century, Britain had the world’s largest coal reserves and led in coal-based science and technology. Coal powered economic growth during the Industrial Revolution, while its coal-powered navy ruled the high seas.

Britain had ceded its dominance in coal to the United States in 1901. At the same time, Germany began to challenge British hegemony, prompting the latter to switch from coal to oil for its navy. The race for oil then intensified in the next twenty years, and included Hitler’s invasion of Russia and Japan’s of the Dutch East Indies to secure oil supplies.

The United States had led the production of oil and oil-related science and technology since 1860. The “oil edge” also helped propel it to a position of world hegemony after the Second World War. Though the Soviet Union eclipsed the United States in production in 1975 and thereafter, there was no power able or willing to challenge to the oil-dominant global energy system. The Soviet Union, after all, was just as invested in extending oil’s run.

The last ten years

The current-day energy transition to a cleaner energy regime that mitigates the social, environmental, political and economic costs of global warming started in earnest in the 2000s, just as China was beginning to hit its groove after joining the World Trade Organization.

Global production of oil was forecast to be on the verge of peaking. In fact, global production of conventional oil supplies did peak in 2006, but the unconventional (shale) revolution helped oil to surge again. The United States then reassumed the mantle of the world’s leading producer. At the same time, the country became a major player in producing and adopting solar and wind power technologies.

As China, meanwhile, continued its economic ascent, its energy strategies changed dramatically. In the 2000s and early 2010s, Beijing seemed destined to purchase every available barrel of oil – its demand growth was the major that oil prices rose in the 2000s and stayed high until 2014. Today, it is proactively reducing oil imports to limit its dependence on foreign supplies. It is also embracing renewables to mitigate health and environmental degradation from massive amounts of coal use. With these imperatives, China has become the world leader in production and science and technology of renewables.

The next ten years

U.S.-China rivalry has deepened, of course, since Trump entered office. The rivalry will likely to produce more volatility in global politics in coming years.

In recent weeks, oil markets have experienced considerable volatility driven by Trump’s canceling of the Iran nuclear deal and the continuing decline of Venezuela. These events have driven a large volume of analysis (here, here, and here, for example) about the risk of geopolitics to the oil market. These analyses are accurate but also myopic: geopolitics are constant factors shaping energy markets and appear, so far, to be mere tremors to which we have grown quite accustomed. Since the start of the Arab uprisings in 2011, the oil market has, in fact, been saturated by geopolitical risk.

The earthquake is how China’s geopolitical challenge to the United States will hasten the clean-energy transition. China will continue to develop renewables and move away from oil to the extent possible. There are already signs that its oil demand is set to sag. Trump’s policies are actually encouraging the energy transition. By focusing on increasing U.S. oil and gas production at all costs, he is playing a short game. China, meanwhile, is playing a long one. It has taken advantage of Trump’s energy policies to cozy up to Europe, whose energy interests are largely aligned with its own in seeking to increase renewables in the energy mix.

The pace of the current-day transition will depend on China’s success. The most likely outcome is that a single energy source will not dominate. Moreover, we are unlikely to have a single hegemon, which is good: a multi-polar energy world is certainly in the majority interest.

12 Comments on "Will US-China Rivalry Hasten the Energy Transition?"

  1. Davy on Thu, 28th Jun 2018 7:24 am 

    “China, on the other hand, is leading the world in renewables and the clean-energy transition.”
    Europe is leading the clean-energy transition not China. China has an incomplete transition in regards to application on the ground. Europe is changing behavior. China is just producing product. It hasn’t shown the degree of energy rationalization Europe has. China is too industrialized with smokestack industries to effectively do what Europe is capable of doing. The US is somewhat in between. The political leadership is not there in the US but there is niche leadership with industry.

    “By focusing on increasing U.S. oil and gas production at all costs, he is playing a short game.”
    I disagree with this usual statement of US policy. I don’t really see where presidents have impacted the real energy situation except around the edges. It is business that drives energy in the US. The admiration drives the hype. The jawboning is important but the real mover is the profit motive in industry in the US.

  2. John on Thu, 28th Jun 2018 7:24 am 

    The first statement of this article is demonstrably wrong. New energy systems come around but transition is painfully slow. We have been mining coal for a thousand years yet today we burn more coal in a year then all the coal burnt between 1700 and 1800.
    China increased coal consumption by 80 million tonnes last year. China has also become the largest importer of oil. Hardly cause for celebration.

  3. Davy on Thu, 28th Jun 2018 7:25 am 

    It will be interesting where this rivalry between the US and China goes. We are in a civilization with the characteristics of a complex ecosystem. Niches are filled and new arrangements limited. What comes after an apex ecosystem is succession and that can only be down in complexity. I am not saying we are there now but we are near a divergence because of exposure to boundaries of disequilibrium that will result in destructive change. There is also exposure to planetary boundaries at play that are part of this. This bifurcation could be 5-10-20 years. This is a short time but for mortals if feels long. This is a process also so many bifurcations are occurring with convergence. Currently there is a plateau occurring of overall stasis of an apex ecosystem.

    This could mean that the US and China will seek to change their relationship and in the process take each other down to a different state of economic equilibrium. With it will go the rest of the world not because the US and China are special but because their rivalry is the dominant economic force of change now. Both sides will win some and lose some but in overall economic decline because globalism is not about divergence. No other arrangement is as materially productive as globalism.

    The US will drop the most mainly because this process has been ongoing and it represents a ntural reorientation to a multipolar world. This process of reorientation is nonnegotiable because it is systematically adaptive and self-organizing. It is the nature of globalism. If globalism breaks it is uncertain if a new dominate power or powers will emerge but as far as globalism is concerned unipolar is over.

    The changes Trump has introduced will just serve to make this process of decline stronger. Populist policy is the disrupter to our global apex economic ecosystem but scale and timing are somewhat deceptive. There will be inertial forces involved. Aspects of the global economy are apolitical and yield driven. Individuals and small groups drive their own policy but they live along with national policy. These forces are hidden below the surface and are unpredictable because they represent many divergent goal. The most important individual force in market based capitalism driven by individual greed but there is then ideology and power to combat these forces. Long story short is China and the US will either bring down this apex economic ecosystem slowly or quickly but it has peaked and it is in a process of forced disequilibrium.

  4. Antius on Thu, 28th Jun 2018 7:42 am 

    China has recently issued a moratorium on the building of new solar power plants. Investment has instead shifted towards natural gas and nuclear. Without coal, these are the lowest cost option for base load power supply.

    The Chinese now look poised to follow the French example from the 1980s on a much larger scale and with much improved technology.

    If, as looks likely, they are able to export EPRs at a cost that undercuts AREVA, then the French will be in trouble. The Chinese have economy of scale and domestic market large enough to build up low-cost supply lines. They will ultimately be able to build plants more quickly and at much lower cost than their rivals.

  5. JuanP on Thu, 28th Jun 2018 8:13 am 

    “The energy world changes rapidly. Technology, social and economic patterns, emergence of new sources, and depletion of old ones can occur within a decade.”

  6. shoal on Thu, 28th Jun 2018 9:51 am 

    “Turmoil Awaits” As China Prepares To Ban Short-Term Dollar Bond Sales”

    “China is caught between a debt rock and a hard soaring dollar. On one hand, over the past few years, taking advantage of a relatively cheap and stable dollar, China’s semi-SOEs corporations gorged themselves on dollar borrowings, blowing out their balance sheets but not in yuan but rather in greenbacks. On the other hand, the dollar has surged in 2018 as the yuan has tumbled at a pace not seen since the 2015 devaluation, leaving USD-exposed borrowers scrambling to rollover existing debt. So faced with the threat of another surge in defaults among USD-borrowers, Bloomberg reports that China is slowing approvals for offshore bonds and is even considering whether to ban outright short-dated issuance in dollars, moves that would reduce financing options for the debt-laden developers that sit at the center of the nation’s economy.”

    “While the long-term view is accurate, and is a much needed “rationalization” of China’s bloated corporate debt bubble, the bigger threat is if the bond market “turmoil” gets out of control at a time when China’s economy is already suffering; meanwhile should the sharp Yuan devaluation not serve as a boost to the economy but merely reinforce the same capital outflow dynamics observed in late 2015 and early 2016, it is likely that a repeat of the global bear market that ensued over two year ago – from which the US was mostly spared – could be in the cards.”

  7. Antius on Thu, 28th Jun 2018 12:30 pm 

    China attempting to crash the US stock market?

    That would be painful for them in the short term, but I suspect the Chinese are interested in long term geopolitical dominance. I would be surprised if this were true.

  8. shaol on Thu, 28th Jun 2018 12:57 pm 

    “Is China Part Of The “Emerging Market Crisis”?”

    “Being huge, consequential and technologically advanced, China isn’t normally lumped into the “emerging” category with Brazil and Argentina. To most observers they’ve already left the kids table and are now seated with the developed-world adults. But that might be premature. A big part of China’s economic ascendance was purchased with borrowed money – including a lot of US dollars – and came at the perceived expense of US well-being. And the US now wants to redress what it sees as unfair terms of trade in the most abrupt way possible. This leaves China with huge debts to service and – possibly – a declining trade surplus with which to do it. Here’s how today’s Wall Street Journal summarizes the situation: Has the Big Yuan Short Finally Arrived? Chinese markets are in trouble once again.”

    “But there’s another side – the emerging market side – to a Chinese devaluation: All those dollars that Chinese companies and local governments have borrowed would – with a rising dollar – become a lot harder to pay off. The following chart illustrates the magnitude of China’s dollar obligations relative to other emerging countries. $100 billion isn’t unmanageable for a several-trillion-dollar economy, but it’s definitely a problem in a world of many other problems. To sum up, a Chinese devaluation helps with trade but hurts with debt repayment. And it’s not clear which side of that equation outweighs the other – or whether this kind of currency war escalation might get out of hand.”

  9. JuanP on Thu, 28th Jun 2018 3:46 pm 

    “Chinese firms to stay in Iran despite US threats”
    I think the biggest beneficiary of the illegal US sanctions on Iran will probably be China. China is likely to buy up at a discount any Iranian assets others are foced to forfeit by the US government. This means more oil and gas for China and a closer relationship between Iran and China. How does this benefit US citizens?

  10. Free Speech Forum on Fri, 29th Jun 2018 9:25 am 

    Trump is driving up the debt, expanding wars, killing the economy with a trade war and sanctions, raising taxes, destroying the Bill of Rights, and increasing regulations and Americans are dancing in the streets.


    Men truly go mad in crowds.

  11. MASTERMIND on Fri, 29th Jun 2018 9:56 am 

    Free speech

    Yes you can’t reason with Trump voters..They are religious lunatics..And we all saw on 911 how far religious lunatics will go..This is why our founding fathers wanted religion and government to be separated..The Republican party created their own religious party..And now the lunatics are running the asylum..

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