Amer­ica’s dom­i­na­tion of oil and gas will not cow China

Be­ing an im­porter of fos­sil fuels and an ex­porter of re­new­able tech­nol­ogy is not so bad

Business Day (Nigeria) - - THE BIG READ -

“THE UNITED STATES OF AMER­ICA is now the num­ber- one en­ergy su­per­power any­where in the world,” Pres­i­dent Don­ald Trump told oil­men in Mid­land, Texas this sum­mer, from a stage dec­o­rated with gleam­ing black bar­rels. The sheer vol­ume of hy­dro­car­bons that such Amer­i­can oil­men have re­leased from the shale be­neath Mid­land and pre­vi­ously un­forth­com­ing ge­ol­ogy else­where gives sub­stance to his boast (see chart 1). Over the past decade Amer­ica’s oil out­put has more than dou­bled and its gas pro­duc­tion in­creased by over 50%. Amer­ica is now the world’s top pro­ducer of both fuels.

Had they heard Mr Trump say that “We will never again be re­liant on hos­tile for­eign sup­pli­ers,” pres­i­dents from Franklin Roo­sevelt on might have nod­ded in en­vi­ous ap­proval. Af­ter the sec­ond world war Amer­ica’s un­matched abil­ity to con­sume oil out­stripped its un­matched abil­ity to pro­duce it. En­sur­ing sup­plies from else­where be­came an over­rid­ing pri­or­ity. The oil shock of the 1970s had a pro­found ef­fect both on the econ­omy and on geopol­i­tics, driv­ing much of Amer­ica’s sub­se­quent in­volve­ment in the Mid­dle East. The surge in do­mes­tic sup­ply in the 2010s both boosted the econ­omy and opened up new geopo­lit­i­cal op­por­tu­ni­ties. Amer­ica can ap­ply sanc­tions to pet­rostates such as Iran, Venezuela and Rus­sia with rel­a­tive im­punity.

But what it might mean to be an en­ergy su­per­power is chang­ing, thanks to three linked global shifts. First, fears about fos­sil­fuel scarcity have given way to an ac­knowl­edg­ment of their abun­dance. Not least be­cause of what has been achieved in Amer­ica, the en­ergy in­dus­try now knows that it will be lack of de­mand, not lack of sup­ply, which will cause pro­duc­tion of oil, coal and, later, gas to dwin­dle. In its lat­est “World En­ergy Out­look”, pub­lished on Septem­ber 14th, BP, an oil com­pany which has re­cently said it plans to go car­bon neu­tral, ar­gues that de­mand for oil may al­ready have peaked, and could go into steep de­cline (see chart 2 ).

This is be­cause of the sec­ond shift: an ac­knowl­edg­ment by most coun­tries that, for the sake of the cli­mate, re­liance on fos­sil fuels needs to come to an end. And that leads to the third shift: elec­tri­fi­ca­tion. Fos­sil fuels pro­vide heat that is mostly used to move things, be they ve­hi­cles or elec­tric gen­er­a­tors. So­lar pan­els and wind tur­bines pro­vide en­ergy as elec­tric­ity straight off.

Max­imis­ing their emis­sions-free ben­e­fits means pro­cesses and de­vices that now rely on com­bus­tion must in fu­ture use cur­rents and bat­ter­ies in­stead. The BP anal­y­sis ar­gues that in a world go­ing all out for de­car­bon­i­sa­tion the share of en­ergy used in the form of elec­tric­ity would rise from about a fifth in 2018 to just over half in 2050.

Fall­ing de­mand for fos­sil fuels will tilt the bal­ance of power away from pro­duc­ers and to­wards con­sumers—though there will doubt­less be re­ver­sals now and then along the way. And in a world which needs to gen­er­ate much more fos­sil-free elec­tric­ity, mass pro­duc­tion of the means whereby to do so will be­come cru­cial, as will gov­ern­ment back­ing and know-how in de­ploy­ment. Be­ing a mighty pumper of oil will do a lot less for Amer­ica un­der such con­di­tions than once it might have done. But China, the world’s big­gest fos­sil-fuel im­porter as well as its lead­ing ex­po­nent of re­new­able en­ergy at gi­gawatt scales, will have the wind, as it were, at its back.

The covid-19 pan­demic has pro­vided a dra­matic pre­view of a world in which de­mand for oil falls in­stead of ris­ing. When the globe stopped spin­ning in March, its thirst for oil sud­denly sub­sided. Pet­rostates de­pen­dent on pricey oil for their spend­ing now face gap­ing deficits. In­vestors have fallen out of love with oil com­pa­nies. For all Mr Trump’s grate­ful boos­t­er­ism, the value of Amer­ica’s shale sec­tor has fallen by more than 50% since Jan­uary. Exxonmo­bil, an oil com­pany in­cluded in the Dow Jones In­dus­trial Av­er­age since 1928, has been kicked off it. With a market cap­i­tal­i­sa­tion of $155bn it is worth con­sid­er­ably less than Nike, a shoe­maker with a swoosh.

In the face of this tur­moil China’s de­mand for oil im­ports, al­ready the largest in the world, con­tin­ues to grow—pro­vid­ing some wel­come sta­bil­ity. The coun­try’s in­de­pen­dent re­fin­ers—the “teapots”—have be­come large enough that they help set oil’s price floor. “They are es­sen­tially the vacuum cleaner of the crude market,” says Per Mag­nus Nysveen of Rys­tad En­ergy, a con­sul­tancy. Michal Mei­dan, who leads China en­ergy stud­ies at Ox­ford Univer­sity, points out that the trad­ing arms of state-owned oil gi­ants SINOPEC and China Na­tional Petroleum Cor­po­ra­tion are now two of the three largest traders of crude car­goes priced on the Platts Dubai fu­tures con­tract, which means they in­flu­ence the price of crude bound for Asia. Low prices also al­low China to build up its strate­gic re­serves.

Big finds off the coasts of Brazil and Guyana and the de­vel­op­ment of Aus­tralia’s liq­ue­fied nat­u­ral gas (LNG) ca­pac­ity, along with Amer­ica’s shale boom, add to China’s op­por­tu­ni­ties; a buy­ers’ market is a good place to be the big­gest buyer, notes Kevin Tu of Columbia and Bei­jing Nor­mal Uni­ver­si­ties. There are plenty of bullish oil­men who think that, BP to the con­trary, peak de­mand has yet to be reached. But even they recog­nise that the sup­ply of oil be­low ground out­strips the thirst above it, and that com­pe­ti­tion for cus­tomers is likely to heat up.

In some in­stances com­pe­ti­tion for Chi­nese de­mand may be straight­for­ward. When it em­barked on a price war with Rus­sia this spring, Saudi Ara­bia slashed prices on ship­ments bound for China. The coun­try’s big­gest re­fin­ers are mulling a plan for a buy­ing con­sor­tium to strengthen their ne­go­ti­at­ing power with the Or­gan­i­sa­tion of the Petroleum Ex­port­ing Coun­tries. China will prob­a­bly also flex its fi­nan­cial mus­cle as pet­rostates buckle un­der debt. It has is­sued oil-backed loans to crude-rich coun­tries such as An­gola and Brazil for more than a decade.

China’s po­si­tion as a buyer also al­lows it to un­der­cut Amer­ica’s at­tempts to squeeze oil ex­porters. Chi­nese buy­ers long con­tin­ued to im­port Ira­nian and Venezue­lan crude. Its en­ergy al­liance with Rus­sia is par­tic­u­larly im­por­tant.

A dif­fer­ent strength

As en­ergy ex­pert Daniel Yer­gin points out in “The New Map” (see ar­ti­cle) Vladimir Putin re­alised the sig­nif­i­cance of en­ergy re­la­tions with China early on; but the pivot to China be­came more urgent af­ter the fi­nan­cial cri­sis of 2007-09. In 2009 the China De­vel­op­ment Bank lent two state- con­trolled Rus­sian com­pa­nies, Ros­neft, an oil pro­ducer, and Transneft, a pipe­line builder and op­er­a­tor, $25bn in ex­change for de­vel­op­ing new fields and build­ing a pipe­line which would sup­ply China with 300,000 bar­rels of oil a day.

In 2014 Western sanc­tions over Crimea in­spired Gazprom, an­other Rus­sian en­ergy gi­ant, to com­mit to a long-hag­gle­dover gas pipe­line, the Power of Siberia, which opened last De­cem­ber. Ty­ing in Chi­nese custom gives Rus­sia a large market un­moved by calls for sanc­tions at a time when Euro­pean de­mand is fal­ter­ing. But as Erica Downs of Columbia Univer­sity points out, “As soon as a pipe­line is built, the bal­ance of power shifts from sup­plier to buyer.” Af­ter the first oil pipe­line was built, China re­fused to pay the agreed price.

All this power in the market, though, can­not mask the geopo­lit­i­cal down­side of re­ly­ing on im­ports. Be­ing a large im­porter may give you more power than be­ing a smaller one; but it still leaves you vul­ner­a­ble. China is acutely aware that much of its oil comes through the straits of Hor­muz and Malacca, which could be closed by third-party con­flicts or, in ex­tremis, the US Navy. In re­cent months China’s con­cern about en­ergy se­cu­rity has risen as re­la­tions with Amer­ica have de­clined, notes Ms Mei­dan—for all the cur­rent talk of de­cou­pling, China has been buy­ing lots of LNG from Amer­ica, as well as crude for its stock­piles. Com­mu­nist Party doc­u­ments for China’s new five-year plan em­pha­sise the need for a more flex­i­ble, reli­able en­ergy sys­tem.

What China lacks in oil and gas sup­plies it makes up for with in­dus­trial pol­icy, which it has long been us­ing to sup­port do­mes­tic coal pro­duc­tion and nu­clear power as well as what is now by far the world’s largest re­new­ables sec­tor. Chi­nese com­pa­nies have in­vested in mines from the Demo­cratic Repub­lic of Congo (DRC) to Chile and Aus­tralia, se­cur­ing ac­cess to the min­er­als needed for so­lar pan­els, elec­tric ve­hi­cles and the like. Un­able to be a pet­rostate, it is be­com­ing what one might call an elec­trostate, in­vest­ing strate­gi­cally all along the chain from mine to me­ter.

What China lacks in oil and gas sup­plies it makes up for with in­dus­trial pol­icy, which it has long been us­ing to sup­port do­mes­tic coal pro­duc­tion and nu­clear power as well as what is now by far the world’s largest re­new­ables sec­tor

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