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

“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