China, US Energy Paths Cross and Clash — In Odd Ways
It’s odd to see the Biden administration pushing so hard to Make America Great Again, using the Trumpian tools of tariffs and the promise of factory jobs, with subsidies to top it off. Not bad in all respects, but peculiar in many.
It’s also odd to see how this inward-looking US stance is playing into the hands of unexpectedly outward-looking Chinese leader Xi Jinping, as he trumpets messages of peace and cross-border cooperation on the world stage.
Only in 2016 did Washington evidently take notice that China had become the wealth creator-cum-factory for the world. Up to that point, both major US political parties had for decades fixated on helping US-registered corporations get rich by investing abroad, while turning a largely blind eye to ordinary Americans being shunted into low-paying “service,” instead of unionized factory, jobs.
Beijing had noticed its own shifting status decades earlier and acted effectively to position and prepare itself to overtake the US as the World’s Largest Economy. But when Trump pointed out hot-button aspects of this dynamic and vowed to fight for the WLE title, Washington abruptly repented the error of its ways and went into anti-Chinese overdrive. Biden hasn’t changed things much, other than to put a lot of money where Trump’s mouth was.
Nowhere does the resulting competition stand to be more consequential for the future of the Earth than in energy, both old (fossil fuels) and new (renewables).
US Energy Path
The US has been the center of the fossil fuel universe for a century. It produces more oil, natural gas and coal combined than anybody else. Also, through Petrodollar deals with Saudi Arabia stretching back to the 1940s and solidified in the 1970s after the Arab oil embargo, the US has shared in the financial bounty of Arab oil. It got that bounty in exchange for military and political protection of the medieval-style Sunni kingdoms and emirates of Saudi Arabia, the UAE, and Qatar — and for being a reliable customer.
The results have been catastrophic, if you consider climate change and the billions in oil revenue spent by the Arab Gulf monarchies on radicalizing Sunni Muslims worldwide. But for the US itself, it had some big advantages.
Old Energy leadership underpinned Washington’s claim to be the only “superpower” after the Soviet Union collapsed. The oil-rich Middle East became the main stage for “projection” of US military power. In addition, the dollar’s monopoly role in oil trading and as a reserve currency for rich oil exporters — guaranteed by those Petrodollar accords — spread to other commodities and countries. This gave the US seemingly unlimited borrowing rights, and empowered Washington’s use of financial sanctions.
Then came climate change and the realization that fossil fuels must be phased out. The US government knew this when Jimmy Carter was in the White House in the late 1970s but chose to ignore it for decades while reaping the benefits of petro-dominance.
No sooner had the seriousness of the climate crisis belatedly regained US attention than the “shale revolution” hit. Reversing a long decline, national oil output more than doubled from 2009 to 2019. Instead of the world’s largest oil importer and a prospective LNG buyer, shale made the US nearly self-sufficient in oil, with natural gas aplenty to export as LNG. Climate concerns slipped back down Washington’s priority list.
By the Obama years, the US no longer needed Middle East oil at home and had lost its stomach for Middle East wars. Links to Saudi Arabia and other Arab Gulf states weakened. They were threatened by US competition in oil markets, even as China became their most important customer. These Opec members were also drawn to Russia, which had never been in Opec but was happy to cooperate in containing the effects of America’s shale revolution. “Opec-Plus” was born.
China’s Energy Path
China’s energy path has been very different. It has long paid lots of attention to the climate, probably not least because it started importing oil in the 1990s and this century became the biggest, fastest growing market for Mideast oil. That’s an uncomfortably expensive position, even if it also buys you big influence with oil exporters — as the US had experienced for so long.
Through most of this century, China has also been openly pursuing New Energy leadership with large-scale manufacturing in solar and other new-energy technologies. It’s “Made in China 2025” industrial development plan from 2015 set detailed targets, including boosting domestic content in core technologies to 40% by 2020. Those goals were easily surpassed in many technologies, notably including solar.
In practice, China’s strategy on solar, batteries, and other technologies was — and still seems to be — to let it rip with construction of private capacity, encouraging lots of companies to invest lots of money. Overcapacity results, driving down prices until demand grows to meet the capacity. At some point in that process, Beijing typically starts to weed-out private-sector operators, cutting subsidies and other aid in order to consolidate the new industry and ensure high-quality output.
This strategy has brought rapidly falling prices in renewable technologies over the last decade, particularly solar, batteries, and offshore wind turbines. The climate benefited, as did consumers around the world. Manufacturers outside China suffered. Many died. But few cried — until recently.
The difference in energy positioning resulting from the diverging paths taken by the US and China has been reinforced by the Ukraine war and sanctions on America’s Old Energy rival Russia.
China now has not only overwhelming leadership in New Energy manufacturing, complete with mammoth export capacity. It also has access to Iranian, Russian and Venezuelan oil at much lower prices than US-allied buyers, because of sanctions on those fossil fuel exporters.
Middle Kingdom meets Middle East
As this new reality has unfolded, China has taken on an unexpectedly strong leadership role in the Middle East, a role that under the Petrodollar accords was the exclusive purview of the US.
First, when China was just waking from Covid-hibernation, Xi traveled to Saudi Arabia. There, in what was clearly intended as a new and improved version of the Petro-dollar accords, he offered the provide a stable oil and gas market and also new energy, high tech and other development opportunities to the Saudis and their Sunni allies — with transactions to be in yuan, not dollars.
Then came China’s mediation of a far-reaching mutual recognition agreement between Saudi Arabia and Iran that could be a game-changer in the region, with positive implications for almost everyone. The exceptions, arguably, are Israel and the US.
This week, Xi went to Moscow, where he did not agree to sell weapons to Russia as the US said he might, to buy more natural gas as Russia said he might, or to negotiate peace between Russia and Ukraine, as some had hoped he might. What he did was demonstrate that he has Russia’s back and will join Moscow in trying to construct a new “multi-polar” world order outside now widely resented US control.
What have US officials been doing all this time? Shedding capacity to influence global energy events — or so it often seems. On the Old Energy front, the US has sent as much natural gas as possible to Europe and fixated on keeping Germany from edging back towards Russia in Old Energy or becoming too attached to China’s New Energy. It has also pulled back on efforts to rein in oil production at home, in apparent hope that US oil and gas will remain available for longer to replace Russian supply.
Unfortunately for this gambit — but fortunately for the climate — the shale revolution looks to have run its course. Prime deposits are now largely tapped and further big increases in US oil and gas production are unlikely. That may help explain Biden’s new-found enthusiasm for drilling in Alaska.
However, Washington remains determined to rebuild and greatly expand its manufacturing base in New Energy, as well as in microchips and more. In time, this will hopefully bring a cleaner and more self-reliant US economy. But in the meantime, its all-and-only America focus irritates not just China — its intended target — but many friendly nations, as well, including even the Europeans, Japanese and South Koreans. That’s not to mention virtually the entire Global South.
It’s time the US changed tack and went back to making more and consuming a lot, lot less. Hopefully in new ways that will result in a smaller, less polluting, more Earth- and people-friendly economic and social structure. But is it necessary that the US should alienate everyone else in the process, to the diplomatic advantage of China? That should surely be the question Washington is asking itself these days.
