China’s Coming Upheaval
Competition, the Coronavirus, and the Weakness of Xi Jinping
In 1997, in need of increasing oil and gas imports to fuel its accelerating economy, China launched a new energy policy. Intent on replicating Washington’s close relationships with large oil-producing countries, its diplomats toured oil-state capitals, offering investment and arms in exchange for guaranteed supplies. Of particular interest were governments that had been ostracized by Western powers—an opening, Beijing believed, that would allow it to level the energy playing field with the United States and have the added benefit of fueling conflicts that would distract the U.S. military just as it was trying to refocus on Asia.
Yet many of China’s forays turned out badly. New partners defaulted on loans and failed to deliver the promised oil. The practice of investing in dangerous places where others would not put the lives of Chinese workers at risk. At home, several leaders of large energy corporations have been purged in so-called anticorruption drives. Meanwhile, the United States has enjoyed a domestic energy boom that is rapidly turning it into a major exporter of oil and natural gas and cushioning its economy against oil-price shocks. Beijing has begun to worry that, given the United States’ decreasing reliance on supplies from the Persian Gulf, Washington might intervene more slowly to quell disturbances in the Middle East that threaten to disrupt the flow of oil.
Accordingly, since assuming office in 2012, Chinese President Xi Jinping has turned to a new strategy: a pivot to renewable energy. China already dominates the global solar-panel market, but now it is expanding its support for oil-saving technologies, funding the development and production of everything from batteries to electric cars. The goal is not just to reduce China’s dependence on foreign oil and gas but also to avoid putting the country at an economic disadvantage relative to the United States, which will see its own growth boosted by its exports of oil and gas to China. China’s aims are also strategic. By taking the lead in green energy, Beijing hopes to make itself an energy exporter to rival the United States, offering other countries the opportunity to reduce their purchases of foreign oil and gas—and cut their carbon emissions in the process.
If Beijing’s new energy strategy succeeds, it will help both the global fight against climate change and China’s ambition to replace the United States as the most important player in many regional alliances and trading relationships. That ambition has been bolstered by the Trump administration’s backward-looking approach to energy policy: its focus on coal, oil, and natural gas; its abandonment of the international organizations that shape global energy markets; and its rejection of the Paris climate accord. Such moves are helping pave the way for China to become the renewable energy superpower of the future. Washington needs to respond before it is too late.
Beginning in the first decade of this century, breakneck economic growth in China created a need for foreign oil and gas, driving China’s transformation from a regional power to a global one. Hampered by competition for resources from large Western oil companies, Beijing focused on so-called rogue states, where, because of Western sanctions, those rival companies could not invest. It first targeted Iran, Iraq, and Sudan, then Russia and Venezuela.
The results have been less than stellar. In Iran, Western and then UN sanctions hindered Chinese efforts for several years by limiting the amount of money Chinese firms could spend in Iran. And even since the Iran nuclear deal relaxed sanctions, other problems have cropped up. In early 2016, for example, two Chinese national oil companies, Sinopec and the China National Petroleum Corporation, finally managed to get production moving at two fields in Iran’s Khuzestan Province, but they now have to worry about Saudi-backed Arab separatists, who have recently bombed oil facilities there.
China has encountered similar problems in Iraq, where a lack of security has plagued oil projects. And in the more secure Kurdish region, estimates of oil reserves have been reduced by half since initial surveys. Together with low oil prices, that means that Sinopec is unlikely to make a profit on its investments there. Chinese exploration for natural gas in Saudi Arabia has also come up dry.
China’s increasing dependence on foreign oil has made its leaders uneasy.
In Africa, Chinese projects have fared little better. Prolonged civil wars in Sudan and South Sudan have severely restricted the amount of oil that Chinese firms operating there can extract. Beijing has faced international condemnation for its support of the Sudanese government, which has been sanctioned by the United States for war crimes. And attacks on Chinese oil workers in Ethiopia, Libya, Nigeria, Sudan, and South Sudan have forced the Chinese government to evacuate its personnel and have led to political criticism at home.
China has struggled even in relatively stable places. Last September, a Chinese conglomerate invested $9 billion in the Russian state-controlled oil giant Rosneft in return for a 14 percent ownership stake. But Rosneft is saddled with nearly $50 billion in debt and has undertaken a program of ambitious international spending driven less by a coherent profit strategy than by Russia’s strategic interests. This decision, on top of the uncertainty caused by U.S. sanctions on Russia, led Rosneft’s share price to decline by 23 percent during 2017, which translates into a multibillion-dollar loss for the Chinese conglomerate.
The story is similar in Venezuela. From 2007 to 2014, Chinese firms provided around $60 billion in oil-backed loans to Caracas. But Venezuelan crude oil exports to China reached just 450,000 barrels a day in 2017, only half the volume the Chinese had anticipated. One of the largest lenders, the China Development Bank, currently receives barely enough oil and refined oil products from Venezuela to cover the interest payments on its loans.
All told, China’s $160 billion in spending on oil and gas assets has bought it less energy that it might have expected. Its foreign oil resources are projected to produce roughly two million barrels a day by 2028. By comparison, just over a decade ago, Saudi Arabia spent $14 billion to add two million barrels a day of new production. China’s oil imports pale in comparison with the United States’ domestic oil production, which stood at 9.8 million barrels a day at the end of 2017 and could reach over 20 million barrels a day in the next decade. Moreover, China’s own oil production, currently 3.9 million barrels a day, is falling fast due to mismanagement, depleted fields, and low prices. China currently imports around 70 percent of the oil it uses. By 2030, that figure is expected to reach 80 percent.
Meanwhile, the United States will likely become a net exporter of oil and natural gas by the 2030s, if not sooner. When it does, other energy producers will lose their long-standing leverage over U.S. policy. (In 1973, for example, OPEC placed an embargo on oil exports to countries, including the United States, that had supported Israel during the Yom Kippur War.) And the U.S. economy, which boasts hundreds of thousands of new oil and gas jobs, will be better shielded than China’s economy from a sudden drop in the global oil supply.
China’s increasing dependence on foreign oil has made its leaders uneasy. Its 12th five-year energy plan, which ended in 2015, noted “a profound adjustment in energy supply patterns” resulting from the development of new oil and gas sources in Canada and the United States. It characterized China’s energy security situation as “grim,” in contrast to that of the United States. Such trends have also changed Beijing’s calculus in the Middle East. Although Washington is still saddled with the responsibility of protecting the region’s oil flows, an oil cutoff caused by conflict there would now do more damage to China’s economy than to that of the United States. Beijing has to take account of the growing risk that Washington will abdicate its protector role in the region or, at the least, force China and other countries to foot more of the bill.
THE BIG GREEN BANG
This new reality has prompted China to ramp up its investment in renewable energy and low-carbon technologies. It is not only looking for domestic energy security but also banking on green energy products as major industrial exports that will compete with Russian and U.S. oil and gas. China aims to make itself the center of the clean energy universe, selling its goods and services to help other countries avoid the environmental mistakes it now admits were part of its recent economic growth.
There is a precedent for this approach. Beginning around ten years ago, a booming solar power industry in Germany helped China’s nascent solar-panel manufacturing sector get off the ground. The Chinese government plans to repeat that success on a grander scale. It hopes that demand for clean energy technology from countries looking to reduce their carbon emissions will create jobs for Chinese workers and strong relationships between foreign capitals and Beijing, much as oil sales linked the Soviet Union and the Middle East after World War II. That means that, in the future, when the United States tries to sell its liquefied natural gas to countries in Asia and Europe, it may find itself competing not so much with Russian gas as with Chinese solar panels and batteries.
According to the International Energy Agency, the Chinese public and private sectors will invest more than $6 trillion in low-carbon power generation and other clean energy technologies by 2040. The Chinese renewable energy sector already boasts 125 gigawatts of installed solar power, over twice the figures for the United States (47 gigawatts) and Germany (40 gigawatts). Chinese firms now have the capacity to manufacture 51 gigawatts’ worth of photovoltaic solar panels every year, more than double total global production in 2010. The U.S. Department of Energy estimates that the Chinese government has provided as much as $47 billion in direct funding, loans, tax credits, and other incentives to solar-panel manufacturers since 2008. Over the last decade, Chinese exports have contributed to an 80 percent drop in global solar-panel prices. Future Chinese investment in battery technology is likely to have a similar effect on battery prices. Overall, China currently generates 24 percent of its power from renewable sources; the United States generates 15 percent.
China’s bet on renewable energy is designed to improve its national security.
China is also betting big on electric vehicles, heavily subsidizing their development and production. In 2015, Chinese public subsidies for electric vehicles totaled more than ten times the amount provided by the U.S. government. Over 100 Chinese companies currently make electric cars and buses. The Chinese car manufacturer BYD is now the largest producer of electric vehicles in the world, with another six Chinese firms also ranking in the top 20. In 2015, China surpassed the United States in annual and cumulative electric car sales. There are over one million electric cars on Chinese roads today, almost double the number in the United States. By 2020, China aims to have five million in operation. China could eventually boast as many as 100 million electric vehicles. In September, Chinese officials confirmed that the government is developing a timetable to end the use of gas-powered cars in China, in line with other countries, such as France and the United Kingdom, that are aiming to eliminate them by 2040.
Beijing is also working to dominate the financing of green energy. In late December, it announced that it intends to create the world’s largest carbon market, in which firms trade credits for the right to emit greenhouse gases. China already buys more “green bonds”—which fund projects designed to prevent climate change or mitigate its effects—than any other country and is actively promoting so-called green finance within its financial sector by encouraging its major banks, including the People’s Bank of China, to accelerate the issuance of green bonds and other kinds of credits for clean energy. The Chinese government has started to promote cooperation on green finance between Chinese and foreign businesses through bilateral efforts, such as the UK-China Economic and Financial Dialogue. It is also playing up its environmental standards to attract multinational lenders to pay for its ambitious $1.4 trillion Belt and Road Initiative, an infrastructure program designed to expand Beijing’s influence in Asia.
China’s bet on renewable energy and electric transport is also designed to improve its national security. Chinese analysts have long decried the risks of shipping oil through sea-lanes that are dominated by the U.S. military and increasingly threatened by the growing navies of regional powers such as India and Japan. Replacing foreign oil with domestic sources of renewable energy would remove this problem. Meanwhile, flexible energy microgrids (which generate and distribute power in self-contained grids that can detach from centralized systems during a crisis) and multifuel transportation systems (which move away from sole reliance on oil-based gasoline and diesel) will help China withstand cyberattacks and limit the effects of natural disasters and wars. Advanced clean energy technologies will also likely fuel autonomous weapons, such as drones, artificial intelligence, and satellite-based equipment that can disable U.S. satellites and global positioning systems, all of which China is trying to master.
China’s energy pivot promises to reshape the international order. Its most direct impact will be on the global response to climate change. Just as China’s big move into solar-panel manufacturing brought down the costs of that technology, so the prices of batteries, electric cars, and carbon capture and storage will likely collapse as China invests.
The energy pivot is also already changing how China deals with the rest of the world. It is courting countries in Europe, Central Asia, and Southeast Asia with the promise of cheap loans, upgraded energy and transport infrastructure, and freedom from energy shortages and energy-related pollution. Russia’s history of heavy-handed threats to cut off supplies of oil and gas to its neighbors has made Beijing’s job all the easier. Helping countries generate clean, abundant energy will allow China to compete more aggressively with the United States by undercutting Washington’s ability to use its new oil and gas exports to forge closer relations with other countries. Chinese officials have even argued that by assisting countries in developing green business models and providing access to reliable energy and modern infrastructure to poorer countries, China can help redress inequality among nations and create more consistent global economic growth, lowering the risks of terrorism and conflict.
Not all the effects of China’s move into clean energy are likely to prove so benign. If China comes to depend largely on domestic energy, it will become less willing to offer preferential loans to failing oil states. That could prove disastrous for some countries, especially if China’s renewable energy technology exports also eliminate a significant proportion of the world’s demand for oil and gas. This story has already played out in Venezuela. In 2016, China refused to extend new loans to Caracas, cutting off Venezuela’s most important remaining financial lifeline and pushing the country deeper into debt, poverty, and political breakdown. As China sells more and more renewable energy technology and electric vehicles at home and abroad, other oil states, such as Angola, Nigeria, and Russia, could experience similar fates. Even countries in the Persian Gulf could suffer if they do not reform their economies. The result could well be more dangerous failed states with disenfranchised populations.
AMERICA’S ENERGY CHALLENGE
China’s new energy strategy raises serious questions for U.S. energy and climate policy. The Trump administration argues that the United States can maintain U.S. energy dominance by selling its vast supplies of oil and natural gas to the rest of the world, as long as domestic producers are unfettered by excessive government regulation. But the success of that vision will rely on international energy and carbon rules. If the United States abdicates its global role, those might be set by other countries.
Although President Donald Trump has announced that the United States will withdraw from the Paris climate agreement, the country cannot formally do so until 2020. That means that the United States still holds leadership positions in the bodies that will play a large part in determining global energy-market regulations, energy- and carbon-pricing policies, and possibly even which fuels—coal, oil, gas, nuclear, or renewables—will be favored globally. But if the United States leaves those groups, they may well design a global energy architecture that favors China’s interests. That could allow China to sell its energy technology products abroad free of tariffs, while fees on carbon emissions would hamper U.S. oil and gas exports. It could also make Chinese, rather than U.S., requirements for energy-product labeling and efficiency and for zero-emission vehicles the global standards. And if Chinese financial institutions help set the rules and standards for green financing, they could stack the deck in their own favor, hurting U.S. banks in what is set to become a multitrillion-dollar industry in the coming decades.
The Trump administration has shown little sign that it has a real vision for sustaining U.S. energy dominance.
To keep the United States’ options open, the Trump administration needs to find a creative way to meet the country’s original pledge in the Paris agreement to reduce its emissions by roughly 27 percent from 2005 levels by 2025. There is still time to do so. A majority of U.S. states and major cities will continue to implement the initiatives they set out in alignment with the Clean Power Plan, an Obama-era policy designed to get states to cut their carbon emissions, which the Trump administration rescinded in October. U.S. car and truck manufacturers and ride-sharing companies are engaging China to sell their products and services to Chinese consumers. By recommitting to the Paris agreement, even with a less ambitious strategy, the Trump administration would avoid needlessly antagonizing countries that care about the accord and maintain U.S. influence in global rule-making on energy.
The United States should also work both inside and outside the framework of the Paris agreement to create trade rules and carbon-market systems that would favor U.S. oil and natural gas exports in the immediate term and lay the groundwork to promote U.S. clean technology companies in the long run. A good model exists in the agreement finalized in November among Alaska, Sinopec, the Bank of China, and China’s sovereign wealth fund, which will result in a Chinese investment of up to $43 billion to develop natural gas reserves in northern Alaska. Natural gas could replace coal in countries such as China and India, reducing carbon dioxide emissions. And tying China to U.S. resource extraction would help cement U.S.-Chinese energy cooperation and ensure that the United States’ energy exports will remain competitive with those of other countries trying to sell oil and gas to China.
So far, the Trump administration has shown little sign that it has a real vision for sustaining U.S. energy dominance. It seems inclined to expand rules set by the Committee on Foreign Investment in the United States in order to safeguard U.S. advantages in artificial intelligence and other digital technologies important to protecting U.S. energy infrastructure. That could be worthwhile, but the administration will need a much broader vision, one that goes beyond a proposed small tariff on imported solar panels and looks at the rest of the U.S. clean technology complex, which includes new batteries, energy-saving digital products, and alternative-fuel vehicles.
The administration has begun the process of rewriting the Clean Power Plan. It has suggested improving the efficiency of power plants by reducing leaks and using new digital technologies to improve control systems. But that will not be enough. It also needs to devise policies to help innovation and promote the adoption of technologies that can rival Chinese products, such as smart meters and solar panels or wind turbines with connected batteries to store the energy generated. New regulations on the power generation industry should reward states, counties, and cities that want to shift to clean energy and issue green bonds.
Rick Perry, the secretary of energy, has argued that natural gas and renewable sources of energy are less reliable than fossil fuels or nuclear power and so the administration should subsidize coal and nuclear power in key markets to prevent interruptions in supply. But this argument fails to realize that new technologies can create a flexible, responsive grid capable of bouncing back quickly in the aftermath of sudden surges in demand, natural disasters, or cyberattacks.
The administration should also think creatively about how to best tap the United States’ increasing surplus of cheap natural gas to lower the country’s emissions and meet its pledge under the Paris agreement. Washington should consider supporting new uses for natural gas, such as to power long-distance trucks or to make hydrogen fuel for other vehicles. Doing so while minimizing emissions will require enforcing rules governing the leakage of methane from oil and gas production, transport, and disposal. Those rules have bipartisan support in Congress as well as support from many industry players. But the Department of the Interior has delayed their implementation and even suggested that it is considering scrapping them altogether.
There is some good news. The Republican tax reform bill signed by Trump in December left federal support for renewable energy and credits for electric cars intact (an earlier version of the bill had eliminated them). But these programs don’t do enough to meet the challenge of China’s massive public investments.
Washington should embrace additional policies to promote private-sector investment in clean technology, such as allowing renewable energy investors to form master limited partnerships (MLPs), a type of publicly traded entity that avoids double taxation for its shareholders. Currently, MLPs are restricted to companies that extract or process natural resources or lease real estate. The tax bill slashed the tax rate for MLPs, making them even more attractive, but failed to extend the structure to renewable energy production, even though a bipartisan congressional group proposed doing just that last October.
The United States’ withdrawal from the Paris accord will likely be accompanied by lackluster U.S. participation in Mission Innovation, a global initiative involving the European Union and 22 major countries, including China and the United States, to accelerate the transition to clean energy by doubling the public R & D budgets of the participating countries. Failing to take part would be a mistake. China is building an energy system that will help its economy and allow its military to better withstand cyberattacks and natural disasters. The United States should do the same. That means developing and installing new technologies, such as smart grids, solar panels, and wind turbines, at U.S. military bases to reduce the damage from potential interruptions in power supplies or attacks on power sources.
During the Cold War, the United States realized the likely economic and military consequences of losing the space race, and it rose to the task. Meeting the challenge of China’s pivot to renewable energy will be no different. The United States risks frittering away its dominance of the global energy market. But with strong leadership and a long-term commitment, it can secure its energy future for decades to come.