China's Energy Weapon Comes in One Color: Green
The phrase "energy weapon" tends to conjure up grainy images of Americans sporting bad hair and disco fashions waiting in line for gasoline. Might the 21st-century version involve solar panels and electric cars instead?
Amy Myers Jaffe, a director at the Council on Foreign Relations, argues along these lines in a recent essay for Foreign Affairs. China, having little to show for a $160 billion splurge of acquisitions, loans and investments aimed partly at securing foreign supplies of fossil fuels, is pivoting instead toward a greener form of energy geopolitics.
By investing in technologies such as solar power, batteries and electric vehicles, China is building both a shield against extortion by fossil-fuel exporters and a means of reducing other countries' dependence on fossil fuels in general. Both could help blunt the influence of its great rival and aspiring energy dominatrix, the U.S.
Jaffe's aim is to warn the U.S. not to cede leadership in the new energy economy to its biggest potential adversary. And there is something weird in 2018 about the U.S. touting its raw resources while downplaying its tech edge (although tech plays a large and growing role in the shale boom).
Whether or not you think China can credibly mount a green counter-strategy, the important thing is that it will almost certainly try.
China attempting to seize leadership in developing alternative energy is, to use a technical term, a no-brainer. And on several fronts:
- Pollution: The price of rapid industrialization has been the fouling of China's environment (just as it was for the West last century). Only 2 percent of China's population breathes air that meets the World Health Organization's air-quality guideline on particulates, according to the International Energy Agency.
- Independence: While China is estimated to have substantial shale oil and (especially) gas resources, don't expect an Asian version of the Permian basin to spring up anytime soon. Chinese dependence on foreign fossil fuels is already higher than it ever was for Americans -- and going higher. Depending on the U.S. Navy to keep vital sea lanes open to deliver these cargoes is perhaps unwise.
- Capabilities: On the other hand, China does know a thing or two about manufacturing and giving its domestic industries a nudge or two with favorable financing and political backing.
This offense launched from the factory floor is actually analogous to the U.S. one centered on shale fields and export terminals in one key aspect.
The shale boom wasn't a Washington-led attempt to reshape energy geopolitics. Rather, it was a product of raw competition in the U.S. exploration and production sector, fueled by high oil and gas prices and an army of investors willing to fund it. Either way, it has reset the cost curve for oil and gas lower, causing considerable discomfort for the likes of Saudi Arabia and Russia.
Even as that was going on, China was doing much the same to the solar-power market. As Varun Sivaram details in "Taming the Sun," his new book on the future of solar power, Chinese companies began capitalizing on existing expertise and technology in places like Australia and Canada in the early 2000s to build a domestic industry. Then a combination of Chinese government subsidies, including some for solar deployment in foreign export markets such as Germany and Spain, turbocharged it:
Similar to shale's impact, China's rapid expansion of its solar-power supply chain also crammed down the cost curve. The price per watt has dropped by 80 percent since 2010, causing many manufacturers to go bankrupt and leading President Donald Trump to target solar modules for tariffs (in vain, probably). On the other hand, it also spurred the rapid growth in solar-power deployment across much of the world.
That could be a taste of what's to come.
China's pivot from simply sucking in fossil fuels for industrialization toward rising investment in exportable new energy technologies represents a seismic shift in the global energy market (see this). This is partly because China gets more leverage in its negotiations with all energy suppliers as it expands its options (something that's happened already in oil and gas).
What makes this profound, though, is that China's investing in energies that aren't just different in terms of degree but different in kind. As I wrote here, the expansion of manufactured energies and electrification portends more fuel-on-fuel competition and deflation in the cost of raw energy. And China is a highly motivated investor in that expansion.
Will China-sized investment in new energies predicated partly on externalities such as security and pollution, and replete with subsidies, likely result in some bad bets and burned cash? Almost certainly. Will it also cut the cost of these technologies and accelerate their spread? Quite possibly.
The oft-forgotten lesson of the unsheathing of the oil weapon in the 1970s is that the resulting backlash -- in the form of efficiency, diversification and the creation of futures markets -- ushered in two decades of low prices.
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Mark Gongloff at email@example.com