The Quest: Energy, Security, and the Remaking of the Modern World

by Daniel Yergin

  What is the balance in these INOCs? The Chinese companies are sometimes portrayed mainly as “instruments” of the state. A new study from the International Energy Agency concludes otherwise—that “commercial incentive is the main driver” and that they operate with “a high degree of independence” from the government. As the IEA puts it, they are “majority-owned by the government” but “they are not government-run.” As they become increasingly internationalized, they operate more like other international companies.

  For all concerned, the development of the Chinese companies has been an evolution. Fu Chengyu, now the chairman of Sinopec, summed up the changes this way: “Evolving so completely from full state-ownership to join the ranks of major international corporations is a huge transformation—one that, back when I started in the oil business in the oil fields of Daqing , we never thought could be possible. Back in those days, China’s largest source of foreign exchange was not manufacturing, but in fact sales of oil to Japan! Today everything around us has changed. But so have we.”18

  PROPORTION

  Chinese companies will likely become bigger, more prominent players; they will certainly compete; but they will also be sharing the stage with established American, European, Middle Eastern, Russian, Asian, and Latin American companies—and often in partnerships.

  For all the talk about China “preempting” world supplies, its entire overseas production is less than that of just one of the supermajor companies. It’s very hard to conceive of China ever being in a position to preempt world supplies. Moreover, while some of Chinese overseas production is shipped to China, most of it is sold into world markets at the same prices as similar grades of petroleum. Destination is determined by the best price, local and international, taking into account transportation costs. And that is all the more true of oil from joint ventures, in which much of China’s international oil is produced.

  There is a further critical consideration. Chinese investment and effort in bringing more barrels to the markets contribute to stability in the global market. For were those barrels not forthcoming, the growing demand from China (and elsewhere) would add more pressure and lead to higher prices. Additional investment means more supply and adds to energy security. The Chinese oil companies are committing more capital and resources to expanding Iraq’s oil output, and taking more risk, than the companies of any other nation.

  Indeed, it would be quite surprising if a country in China’s position—rapidly rising demand, rapidly growing imports, a well-established domestic industry, huge holdings of dollars—did not venture out into the rest of the world to develop new resources. Indeed, were they not doing so, they would likely be roundly criticized around the world for not investing.

  Moreover, “go out” is not the sole strategy of the Chinese companies. About 75 percent of the companies’ output is within China. Altogether, China’s domestic oil production makes it the fifth-largest in the world—ahead of such large producers as Canada, Mexico, Venezuela, Kuwait, and Nigeria. Within the Chinese industry itself there is talk about the “second age of Chinese oil.” This means the application of new technologies and new approaches to the discovery and development of domestic petroleum resources, as well as a much greater focus on what are increasingly seen as abundant but undeveloped domestic resources of natural gas, including shale gas.

  These are the new commercial realities—China as a growing consumer of oil, China as an increasingly important participant in the world oil industry. But there is also a security dimension, which arises from growing dependence for a country for which “self-reliance” had been such a strong imperative for so many years.

  10

  CHINA IN THE FAST LANE

  In the late 1990s, when energy security proposals were presented to the Chinese government, they were tabled. “They said there was no energy security issue,” said a senior adviser, “and that was partly right. It was a benign market.”

  But that changed as oil consumption surged, increasing the reliance on imports, and prices started their upward trek. A country that had been self-sufficient in oil as a matter of policy found itself increasingly dependent upon the global market—something that was anathema in its earlier and very different stage of development. This dependence made energy security a central concern in Beijing. As one of the country’s top officials put it, “China’s energy security issue is oil supply security.”

  By 2003 a new factor had further increased the anxiety about energy security—the war in Iraq. For Beijing, it was hard to believe that the promotion of democracy in the Middle East was what propelled the United States into Iraq in March 2003. If not that, it had to be something more concrete, more urgent, more critical, more threatening. In short, it had to be oil. And if the United States was worried enough about oil to launch a full-scale invasion, then, in the view of many Chinese, energy security was clearly much more important—and urgent.1

  Part of the new insecurity arose from apprehension about the sea-lanes, the economic highways for the world commerce that were increasingly important as the lifelines for Chinese oil imports—and indeed for Chinese trade in general. Half of the country’s GDP depends on sea-lanes. In November 2003, seven months after the invasion of Iraq, President Hu Jintao reportedly told a Communist Party conference that the country had to solve what became known as the Malacca Dilemma. This referred to China’s reliance on the Malacca Strait, the narrow waterway connecting the Indian Ocean and the South China Sea and through which passes more than 75 percent of China’s oil imports. “Certain powers have all along encroached on and tried to control navigation through the strait,” Hu is said to have declared. “Certain powers” was an obvious euphemism for the United States.2

  The growing attention to risk was reinforced by what happened in 2004: the unanticipated jump in both Chinese and global demand for oil and the consequent rapidly rising prices. An energy problem had already become evident in China from late 2002. But initially it was a coal and electricity problem, not an oil problem. China depends on coal for 70 percent of its total energy and about 80 percent of its electricity. The economy was growing so fast that tight supplies of coal turned into outright shortages. At the same time, electric power plants and the transmission network could not keep up with the demand for power. The country simply ran out of electricity. As brownouts and blackouts hit most of the provinces, a sense of crisis gripped the country. Factories were working half days or even shutting down because of shortages of energy, while sales of diesel generators soared as desperate industrial enterprises resorted to making their own electricity. Power was so short in some parts of the country that traffic lights weren’t working, and children were back to doing their homework by candlelight. Hotels in Beijing were requested to keep room thermostats above 79 degrees Fahrenheit, and their staffs ordered to use the stairs rather than the elevators.3

  Only one short-term alternative to coal was available for satisfying the accelerating energy demand—oil. That is why China’s oil demand in 2004 grew not by the anticipated 7 or 8 percent but that much higher 16 percent, requiring a rapid rise in petroleum imports. The Chinese oil companies hurriedly stepped up their efforts both to increase domestic production and to access additional supplies internationally.

  Around this time, the theses about peak oil and limitations on future supply were permeating discussions in Beijing, as elsewhere in the world. The overlay of a fear of imminent and permanent shortage, which was so common in this period, added to a pervasive sense of crisis about the adequacy and availability of future supplies and whether a new rivalry would emerge.

  PETRO-RIVALRY?

  But what would a “new-energy-security strategy” look like? This became part of what has become a continuing debate about the possibility of a petro-rivalry between the United States and China. Some strategists in Beijing worry about China’s depending on a world oil market that they assert is unreliable, rigged against them, and in which the United States has, in their view, excessive in
fluence. Some of them even argue that the United States has a strategy to interdict sea-borne Chinese oil imports—cut off China’s overseas “oil lifeline”—in the event of a confrontation over what has been for decades the most critical issue between the two nations, the self-governing island of Taiwan and its relationship to mainland China. They criticize the presence of the U.S. Navy in the regional seas and U.S. support for Taiwan—even as economic links between Taiwan and the People’s Republic continue to grow. Some of the military leaders denounce the United States, in the words of one admiral, as a “hegemon.”

  The reverse of such fears can be found among some strategists in the United States. There are those who argue that China, driven by a voracious appetite for resources and control, has a grand strategy to project its dominance over Asia while also seeking to preempt substantial world oil supplies. China is said to be pursuing this strategy with a single-minded mercantilism, backed up by growing military power. They point, for evidence, to double-digit increases in Chinese defense spending, a rapid naval buildup, China’s pursuit of naval and aviation technology, and its potential for developing a “blue water navy” that would project naval power far beyond China’s neighborhood. Moreover, China has established a network of strategic ports, bases, and listening posts along the Indian Ocean. These critics specifically cite the development of new missiles that seem aimed directly at U.S. sea power—specifically aircraft carriers—and at upsetting the security of sea-lanes that U.S. sea power protects—security from which China, as much as any nation, directly benefits.

  All this could stir up the specter of a naval arms race reminiscent of the Anglo-German naval race that did so much to inflame the tensions that ignited the First World War. Despite an extensive and growing economic relationship in the years that led up to August 1914, Britain and Germany were driven apart by rivalry and the suspicions aroused by their naval race, by anxiety over control of sea-lanes and access to resources, by competition over who would have what place in the sun—and by growing nationalistic fer vor. Echoes of the Anglo-German naval race can be heard in today’s arguments.

  Controversy over the South China Sea has already created some tension between the United States and China. That sea’s 1.3 million square miles are bounded on the west by China, Vietnam (which calls the region the East Sea), and Malaysia, down to Singapore and the Strait of Malacca; and then, coming up on the east, by Indonesia, Brunei, the Philippines, and at the top, by Taiwan. Through its waters pass most of the trade between East Asia and the Middle East, Africa, and Europe—including most of the energy resources shipped to China, Japan, and South Korea. “It’s really a lifeline of our commerce, of our transport, for all of us, China, Japan, Korea, and Southeast Asia, and the countries beyond to the west,” said the secretary general of ASEAN, the association of ten Southeast Asian countries.4

  In 2002 China and the ASEAN countries signed an agreement that seemed to settle rival claims. But later some Chinese military officials began to speak of China’s “undisputed sovereignty” over the South China Sea, control of which they elevated to what they called hexin liyi, a “core interest.” Others in the China foreign policy community have subsequently described the assertion of “core interest” as “reckless” and “made with no official authorization.” If China were to successfully assert such an interest, it would control the critically important merchant shipping lanes as well as be in a position to deny freedom of passage to the U.S. Navy. Not surprisingly, the ASEAN countries, as well as the United States, have rejected China’s claims. Still, to underline those claims, a Chinese submarine went down to the deepest part of the sea, where its crew planted a Chinese flag.5

  Energy resources are an increasingly important part of the argument. Substantial oil and gas resources are produced around the South China Sea, notably in Indonesia, Brunei, and Malaysia. Estimates of the undiscovered oil in the South China Sea range between 150 billion and 200 billion barrels, which is more than enough to stir competition, although far from proven. Although China and Vietnam have worked out some joint-production agreements, they are at odds over ownership of other exploration areas. Particularly contentious are the Spratly Islands, whose waters are thought to be rich in resources and are claimed in whole or in part by several countries. Meanwhile, in the East China Sea, Japan and China have had a long dispute, which recurrently flares up, over sovereignty and drilling rights.

  It is exactly these kinds of tensions that can fester, blow up into incidents, and lead to much more serious and disruptive consequences. That explains the urgency for finding frameworks that can meet the interests of the various nations involved.

  “RESPONSIBLE STAKEHOLDERS”

  While these tensions persist, China’s direct anxiety over energy security appears to have eased. Hu Jintao offered his own answer to the Malacca Dilemma when he presented, at a G8 meeting in 2006, a definition of what he called global energy security in which importing countries like the United States and China are interdependent. Energy insecurity for China, he has said, also means energy insecurity for the United States—and vice versa. Thus collaboration is one of the main answers to the dilemmas of energy security.

  Part of this shift is based on China’s growing realization that it can obtain the additional energy it needs by participating in the same global economy from which it has benefited so considerably. In simple words, China can buy the energy it needs. That was not so obvious a few years ago, but experience since has shown that it is eminently feasible. This applies not only to oil but also to natural gas, the imports of which are growing. “There’s no other solution but to rely on the marketplace,” said an energy strategist in Beijing. “What’s different about exporting to America and importing energy from elsewhere? China is part of world markets.”

  Moreover, China has very large coal reserves. Adding in domestically produced oil and hydropower, China is more than 80 percent self-sufficient in terms of overall energy. A sign of greater confidence is the change in the discussion about making synthetic oil from coal. This was a very high priority when oil prices were spiking and some people were predicting permanent shortage, but now the Chinese talk about its development more as an insurance policy against disruption rather than a large-scale substitution.6

  An effort to reduce the tensions is evident within the larger framework of relations. It is built on the recognition of the new reality—China’s prominent place in the global economy and the world community. The administration of George W. Bush initially described China as a “strategic competitor” with all the implications that went with that. But as the years passed, a more cooperative approach emerged, based upon a mutual understanding of the interdependence. “Rising power” and “peaceful rise” were the way that senior Chinese had come to describe their country’s new role and position. Some Chinese strategists have emphasized the need to manage and ameliorate the inevitable tensions that would arise between a latecomer and an established power. For its part, the United States proffered the concept of “responsible stakeholder,” an idea first proposed by Robert Zoellick, at the time deputy secretary of state and subsequently president of the World Bank. The argument was that China could play a larger constructive role in diverse international arenas that was commensurate with its new stature. The Chinese came to interpret “responsible stakeholder” as meaning shared “international responsibilities” for the international system from which they are benefiting—and which they are helping to shape.

  This new orientation has become embodied in a set of arrangements for addressing issues, defusing tensions, and fundamentally providing strategic reassurance. These include a “strategic and economic dialogue” between the two countries and an “energy and environment cooperation framework,” which was launched at the end of the Bush administration and continued by the Obama administration. China’s collaboration with the International Energy Agency and its participation in the International Energy Forum enable greater alignment and less tension on energy-security
issues. On a global basis, the G7 and the G8 club of the major industrial countries now shares the stage with the G20, which expands the table to include the major developing countries, with China obviously in a very prominent position. The relevance of the G20 was made clear when it became an essential forum for coordination during the financial crisis of 2008–9.

  All of this does not guarantee that competition over energy, and tensions about access and security, will not flare up and become more threatening. But it does mean that an established framework exists to handle such issues and to help prevent their escalation into something more serious. One Chinese decision maker summed up the evolution of thinking this way: “The government considers energy security very important, a first priority. But there is a change of understanding. Now we recognize that we have lots of options and choices to solve energy security issues.”7

  This is all the more important as China’s oil consumption is destined to rise as it moves at record speed into the auto age.

  THE FAST LANE

  China is making the transition to a mass automobile culture as other countries have already done, but it is doing so at an extraordinary rate and on a scale never seen before. In the United States, oil accounts for about 40 percent of total energy consumption. In China, despite rapid demand growth, oil is only 20 percent of total energy use, and the largest part of that oil is used as fuel in industry or as diesel in trucks and farm equipment. But that is changing swiftly. As the Chinese automobile industry moves into the fast lane, the impact will be felt not only across the nation but globally.

  In 1924 Henry Ford, already known worldwide for his Model T, received an unexpected letter. “I have . . . read of your remarkable work in America,” wrote China’s president Sun Yat-sen. “And I think you can do similar work in China on a much vaster and more significant scale.” He continued: “In China you have an opportunity to express your mind and ideals in the enduring form of a new industrial system.” The invitation was all the more gracious as Sun himself was highly partial to Buick, made by Ford’s great rival, General Motors. By the late 1920s, Ford Motor was already shipping cars to China and had opened a sales and service branch in that country. But Sun Yat-sen’s dream was not to be realized.