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

by Daniel Yergin

  In the “new industrial system” that the triumphant Mao imposed after 1949, the automobile had virtually no place. Even as late as 1983, China produced fewer than 10,000 cars. By then, however, Mao was gone, and the creation of an automobile industry had been identified as necessary to the reforms that Deng Xiaoping was introducing. It was part of a modern society, one of the “pillars” of economic development, critical to technical advance and to creating jobs for those moving from farms into cities.

  But how to do it? China was so far behind the United States and Japan in terms of technology and industrial capability, and had been so isolated, that there was no point in trying to start from scratch.

  And so the answer turned out to be joint ventures. The first one, however, Beijing Jeep, never fulfilled the original hopes. Volkswagen scored the first successful joint ventures when it teamed up, beginning in the mid-1980s, with Shanghai Automotive Industry Corporation and China’s First Auto Works. Yet by 1990 China was still producing only 42,000 cars a year, and the roads still belonged to the great swarms of bicyclists. But General Motors, Toyota, and Hyundai were also establishing joint ventures, to be joined by Nissan and Honda, among others.

  China’s accession to the WTO in 2001 really ignited the growth of the auto industry—fueled by the emergence of distinctly local companies with such names as Chery, Geely, Great Wall, Lifan, Chang’an, and Brilliance. As the Chinese sales grew, the other international automakers realized that they could not afford to be left out of the most dynamic automobile market in the world, and they too signed up for joint ventures.

  Indeed, auto executives could now see a point on the horizon when China might actually overtake the United States as the world’s largest automobile market. It was inevitable, they said. It was just a matter of time. In 2004 General Motors predicted that it could happen as early as 2025. Some went further and said it could happen as early as 2020. Maybe even 2018. But, they would add, that would be a real stretch.

  As things turned out, it happened much sooner—in 2009, amid the Great Recession. That year China, accelerating in the fast lane, not only overtook the United States but pulled into a clear lead. The massive and swift Chinese economic stimulus program targeted the automobile industry as one of the “core pillars of growth” with tax cuts on new vehicles, cash subsidies, and price reductions on some vehicles. Car sales increased 46 percent over the previous year, while in that same year U.S. sales plummeted to the lowest level since 1982. Seen in perspective, the shift in relative positions was staggering. In 2000, 17.3 million new cars were sold in the United States, compared with 1.9 in China. By 2010 only 11.5 million were sold in the United States, while China had reached 17 million. By 2020 sales in China could reach 30 million—and keep going.

  AUTO NATIONS: U.S. AND CHINA

  Source: IHS Global Insight

  American automakers may be struggling at home but not in the booming Chinese market. General Motors now does sell more automobiles in China than in the United States. The name Buick may not anymore exude class to American or European ears, but the black Buick Xin Shi Ji (“New Century”) luxury sedan had a powerful allure for Chinese. Buick was so dominant a brand that by the early 1930s, one out of every six cars on China’s streets was an imported Buick. Not only had Buick been Sun Yat-sen’s favorite car, but also much favored by Zhou En Lai. Indeed, when GM first started manufacturing cars in the country, the Chinese insisted that Buick be the brand name, and for several years Buick led as a luxury car. Audi, Mercedes, and BMW might have overtaken the luxury segment, but Buick still remains a stalwart in the market.8

  GOING OUT—ON WHEELS

  Some of the Chinese companies are already producing inexpensive automobiles that are being sold in increasing numbers into developing countries. Chinese companies, like Indian manufacturers, also have their eye on a new, potentially very big market—cars priced from $2,500 to $7,500 and aimed at the hundreds of millions of people climbing up the rungs of the income ladder.

  But the specter that haunts Detroit and Tokyo and Stuttgart and the other auto cities is whether—and when—China’s auto companies (supported by local components suppliers) will reach a level of sophistication at which they can directly compete in the United States and Europe against the likes of GM, Ford, Toyota, and Daimler. Price will likely not be enough. Assuring quality and safety will also be essential. Fuel efficiency will be a criteria. They will also have to build dealer networks.

  One Chinese company that has partly solved that problem is Geely, which got started in 1986 making components for refrigerators and only produced its first car in 1998. Within a decade it was one of the top domestic Chinese manufacturers. In 2010 Geely purchased Volvo from cash-strapped Ford, giving it an instant global sales and dealer network. It is not clear whether that means Geelys will eventually go into American and European showrooms. But by producing Volvos in China, Geely would have a potentially upmarket brand with which to challenge BMW and Mercedes at home.

  The rapid expansion in China’s auto industry is adding many jobs and stimulating domestic consumption—two steps that China’s trading partners have, for years, been calling for. At the same time, this is causing worry among China’s leadership about adding to future oil imports as well as about the quality of life. China’s major cities are already clogged with traffic for which they were not built, and the delays and congestion—and growing pollution—embody the costs of such success. Some predict that if Beijing continues to add cars at its current rate of 2,000 vehicles a day, average speeds in the city could drop to nine miles an hour.9

  THE PRICE OF SUCCESS

  The abstract GDP and energy consumption numbers tell an extraordinary story. Never has the world seen so many people moving so quickly out of poverty into a world of economic growth and expanding opportunities. The scourges of hunger and malnourishment are receding rapidly. But there is an environmental price. Water is a great problem, both because of potential shortages and because of pollution from untreated waste. But it is the air that carries the burden of the rapidly growing energy consumption. Individual Chinese feel the pollution in their lungs and in their health.

  CHINA’S RISE: GDP AND TOTAL ENERGY DEMAND

  Source: IHS CERA, IHS Global Insight, International Energy Agency, China National Bureau of Statistics

  The major source of air pollution is coal, whether burned in individual homes for cooking and heating or used to generate electricity or burned in factories. Electricity demand is growing at about 10 percent. The rapidly growing automobile fleet is adding to the pollution in major cities. Regulations are seeking to push new cars to European levels of pollution control, but with mixed results.

  Meanwhile, in recent years China has become less energy efficient, reversing a long trend. Between 1980 and 2000, China’s economy quadrupled, and its energy use only doubled. Such a record in energy efficiency was a considerable achievement. With the new century, however, the relationship suddenly reversed. Energy consumption started growing much more rapidly than the economy. From 2001 onward, a huge wave of investment stimulated enormous expansion in industry, particularly heavy industry. Many of the factories—old and new—were quite inefficient in how they used energy. As China became the workshop of the world, its energy-intensive heavy industries were operating at double-time supplying the world’s market. China, for instance, became the largest producer of steel—almost half of the world’s entire output—and the biggest exporter of steel in the world. Thus it would be correct, at least in part, to say that as Chinese production has supplanted energy-intensive output in the United States and Europe, some share of energy consumption that used to take place in the United States and Europe has in effect migrated to China. Or to put it more sharply, the United States and Europe have outsourced part of their energy consumption to China. As a result of the rapid rise in energy use, Beijing has put conservation—energy efficiency—at the very top of its priorities.10

  As in other countries, climate change and
emissions are becoming an increasingly important factor in reshaping China’s energy policies. But climate change is also a mechanism to tackle other more immediate and, from the Chinese point of view, much more urgent problems—environmental degradation, rising energy demand, and energy security. To reduce carbon is also to reduce air pollution and contain energy use, and thus modulate imports of energy.

  POWER SURGE

  In the second decade of the twenty-first century, one of China’s great challenges is to ensure that it has the electricity its rapidly growing economy needs and at the same time protect the economy against the environmental consequences of fast economic growth. For a number of years, China was adding on an annual basis the equivalent of the entire installed capacity of a France or a Britain. This averaged out to another new, full-sized coal-fired plant going into service every week or two. The tempo has slowed down somewhat, but enormous capacity is still being added on an annual basis.

  It is hard to comprehend the scale and pace of growth. A dozen years ago, China’s generating capacity was not much more than a third that of the United States. Today it exceeds the United States. Between 2005 and 2010, China’s total electricity capacity doubled. It is as though the country built in just half a decade a new electrical system of identical size to the system in place in 2005! About 22 percent of new capacity added in 2009 was hydropower, and about 11 percent wind. Natural gas has just 2 percent. Still, the bulk of the new capacity—65 percent—is coal (lower than the 77 percent in 2005). But this also means that new, highly efficient, supercritical and ultra-supercritical coal plants, with more pollution controls, are being brought on line, while older, more-polluting and less-efficient coal plants are being retired early.

  Coal will continue to be the mainstay of the electric power industry. As a result of growing demand for coal, China is no longer self-sufficient in that resource either. Once a significant coal exporter, China is the world’s second largest importer of coal.

  But greater diversification among fuel sources will still be sought. A substantial part of the country’s target for non-fossil-fuel energy will be met by large hydropower plants. The Three Gorges Dam, which began producing electricity in 2003, has an installed power-generation capacity equivalent to about twenty nuclear plants. About 80 nuclear power plants are either under construction or in planning.

  State Grid, the largest utility in the world, is spending about $50 billion a year to build what some consider the most technologically advanced grid system in the world. This is another way to promote efficiency. China needs what State Grid chairman Liu Zhenya calls a “strong and smart grid” to transport power thousands of miles from the west and the north across the country to the load centers on the east coast and in the center of the country. This would also reduce the heavy burden of coal transport by truck or rail. The huge wind potential of the sparsely populated Northwest is seen as particularly desirable. It is not only clean energy, but is also an accessible domestic source that can be harnessed to meet China’s future need. But it is only accessible with a vast expansion of long-distance transmission.11

  In its 12th Five Year Plan, adopted in 2011, China put further emphasis on what it called its emerging-energy policy—to disproportionally push for alternatives to coal and oil, which means renewables (including hydropower), nuclear, natural gas, electric vehicles—and efficiency.

  ENERGY AND FOREIGN POLICY

  When it comes to oil, there are risks of a clash of interests between China and other countries, notably with the countries of Southeast Asia and Japan. How real these risks become will depend upon how the nations involved define and adjust their maritime positions.

  In terms of relations with the United States, the real risks would come not from competition in the marketplace but would more likely arise when oil and gas development becomes embroiled in geopolitical concerns, foreign policy, and human rights issues. One of those issues was Sudan, where a Chinese-led consortium produces substantial amounts of oil. Venezuela could become an issue, as Hugo Chávez is deliberately trying to play a “China card”—bringing in Chinese investment and promoting China as an alternative market in his campaign against the United States. But that does not seem all that strong a hand.

  But currently there is only one country where the risk of energy and foreign policy interests colliding is high. That country is Iran, in light of its nuclear program and pursuit of nuclear weapons. As a result, Iran presents the most complex, contentious, and potentially most difficult issue. Western and Japanese oil and natural gas companies have withdrawn or are in the process of withdrawing from Iran owing to its standoff with the United Nations over nuclear weapons and the growing body of sanctions. This creates a vacuum, and thus an opportunity for China to secure a significant position for its “go out” strategy in one of the major Middle East oil and gas producers. Chinese companies have negotiated, at least on paper, tens of billions of dollars of contracts for investment in the Iranian oil and gas industry that would provide access to substantial oil and gas resources, but they are not moving fast. At the same time, China has a larger interest in the stability of the entire Gulf region, on which it depends for a significant amount of its imports. Chinese companies have prominent roles in Iraq.

  China has generally gone along with U.N. sanctions but has opposed them on the energy sector. As tensions mount, and votes come up in the U.N. Security Council, China’s economic links with Iran, and its willingness or unwillingness to restrict its own dealings with Iran, could become a critical focal point in its relations with the United States and Europe. That could engender, if not managed carefully, much wider tensions, affecting the structure of overall collaboration in the world community. In the words of the International Energy Agency, “what will happen to the largest investment” to which the Chinese companies “have committed remains unclear.”12

  THE OVERLAP OF INTERESTS

  So much has happened since the discussion that night at the end of the 1990s, in the chilly courtyard of the China Club restaurant in Beijing, about China’s need to benchmark itself against the global oil industry. Then China was only a minor part of a global industry. Today it is the single most dynamic, rapidly changing element in the global oil market. Yet the fast growth of Chinese energy consumption and surging oil imports brings uncertainty, both for China and for the other major importers. The potential for conflict gets most of the attention.

  Yet there are also the common interests between China and other oil consumers, particularly the United States. These two countries are bound together—much more connected perhaps than many recognize—in the global networks of trade and finance that fuel economic growth. More specifically, they have shared interests as the world’s two largest petroleum consumers. The United States and China each import about half of their oil requirements. In the case of China, that share is likely to increase. Altogether, between them, they account for 35 percent of world petroleum consumption. Both benefit from stable markets, open to trade and investment, and improved energy security. But Chinese confidence needs to be enhanced in the reliability of the global market and the institutions maintaining its security. In turn, greater transparency about energy use and inventories in China would build confidence and create greater clarity for other importers. Both countries share common interests in encouraging greater energy efficiency, promoting innovation in renewables and alternative energy as well as conventional energy, and in managing carbon to reduce the threat of climate change. They have defined a common clean-energy agenda. Moreover, as holders of the world’s largest and second-largest coal reserves, they depend upon coal for substantial parts of their electricity generation, and thus share interests in finding a pathway to commercial clean coal.

  When all this is added up, there is much room for cooperation. Such collaboration would improve the energy and economic positions of both countries. And that, in turn, would contribute to the security and well-being of both countries as well as that of the global community.
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  PART TWO

  Securing the Supply

  11

  IS THE WORLD RUNNING OUT OF OIL?

  Since the beginning of the twenty-first century, a fear has come to pervade the prospects for oil and also feeds anxieties about overall global stability. This fear, that the world is running out of oil, comes with a name: peak oil. It argues that the world is near or at the point of maximum output, and that an inexorable decline has already begun, or is soon to set in. The consequences, it is said, will be grim: “An unprecedented crisis is just over the horizon,” writes one advocate of the peak oil theory. “There will be chaos in the oil industry, in governments and in national economies.” Another warns of consequences including “war, starvation, economic recession, possibly even the extinction of homo sapiens.” The date of the peak has tended to move forward. It was supposed to arrive by Thanksgiving 2005. Then the “unbridgeable supply demand gap” was expected to open up “after 2007.” Then it would arrive in 2011. Now some say “there is a significant risk of a peak before 2020.”1