Political campaigns, to the extent that they deal with serious issues at all, invariably oversimplify both the problems and potential solutions. The 2012 US presidential campaign clearly won’t be an exception. One serious issue that Americans deserve to hear discussed in a thoughtful and reality-facing way is China’s growing role in the global economy and what this means for their future. But while China will certainly be mentioned at various times during the campaign, candidates from both parties are almost certain to ignore the most significant aspect of this economy’s emergence.
Candidates will try to score points talking about Beijing’s trade practices, its supposedly undervalued currency and its human rights record. Meanwhile, they’ll overlook an issue destined to impact American life in an infinitely more damaging way: China’s energy policies and how these relate to America’s long-term energy needs. The failure of the US to understand and respond to China’s energy policies benefits China more than anything else. And it puts America’s future in peril.
Look at what is going on in China today: Beijing has identified a number of strategic economic sectors that it is fostering, including alternative energy, biotechnology, next-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, and energy-saving and environmentally friendly technologies. The current five-year plan will steer trillions of dollars into these sectors through policy incentives to corporations, investments by local governments and bank lending. But all this understates the magnitude of what the country is undertaking.
China is in reality relentlessly, some would say frantically, pursuing a policy of developing its alternative energy generating capacity. This goes far beyond Beijing’s unwavering commitment to nuclear power. China will also make huge investments in a wide range of renewables. The country’s ambitions are truly stunning: its target is to generate 20 per cent of its primary energy from alternatives by 2020, up from about 12 per cent in 2010. In the United States today, renewables account for less than 2 per cent of primary energy usage and are likely to account for only a very modest portion of the energy pie going forward.
Implicit in China’s energy transition is the need for massive amounts of commodities. Building wind turbines, smart grids, solar panels, and nuclear reactors requires tremendous quantities of everything from hard commodities like oil, copper and iron ore, to human labour.
ANOTHER transition the country is undertaking is redirecting its economy from being heavily dependent on exports and investments to one based more on consumer demand. This implies wages rising faster than the economy and inflation. So far, China is succeeding and then some. Wages have been rising at about 12 per cent annually, and they will probably accelerate in the next several years. Wage increases will make inflation a long-term problem. But unlike the developed world, China has a powerful weapon for battling inflation, whether it is wage- or commodity-driven: currency appreciation. It will continue to manage this according to its own timetable while ignoring America’s misguided call to accelerate the pace of the yuan’s rise.
The country also has plans to move 400 million citizens off farms and into cities in the next 20 years. China’s program of rapid urbanisation, part and parcel of its goal of raising workers’ wages, meshes on one level with its energy aims, since cities require less energy per person than rural areas. Nevertheless, building and expanding cities will add further to China’s need for resources, including energy.
To achieve its goals China has set about gaining complete control of any industry it considers vital to its future. In just a few short years, for example, China has become the world leader in solar energy with more than 60 per cent market share. Chinese solar companies have attained this dominance though generous government support and by pricing their goods far below products from Western competitors. Short-term profits suffer, but in the longer term China will dominate this critical industry. This promises to further increase China’s already commanding position as other solar companies fall by the wayside.
China has also become the leading producer of wind turbines and has a nearly insurmountable advantage thanks to its near monopoly of heavy rare earth elements, which are vital elements in the construction of turbine motors. The country is likewise on the verge of establishing an unassailable position in desalination, producing fresh water from the sea. As with solar, they are using the latest technology and selling the water at 50 per cent of its cost, virtually assuring no other country will compete. China is exporting solar panels and wind turbines to other nations, using its competitive advantages in labour, land, and taxes to dominate the market. This strategy is straight out of America’s playbook whereby the Pentagon acted as the primary market for the US semiconductor industry in its infancy in the 1960s and 1970s while those manufacturers gained economies of scale. The corporate graveyard is already populated with Western companies that have faltered against this determination. And those still standing are destined to lose ground as China reproduces their technological expertise on the cheap.
IN CONTRAST to China, America’s energy policy, endorsed by both parties, is to maximise the extraction of hydrocarbons. The use of horizontal drilling coupled with hydraulic fracturing, more simply known as “fracking”, has opened up vast shale deposits previously thought to be uneconomical to exploit. This technology is seen by some as having the ability to unlock limitless hydrocarbons and the early results have been impressive. Unfortunately, however, these efforts are only likely to provide America with a temporary respite.
Tapping the Bakken Shale, the nation’s largest shale oil formation, has seen American crude production rising to its highest level in eight years. North Dakota, the centre of this renaissance in oil production, should soon overtake Alaska as the second-largest US oil-producing state after Texas. Yet even using the most optimistic estimates, the oil contained within the Bakken is less than what was initially found in Alaska’s Prudhoe Bay, which has been in decline since 1990 and where only an estimated 2 billion barrels of recoverable oil remains. Even the US Energy Information Agency, which has historically offered overly optimistic forecasts, expects the nation’s shale oil and deepwater production to peak by 2020.
In the natural gas arena, the practical results from fracking have also been stunning in the United States. So far, it has really been too much of a good thing, as record high natural gas production has led to low natural gas prices. Now many of those natural gas rigs are being moved over to spots that are more likely to contain oil or natural gas liquids, which command much higher prices than dry gas. In any event, the increase in natural gas production has been a great ride. But with natural gas prices depressed and drilling rigs shifting over to oil, production of natural gas is likely to start to decline.
It may not only be the changes in where and how the rigs are deployed that is causing the decline. Capitalism may be the greatest economic system ever created, but it does have its warts. And one wart is the tendency, just like the male peacock, to show off its feathers for an exaggerated effect. So just as female peacocks who base their mating choice on an impressive display of feathers don’t always get what they are bargaining for, consumers may be in a similar position when it comes to companies engaged in fracking. There is strong evidence that the companies so avidly engaged in shale gas production have, in effect, been showing off their feathers — that is to say, going for the easy and most impressive stuff first. Evidence is bountiful that one part of a shale formation can contain huge amounts of hydrocarbons while another very close by may contain very little at all.
A little-known recent story is that China, a nation with a voracious appetite for energy of all sorts, has postponed plans for tapping its shale deposits for at least a decade. It turns out their shale formations, which as recently as six months ago were believed to be among the most potentially productive deposits in the world, on closer examination are now considered to represent an extremely complex challenge.
In short, the oil and gas America is extracting from its shale deposits will buy the country some time, but it is no long-term panacea in a world in which oil production is likely to remain constrained and several billion people in emerging economies are eager to consume greater quantities of fossil fuel. China has set its course toward alternative energies not so much out of concern for the environment, although that will be an added benefit, but because the country’s leadership recognises that the world is entering an era of resource scarcity.
THERE is a lot of debate about the phenomenon of peak oil and, indeed, peak everything. We won’t attempt to settle the debate here, but suffice to say we know from reading Chinese commentaries that they buy into the notion of not just peak oil, but peak hydrocarbons. Several years ago, for example, an academic paper penned by two Chinese professors argued, as others have, that even coal, which is so vital to China’s energy production, will peak some time in the next decade. Such articles have not been limited to the Chinese press, either. Moreover, the arguments are increasingly focused not just on oil, but pointed toward critical base metals such as copper (vital for wind power) and silver (essential for solar power) as well. This is a major change. For in the past, whenever resources were mentioned in scientific journals and magazines they were mentioned in connection with our desperate need to develop renewables before global warming destroyed our earth, rather than in terms of the implications of our inability to produce enough resources to keep up with demand.
But scientists are coming around to the belief that perhaps more important than global warming is resource scarcity. For instance, an article in the 26 January 2012 issue of Nature is titled “Oil’s Tipping Point Has Passed”. The only controversial assertion it makes is that the amount of incremental oil that we can expect from North America is nowhere near enough to fill the gap caused by natural depletion. Prices of many key industrial materials have been in steady uptrends for more than a decade as supplies have tightened. Contrary to historical norms, prices have even remained high despite slow to non-existent growth in the US and Europe in the last few years.
Emerging economies are behind the stunning growth in demand. In particular China has become a big consumer of industrial materials. The new demand from the emerging economies, which, on a per-capita basis, is still just a small fraction of the materials used in mature economies, is likely to continue climbing at a rapid pace. But with the global production of resources such as oil, coal and copper on a plateau, future gains in resource prices could be alarming. High and rising resource prices are the primary reason behind the decline in Americans’ standard of living in the past decade. The price hikes impose an implicit tax on every American, throttling growth in what is a mature economy. China, on the other hand, because it is growing rapidly, can absorb high and rising commodity prices as part of the cost of conducting business.
The stark contrast between the energy policies of America and China may have a lot to do with the time horizons on which politicians in each country operate. In the US officials intent on remaining in power are always looking just ahead to the next election. They therefore typically shy away from issues that might require voter sacrifice. In China, while the Communist Party’s legitimacy rests on delivering a rising standard of living for its citizens, the government does not have to answer to a fickle electorate. That gives officials room to plan on a time perspective that can stretch into not just years but decades. China has committed to spending trillions of dollars over the next few years alone on new industries, primarily new energies. Meanwhile, the Obama administration’s increase of federal subsidies for wind and solar to $14.7 billion was sharply criticised, with a recent New York Times article describing it as “overly generous”.
America would benefit if its politicians employed China’s foresight on energy needs. A government-sponsored alternative energy program on the scale of the Manhattan Project would put the United States on a path to sustainable economic growth. This would be a huge effort requiring trillions of dollars, which might not be popular with voters since it would add to the nation’s already high deficit. However, it would create high paying jobs that would help to boost a stagnant economy, and in the long run it would help to make the nation truly energy independent.