About the author:
Liu Yangsheng; Senior Fellow of Taihe Institute; Co-Founder of Impact Asia Capital Ltd; Advisory Board Member, CGN Capital Partners Infrastructure Fund III
We are now facing a catastrophic energy crisis on a global level. The Europeans are facing the upcoming harsh winter without sufficient energy for household heating, and both Europeans and Americans are suffering from a surging oil price. How does the ongoing crisis influence the global economy?
In order to have a holistic point of view towards the global energy crisis and global economics, we must revisit what happened during the global economic transformation of the last three decades. First and foremost, there has been a major change in the demand structure of energy. Global population growth and expansion of the middle class required more goods and services, which increased the energy demand. In particular, the middle class has generated a massive demand for electronic consumer products. Therefore, for both the manufacturing side and consumer side, there has been significant growth in demand for power and energy. As such, over the last three decades, a major demand shift has occurred which moved economic gravity from the West to the East.
During the three-decade-long demand shift from the West to the East, the U.S. reduced its manufacturing base significantly, and its service industry became the most significant portion of its economy. Manufacturing demands greater power consumption; thus, the demand for energy use in the U.S., especially in gasoline, has seen a significant reduction. Moreover, the increasing cost of gasoline globally has meant vehicles of higher efficiency, and the lowering consumption percentage has made significant headway in the marketplace.
In Europe, the industrial use of cheap Russian oil and gas has underpinned not only its economic development, but ensured a solid industrial base including the provision of raw materials for petrochemicals. Asia also plays a key role in the global shift of energy demand. As Asia, and especially China, became the manufacturing powerhouse for the world, the demand for power and industrial raw materials, including oil and gas, has soared. Asia is now the largest global consumer of power for manufacturing. Importantly, the rise of the middle class, in Asia and elsewhere, and its demand for reliable power have also shifted energy demand.
And over the global energy demand change in the last four decades, another notable factor is the shift of position of the U.S. As the previously largest importer of energy from the Middle East, the U.S. now largely achieved self-sufficiency with its shale oil and shale gas revolution, and has become a major exporter of energy and a competitor for the market share of the Middle East. China, instead of the U.S., is now the largest purchaser of Saudi oil, and Middle Eastern suppliers naturally move closer to their Asian customers. I consider this change in the global energy landscape as the basis for the ongoing significant geopolitical shift.
Tracing the current crisis back, we can easily figure out that it is the Russia-Ukraine conflict that triggered and catalyzed the crisis. How would you describe the relationship between the energy crisis and the ongoing conflict?
The conflict between Ukraine and Russia is a short-term event with a long-term impact. The sanctions initiated by the United States and followed by Europe are seriously disrupting the global supply chain and the global market. Cheap Russian energy is used to power Europe’s consumer demand and industrial base. Today, Europe relies on US supplies of LNG at a significantly higher price and lower supply reliability. The significant rise in energy costs means Europe is losing competitiveness in the global manufacturing sector. As many weather forecasters have predicted, Europe will suffer a long harsh winter this year. European countries do have their short-term reserves, but merely sufficient for household use, and industrial supply will see many companies suffer serious shortfalls.
Whether the Russia-Ukraine crisis can be resolved quickly is a question that determines if Europe can survive the serious and sharp impact of the U.S.-led sanctions. I’m not optimistic. Neither the Europeans nor Americans, and it is the Americans leading the Europeans, will give up their attempt to hollow out Russia, which, ironically, turns out to be a significant effort to hollow out Europe in terms of industrial competitiveness and its manufacturing base.
Despite the fact that the world is at the juncture of an energy crisis, OPEC+ recently announced the reduction of its oil production by 2 million barrels a day, leading to an oil price surge, regardless of America’s warning. What’s your observation?
In relation to OPEC+, there is no question the U.S. has applied serious political pressure to increase production on Saudi Arabia, the UAE, and the other OPEC countries with which it maintains a good relationship. The U.S. had requested Saudi Arabia to delay production cuts by a month to mitigate their impact on the US November midterm elections. However, the U.S. has lost considerable geopolitical clout, because it is no longer the largest purchaser of energy from Saudi Arabia or the Middle East. Moreover, OPEC+ includes many countries which have suffered under US sanctions, such as Venezuela, Russia and Iran. As such, these countries have no motivation to conform to demands related to US domestic political purposes.
In addition, if things unfold as many predict, and the global economic downturn continues at its current pace, the demand for global energy supply may plummet, similarly to the situation at the beginning of the pandemic, when oil price futures went negative and energy suppliers had to pay customers to take oil. The OPEC+ countries are very concerned about serious projections of the economic downturn in the West, especially in the U.S. and Europe. Sadly, this scenario has already happened, with Europe suffering two consecutive quarters of decline – a technical recession. The U.S. has also had two negative quarters. As economic growth falters, demand for energy also falls, and the economic security of OPEC+ countries, in terms of their profitability, revenue streams, and even economic survival, is at risk. Out of concern for their own economic survival and economic security, OPEC+ has decided to reduce output by 2 million barrels a day. I expect, that despite the 2% OPEC+ cuts of their total output, a significant chance remains for further tightening and cutting of output over the next two to three quarters.
As an eager attempt to seek alternatives, the world has been increasing its investment in sustainable energy for years. For example, according to IEA, the world would invest 472 billion dollars in the development and implication of renewable power. But meanwhile, facing the cold winter, Germany decided to reopen multiple coal-fired power plants. With the current energy crisis, it’s even more complex to deal with environmental and climate problems. How can international society resolve the dilemma of balancing climate actions and the global energy crisis? And what kind of role can China play during the process?
The sectors receiving greater attention due to the energy crisis are environment, climate change, and renewable energy. In terms of climate change, not only new and renewable energy, but carbon neutrality are key considerations. To cope with the ongoing crisis, the European countries have recently announced a shift back to coal, and delayed in meeting their formerly announced carbon neutrality targets. This is very unfortunate. Climate change has caused a devastating impact on Earth. Droughts in a number of places have reached the point where hydropower plants cannot function. Moreover, heat waves are also causing devastating famine, due to the destruction of agriculture. Whatever their political persuasion, especially in relation to sanctions and ideological attacks, the damage to the Earth continues unabated. Switching the world’s focus on new and renewable energy, which are the potential basis to mediate climate problems, has become even more urgent.
China, despite the fact that it has had to increase its coal-fired power solutions because of drought, is sticking to its carbon neutrality targets, and implementation of these policies continues to proceed. I think China will certainly take a lead in the development and implementation of new and renewable energy. Over 80% of the global manufacturing capacity in solar equipment and 60% of wind equipment manufacturing capacity is based in China. If developed countries are serious about renewables, they should revise their current policies. For example, they should abolish customs duties, imposed under the so-called anti-dumping tax, on Chinese-made solar and wind power equipment. It is absurd for Western countries to make claims about climate change actions and the new production of renewable energy while imposing a political penalty on the most efficient producers of the equipment, such as China. China will continue to develop under its stated policies, and further support the Global South and developing countries for the development of new renewable sources of energy, including solar, wind, and hydropower. With so many projects now being implemented by the Chinese government and companies, China is cooperating with the Global South and contributing to making a better world that increasingly focuses on green energy. This is without doubt globally beneficial.
This article is from the October issue of TI Observer (TIO), which is a monthly publication devoted to bringing China and the rest of the world closer together by facilitating mutual understanding and promoting exchanges of views. If you are interested in knowing more about the September issue, please click here:
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