[EAI Commentary] <US-China Competition and the Transformation of the Global Political and Economic Order - Resource Volume> Energy Issues and US-China Strategic Competition

Editor's Note

Beginning with the trade dispute in 2018, competition between the United States and China has gradually expanded beyond trade into the technology and energy sectors. To provide a forward-looking perspective on the future of US-China relations, EAI published a special issue briefing series in July 2019 titled "The Future of US-China Competition: Dynamics of Four-Stage Competition." As a follow-up, EAI has planned a special commentary series, "US-China Competition and the Transformation of the Global Political and Economic Order," to conduct an in-depth analysis of the current US-China competition. The publication schedule is as follows:

1) Lee Seung-ju, Dynamics of the US-China Trade War: Expanding Scope and the Counterattack of Interdependence (Published August 23)

2) Kim Sang-bae, Cybersecurity and US-China Technological Hegemony Competition: The Complex Geopolitics of Its Evolution (Published August 27)

3) Shin Beom-sik, Energy Issues and US-China Strategic Competition (Published September 5)

As the third report in this series, we are publishing a commentary on US-China strategic competition in the energy sector, authored by Professor Shin Beom-sik of Seoul National University. Professor Shin discusses the competitive landscape between the US and China in the international oil market, natural gas, and new energy technologies, driven by global energy diversification. In the oil sector, the perceived threats between the US and China are limited. However, securing energy transport routes are heightening security tensions, and in the natural gas sector, trade disputes are intensifying the competitive dynamic between the two nations. The author assesses that the field of new energy technologies is most likely to escalate long-term strategic competition, and recommends flexible and diplomatic responses for energy security.

Escalation and Expansion of US-China Strategic Competition

The trade conflict between the US and China is increasingly likely to spread into competition and conflict in various sectors. Consequently, there is growing interest in how US-China strategic competition is unfolding in the energy sector and what its future trajectory will be.

Many commentators assert that the deepening trade war and the signs of a currency war between the US and China are the prelude to an outright hegemonic competition. However, it is necessary to distinguish between strategic competition and hegemonic competition. While there is no consensus on clear criteria for distinguishing between the two, and the distinction is not easy, especially given their continuity, hegemonic competition is generally characterized by the use of all available means to vie for supremacy. These means include war as the ultimate option. Thus, the past experience that most hegemonic transitions have been accompanied by war lends further weight to the realist perspective.

However, neither the US nor China appears to desire the current trade war to escalate into an overt hegemonic competition. If the Trump administration wishes to control China's challenge by showcasing American strength, China seems to be seeking various opportunities to leverage market mechanisms that allow for the pursuit of its interests within the existing global market economy system. China appears to need the benefits derived from its integration into the global economic system, which has enabled its rise, more than ever. This is because China has not yet secured a solid foundation from which to deliver a decisive blow to the United States. The Trump administration seems to have clearly defined the current situation as a crisis that could lead to severe consequences if China's challenge is not properly managed. Therefore, the Trump administration initiated a full-scale trade war with China by imposing tariffs on $50 billion worth of Chinese imports in early April 2018, accepting criticism for the 'retreat of the liberal trade order.' However, it is still difficult to answer whether the conflicts and clashes arising from this US policy and China's mercantilist and isolationist response will escalate to the extent of fundamentally altering the nature of the global market economy system. In this sense, it is a more balanced observation to characterize the current competition between the US and China as a process of escalating strategic competition rather than an entry into an outright hegemonic competition phase.

The issue is that an objective assessment of how this strategic competition is manifesting across different issue areas is necessary, and responses should be formulated based on such an assessment. Before delving into the specifics of US-China competition in the energy sector, it is important to examine the characteristics of strategic competition in this field.

The energy sector is, in fact, a crucial area that can influence the foundation of the entire economy. Therefore, it is bound to be a primary area of strategic competition and is treated as a sector involving vital interests. The fact that Japan's decision to engage in full-scale war with the United States during World War II was critically influenced by the US oil embargo against Japan is well known. As such, energy security is treated as a sector that has a decisive impact not only on the economy but also on military security. The escalating US-China strategic competition is transforming the US-China relationship in the energy sector, which has historically been characterized by a complex mix of competition and cooperation, into a situation of competitive advantage. If this heightened competition is not managed appropriately, it could lead to an outright hegemonic competition between the two countries.

However, in the 21st century, in the fossil fuel sector, represented by oil and gas, which still constitute the main energy sources, the US has succeeded in expanding its energy resources through the shale revolution, and China has consistently pursued a policy of diversifying its imports. Therefore, the possibility of intense conflict between the two countries in the fossil fuel sector in the short term appears unlikely. However, changes in the global energy mix and the competition in developing new energy-related technologies driven by the Fourth Industrial Revolution are creating diverse dynamics by differentiating US-China energy competition across various sectors.

The International Oil Market and US-China Competition

The international oil market has recently been in a state of instability for several reasons. Firstly, overall oil demand is increasing globally. According to the U.S. Energy Information Administration (EIA), global oil demand increased by 1.4 million barrels per day in 2019. This is primarily driven by the economic growth of emerging and developing countries and can act as upward pressure on prices from the demand side.

However, the international oil market has recently been exposed to imbalances due to oversupply. This can be attributed mainly to the surge in supply of unconventional fossil fuels, exemplified by the US shale revolution. As a consequence, falling oil prices have led to increased production by key countries in the Gulf Cooperation Council (GCC) and Russia, and even the efforts of the Organization of the Petroleum Exporting Countries (OPEC) to cut production have failed to prevent a sharp decline in oil prices due to this oversupply.

US oil production has increased rapidly, reaching 15.31 million barrels per day in 2018, surpassing Saudi Arabia and Russia to become the largest oil producer. The EIA projected that the US would become a net energy exporter as early as 2020, sooner than expected. Consequently, the leadership of the international oil market is expected to shift from OPEC to the US, Saudi Arabia, and Russia, who will likely dominate oil prices.

This situation means that China, due to its high dependence on oil, has become significantly vulnerable to US price leadership in the context of US-China competition. Fortunately, the sustained low oil price environment resulting from the fierce competition among oil-producing countries to secure market share appears to limit the scope for direct conflict between the US and China.

Meanwhile, China has emerged as the world's factory through its high economic growth. Since becoming a net importer of energy in 1993, China has consistently driven the increase in global oil demand. It is no exaggeration to say that China has made desperate efforts to secure oil resources, as the strong leadership of the Chinese Communist Party is supported by sustained economic growth. As a result, China has succeeded in securing stable oil supplies from Central Asia, Africa, and the Middle East. In particular, China has dominated the African oil market through extensive and active Official Development Assistance (ODA) and various loans. Through development projects and increased investment via the Belt and Road Initiative (BRI), China is securing energy supply sources in Central Asia and the Middle East.

The US government has strongly criticized China's aggressive expansion, accusing it of condoning human rights-abusing dictatorships and engaging in neo-colonial practices that exploit poorer nations. In US-China relations, energy issues have been more actively framed as a security agenda by the US Congress. In a 2005 hearing, the US Congress began to seriously address China's energy issues, expressing concern about China's access to Canadian oil sands. In the same year, Congress opposed China National Offshore Oil Corporation's (CNOOC) bid to acquire the US company Unocal on the grounds of national interest infringement.

In response to the possibility of an energy blockade by the US, China has intensified its efforts to explore and enter overseas energy markets. In this process, it has focused its investments on countries such as Iran, Sudan, and Libya, which are in adversarial relations with the US or are targets of international criticism. In particular, to prepare for the instability surrounding oil transport routes through the Strait of Malacca, China has sought to establish alternative oil transport routes through Afghanistan, Pakistan, Myanmar, and Thailand, but this has been difficult due to US deterrence. In fact, the competition beneath the surface surrounding oil transport routes can be described as extremely fierce. It is no exaggeration to say that the strengthening of China's relationship with Russia is largely related to energy. President Xi Jinping's visit to Moscow in June, where he announced the "Declaration on the China-Russia Treaty of Good-Neighborliness and Friendly Cooperation in the New Era" with President Putin, and China's active investment in Russian fossil fuel resource development can be understood in this context.

An interesting point is China's purchasing dynamics of US oil. In fact, China had purchased almost no US petroleum products for a considerable period, but from 2017, purchases surged, peaking in 2018 with an average daily import volume of 4.5 million barrels. However, as a result of the escalation of US-China strategic competition, imports sharply declined in 2019. This trajectory precisely aligns with China's response to the US designation of China and Russia as 'revisionist powers' in the "National Security Strategy 2017" and the warning of resurgent US-China strategic competition in the "National Defense Strategy 2018," which characterized China as a revisionist adversary challenging US prosperity and security. China attempted to use energy purchases as leverage to hedge against US pressure, but this ultimately proved to be a failure.

Meanwhile, the international oil market continues to exhibit instability due to various geopolitical risks. The negative impact on the international oil market from the situation in Venezuela, oil sanctions on Iran, attacks on oil tankers in the Strait of Hormuz, and the issue in Libya is increasing. In particular, recent attacks on oil tankers by Iran clearly highlight the importance of oil transport routes for energy security. Compared to the US, whose energy security has been strengthened through the shale revolution, the stability of maritime oil transport routes is even more critical for China, which has a high external dependence on oil and thus vulnerable energy security. This is because China's military actions in the South China Sea and East China Sea could have a negative impact on its own energy security, potentially leading to a more cautious stance. Therefore, this also serves as a structural factor driving China's continuous efforts to secure alternative energy sources and transport routes amidst US-China strategic competition.

To summarize, it is clear that competition in the oil sector between the US and China has been continuously expanding. In particular, the US's rise to become the world's largest oil producer and its increased control over oil prices appear, on the surface, to place China at a disadvantage in strategic competition with the US due to its high external dependence on oil.

However, the possibility of this competition intensifying is limited. This is because the international oil market is undergoing structural changes, and the responses of strategic oil suppliers, represented by Saudi Arabia and Russia, are at play. Furthermore, China's long-standing efforts to secure diverse oil supply sources provide it with strategic leeway to avoid direct competition with the US in the oil sector. Therefore, while US-China competition in the oil sector may increase, its intensity is expected to remain limited for the time being.

US-China Relations in the Natural Gas Sector

As pointed out earlier, the strategic competition between the US and China aligns with the Trump administration's evolving perception of China, and this serves as a similar backdrop for examining bilateral relations in the natural gas sector.

In 2018, out of China's total liquefied natural gas (LNG) imports of 70 billion cubic meters (bcm), imports from the US slightly exceeded 3 bcm. However, China's natural gas demand is steadily increasing and is expected to reach 150 bcm by around 2025. Similarly, US LNG exports, which were 30 bcm in 2018, were projected to increase to 130 bcm by around 2025. Consequently, many observers anticipated that LNG would play a significant role in US-China trade.

While China harbored concerns about the US potentially using energy as a geopolitical tool, its domestic demand for natural gas was rapidly increasing, making it impossible to meet this demand solely through existing suppliers, including Central Asia. China, already importing natural gas from Turkmenistan, entered into an agreement with Russia, which was in a difficult position following the Ukraine crisis, to import pipeline natural gas (PNG). China also began importing Arctic LNG produced in Yamal, Russia, and has actively pursued policies to diversify and expand its natural gas supply sources by increasing imports from Australia and Southeast Asia. Nevertheless, China began to consider importing US natural gas to more actively utilize the anticipated increase in gas demand in the future. The following background explains the increase in gas demand within China:

Internationally, a new climate regime has been established, and domestically, severe public criticism regarding fine dust has arisen. As a result, the Chinese government has sought to change its energy mix to utilize more natural gas and nuclear power than crude oil and coal. In 2014, the National Development and Reform Commission under the Chinese State Council formulated a policy to increase the proportion of natural gas in China's primary energy mix from less than 5% (compared to the global average of 24%) to 13% by 2040.

To realize this plan, China sought to alleviate pressure from trade disputes with the US by reducing its trade surplus and simultaneously aimed to reduce its excessive reliance on natural gas from Australia and Eurasia, including Russia. At the first US-China summit after the Trump administration took office in 2017, China proposed expanding imports of US LNG as one of ten measures to address the US trade deficit with China. Discussions on joint investment in natural gas by the two countries' companies also rapidly advanced, leading to an agreement on a $43 billion joint investment project for Alaska LNG development. Consequently, US energy companies began to expand their LNG export facilities. Furthermore, in February 2018, the US company Cheniere Energy signed a large-scale long-term natural gas supply contract with China National Petroleum Corporation (CNPC).

However, the escalation of US-China strategic competition intensified trade disputes. In July and September 2018, China imposed additional retaliatory tariffs of $60 billion on US imports. During this process, China imposed a 25% tariff on US energy products such as diesel, gasoline, naphtha, and LPG in July 2018, and a 10% tariff on LNG by the end of 2018. As a result, China's imports of energy products, including US LNG, significantly decreased.

However, the impact of this US-China strategic competition on the natural gas sector may not be entirely favorable to the United States. This prediction is closely related to changes in the global natural gas market. It is well known that the export of US shale gas has led to an oversupply. However, a more significant impact is that market practices that ensured supplier dominance, such as the 'destination restriction clause' that has governed the natural gas market, have gradually weakened since the advent of shale gas. This is gradually transforming the natural gas market into a consumer-centric market, and low gas prices are further fueling this trend. Therefore, the US's position as a natural gas exporter is structurally weakening. In this situation, the US, having lost a crucial customer like China, will undoubtedly increase pressure on countries like Japan and South Korea to compensate.

In contrast, China's position appears more relaxed. Regarding LNG, China has secured stable imports from Qatar and Australia, and has capacity for imports from Malaysia. Furthermore, Arctic LNG produced in Yamal, Russia, is increasing its exports to China, and the supply of PNG from Russia through the 'Power of Siberia' pipeline is scheduled to begin in 2020. Additionally, China recently decided to invest in the Arctic LNG-2 project, further expanding its supply sources.

A particularly noteworthy aspect is the recent efforts by regional countries to form an East Asian natural gas market. In this process, China's position can be further strengthened by importing PNG from continental gas and various LNG sources. China, with free access to both continental and maritime gas, can become the leader of the East Asian gas market, leveraging its vast domestic market. This situation indicates that there are many factors that significantly limit the utility of US shale gas in the US-China strategic competition.

In summary, the cooperation in the natural gas sector between the US and China, which had reached a significant level due to the US shale revolution and China's increasing demand for natural gas, began to bear fruit through large-scale imports of US LNG and long-term supply contracts. In particular, China sought to use its purchase of US LNG as an attractive card to overcome the pressure from the Trump administration regarding the trade surplus. However, the recent US-China strategic competition has dealt a significant blow to the cooperation between the two countries in the energy sector, particularly in natural gas, dimming the prospects for mid- to long-term energy cooperation. The divergence in the trend of natural gas cooperation between the two countries, which began to show signs in the latter half of 2018, is clearly a result of their strategic competition. However, the possibility of this competition escalating structurally does not appear high. This is because China has numerous existing natural gas suppliers and new alternative sources in Eurasia and the Arctic, and the changing nature of the natural gas market, shifting from a seller-centric to a buyer-centric market, will create an environment that is not entirely favorable to the US.

Energy Technology Sector: Cooperation and Competition between the US and China

The upheaval in global energy geopolitics, initiated by the shale revolution and the new climate regime, is driving an era of energy transition, coinciding with the convergence of new technologies for the Fourth Industrial Revolution and the emergence of new patterns of energy production and consumption. The World Economic Forum (WEF) has already identified innovations in mobility, such as electric vehicles, decentralization of energy systems like micro- and smart grids, and the rapid development of new energy technologies exceeding expectations, as game-changers in the energy sector in 2017. The energy market is undergoing drastic changes and presenting numerous challenges in this era of energy transition. In particular, as the challenge of energy transition becomes intertwined with discussions on the Fourth Industrial Revolution, there are active projections that various technological innovations will lead to an 'Energy 4.0' era based on a new energy paradigm.

The National Development and Reform Commission under the Chinese State Council has also emphasized the need to change the manufacturing-centric economic model, which has driven an average annual energy consumption growth rate of nearly 9.4% over the past 30 years, by linking the energy paradigm shift to changes in China's economic pattern. This orientation is linked to the goal of reducing coal consumption, which accounted for 62% of China's energy mix in 2016, to the 20% range within 20 years. The most crucial aspect here is replacing coal with clean energy. The proportion of non-fossil fuels, such as renewable energy and nuclear power, in the power generation sector is to be increased to 31%, and the proportion of natural gas is to be increased to 10% by 2020 and 15% by 2030. In the long term, the goal is to increase the share of non-fossil fuel use to 50% by 2050.

For a considerable period, the US maintained a positive and cooperative stance towards China's energy transition. Discussions on energy cooperation between the US and China began as early as the 1970s. After China became a net energy importer in 1993, broader cooperation agendas, including energy technology development, efficiency improvements, and environmental issues, were increasingly discussed. During this process, the US made efforts to involve China in multinational energy research and development for technologies related to energy efficiency improvement, the transition to new and clean energy systems, and more. Cooperation in the energy sector between the two countries was particularly actively pursued during the Obama administration, with a strong focus on cooperation in the development of renewable and clean energy. In November 2009, President Obama visited Beijing and agreed to establish the US-China Clean Energy Research Center (CERC), strengthening cooperation in climate change, energy, and environmental fields between the two countries. This cooperative trend led to the activation of the US-China Energy Policy Dialogue channel, and energy cooperation was discussed as a key agenda item in the US-China Strategic Economic Dialogue. CERC, in particular, discussed advanced coal technologies, efficient building technologies, and clean vehicle technologies.

However, China was not entirely satisfied with this energy cooperation. This was because clean energy technologies were strictly controlled due to the US's advanced technology protection measures against China, and the escalating US protectionism in energy technology hindered the market entry of Chinese companies. Consequently, China has recently invested large-scale R&D funds in the clean energy sector. In 2010, China's investment in clean energy surpassed that of the US and the European Union, and its patent applications in the renewable energy sector are following those of the US, Japan, and Germany.

China's rapid growth has caused tension in the US and Western countries. The US government and Congress have taken measures to restrict the export and support of US solar panel technology and wind power-related technologies to China, and the phase of competition has gradually intensified. In particular, the West has strongly criticized China's inadequate intellectual property protection and has responded sensitively to the export of advanced technologies to China. The US has been paying close attention to all activities related to China's energy technology, such as the imposition of safeguard tariffs on US solar panel exports in January 2018. However, China has achieved remarkable results in this area and is evaluated to have achieved top-tier technological capabilities in some fields, such as solar power generation. This signifies escalating competition between the two countries in the field of new renewable energy technologies in the future. It is plausible to predict that this sector of new energy technologies will become the most competitive arena between the US and China amidst the intensifying technological hegemony competition driven by the Fourth Industrial Revolution. The prediction that advanced energy technology will be a core component of US-China strategic competition, or potentially future hegemonic competition, appears to have some credibility.

The recently announced US "National Defense Authorization Act for Fiscal Year 2019" explicitly states that China is a representative country that steals advanced technology and infringes intellectual property rights. It mandates the use of all legal means to prevent the outflow of advanced technology within the US and to thwart China's pursuit of illegal technological hegemony. Ultimately, new energy technology issues need to be recognized and closely monitored as the area where US-China strategic competition is most likely to continuously escalate in the future.

Instead of a Conclusion

The recent escalating trade dispute between the US and China is still premature to be considered the beginning of an outright hegemonic competition. Rather, it is more appropriate to view it as strategic competition aimed at economic superiority. This strategic competition has a high potential to spread and intensify across various domains. In this sense, the predictions of observers expressing concerns about hegemonic competition are understandable.

The repercussions of US-China strategic competition in the energy sector vary in intensity and pattern depending on the sub-sector. In the competition within the oil sector, the US, thanks to the shale revolution, has become the world's largest oil exporter and is aiming for the position of a swing producer. However, China's long-standing efforts to diversify its import sources have resulted in a relatively low perceived threat from the US. Nevertheless, the security of energy transport routes can be a serious issue. The US's "Indo-Pacific Strategy," which is attracting attention as a key measure to contain China, primarily consists of two pillars: military containment linking the US, Japan, Australia, and India, and economic containment utilizing cooperation with various countries such as Thailand, the Philippines, and Pakistan, along with other means. In terms of economic containment, coercive measures by the US related to China's oil transport routes have the potential to escalate into serious military tensions. Therefore, from China's perspective, there are also limiting factors at play that prevent it from engaging in military adventurism in the East and South China Seas that could provoke similar actions by the US.

Meanwhile, the cooperation in the natural gas sector between the US and China, which had shown potential for significant development, has ultimately suffered considerable damage due to the repercussions of their strategic competition. However, natural gas is a sector where China can react less sensitively to US threats due to its diversified import sources and the existence of abundant alternative options. The situation is quite different in the new energy and clean energy technology sectors, where a similar cooperative trend was developing. In this field, where the most comprehensive cooperation was discussed and attempted, the two countries have entered into competition over new energy technologies, and this point is likely to become a quiet but fierce battleground. This is because the preemption and dominance of energy technology itself can become a condition that increasingly influences the outcome of the strategic competition between the two countries over time.

Therefore, middle powers like South Korea, facing significant challenges amidst the waves of US-China strategic competition, need to formulate multifaceted strategies for their energy security and prepare for flexible responses. Competition in the energy sector is a prime example that possesses both security and economic characteristics, making an understanding of the mechanisms through which security and economy influence each other crucial. Securing energy security in the context of escalating US-China strategic competition in the future will ultimately be determined by the success of multifaceted diplomacy, the establishment of efficient and advanced consumption patterns, and technological innovation. ■

■ Author: Shin Beom-sik, Professor, Department of Political Science and International Relations, Seoul National University. He graduated from the Department of Diplomacy and Graduate School of Seoul National University and obtained a Ph.D. in Political Science from Moscow State Institute of International Relations (MGIMO). His main research areas are Russian foreign policy and Eurasian international relations. His major works include "Challenges in 21st Century Eurasia and International Relations" (2006, co-edited), "Transformation of Energy International Politics and Northeast Asia" (2015, co-edited), "Understanding Global Environmental Politics" (2018, co-edited), and "Russia's Perspectives on International Politics" (2008).

■ Responsible Editor: Kim Seyoung, EAI Research Fellow

Inquiries: 02 2277 1683 (ext. 208) I sykim@eai.or.kr

[EAI Commentary] is a commentary series planned to provide a platform for discourse where experts from various fields can offer in-depth analyses and policy recommendations on major domestic and international issues. Please cite the source when quoting. EAI is an independent research institution independent of any partisan interests. The arguments and opinions presented in reports, journals, and books published by EAI are not attributable to EAI and solely represent the views of the respective authors.