[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 to encompass the technology and energy sectors. To provide an outlook on the future of US-China relations, EAI published the special issue briefing series "The Future of US-China Competition: Four Stages of Competitive Dynamics" in July 2019. 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 provide an in-depth analysis of the current US-China competition. The publication schedule is as follows:

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

2) Sangbae Kim, Cybersecurity and the US-China Technology Hegemony Competition: The Complex Geopolitics of Its Evolution (Published August 27)

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

As the third report in this series, we are publishing a commentary by Professor Beomshik Shin of Seoul National University concerning US-China strategic competition in the energy sector. Professor Shin discusses the competitive dynamics 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 threat each country perceives from the other is limited. However, securing energy transport routes is escalating security tensions, and in the natural gas sector, trade conflicts are intensifying the competitive landscape between the two nations. The author assesses that new energy technologies hold the potential for escalating long-term strategic competition, and recommends flexible and diplomatic responses for energy security.

Escalation and Proliferation of US-China Strategic Competition

The trade conflict between the US and China is increasingly likely to spread to competition and conflict in various other fields. Consequently, interest is growing in how US-China strategic competition is unfolding in the energy sector and what direction it will take in the future.

Many commentators assert that the intensification of the current US-China trade war and the signs of currency warfare herald a full-blown hegemonic competition. However, it is necessary to distinguish between strategic competition and hegemonic competition. While there is no consensus on clear criteria to differentiate the two, especially given their continuous nature, differentiation is not easy. Generally, hegemonic competition is characterized by a struggle for primacy, considering all available means, including the ultimate means of war. The past experience that most hegemonic transitions were accompanied by war thus lends further weight to the realist perspective.

However, it appears that neither the US nor China desires the current trade war to escalate into explicit hegemonic competition. If the Trump administration wishes to control China's challenge by showcasing American power, China seems to be seeking various opportunities to utilize market mechanisms that can pursue 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 at this juncture, as it has not yet secured a solid foundation to deliver a decisive blow to the US. The Trump administration seems to have clearly defined the current situation as a crisis where failure to manage China's challenge properly could lead to severe consequences. Therefore, the Trump administration initiated a full-blown trade war with China by imposing tariffs on US$50 billion worth of Chinese imports in early April 2018, accepting criticism for the "retreat of the liberal trade order." However, it remains difficult to answer whether the conflicts and collisions arising from such US policies and China's mercantilist and isolationist responses will intensify to fundamentally alter 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 full-fledged hegemonic competition.

The issue is that an objective judgment is needed on how this escalation of strategic competition is manifesting across different issue areas, and responses need to be formulated based on such judgments. Before delving into the current state of US-China competition in the energy sector, it is necessary to examine the characteristics of strategic competition in this field.

The energy sector is, in fact, a crucial field that can underpin the entire economy. Therefore, it is bound to be a major area of strategic competition and is treated as a sector involving vital interests. The fact that the critical reason for Japan's entry into total war with the US during World War II was the US oil embargo against Japan is well known. As such, energy security is treated as a sector that critically impacts not only the economy but also military security. The currently escalating US-China strategic competition is transforming the nature of US-China relations in the energy sector, which has historically been characterized by a mix of competition and cooperation, into a situation of competitive advantage, and if this heightened competition is not managed appropriately, it could lead to full-blown hegemonic competition between the two countries.

However, in the fossil fuel sector, represented by oil and gas, which still form the bulk of energy in the 21st century, the US has succeeded in expanding its energy resources through the shale revolution, and China has consistently pursued a policy of diversifying imports early on. Consequently, the possibility of intense conflict between the two nations in the fossil fuel sector in the short term appears low. Nevertheless, changes in the global energy mix and competition in developing new energy-related technologies due to the Fourth Industrial Revolution are creating diverse manifestations of US-China energy competition, differentiated by sector.

The International Oil Market and US-China Competition

The international oil market is currently in an unstable situation for several reasons. Firstly, overall oil demand is increasing globally. According to the US Energy Information Administration (EIA), global oil demand is projected to increase by 1.4 million barrels per day in 2019. This is primarily driven by the economic growth of emerging and developing economies and could 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, typified by the US shale revolution. As a consequence, falling oil prices have prompted production increases in key Gulf Cooperation Council (GCC) countries and Russia, and even efforts by the Organization of the Petroleum Exporting Countries (OPEC) to cut production have not been able 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 producer. The EIA projected that the US would become a net energy exporter by 2020, earlier than expected. As a result, the leadership of the international oil market is expected to shift from OPEC to the US, Saudi Arabia, and Russia, who will drive oil prices.

This situation implies that China, due to its high dependence on oil in the context of US-China competition, has exposed significant vulnerabilities to US price leadership. Fortunately, the sustained low oil price situation resulting from the fierce competition among oil-producing countries to secure market share does not appear to provide much room for direct conflict between the US and China.

Meanwhile, China has emerged as the world's factory through rapid economic growth and has been a major driver of increased global oil demand since becoming a net oil importer in 1993. It is no exaggeration to say that China has made strenuous efforts to secure oil resources, as the strong leadership of the Chinese Communist Party is supported by continuous 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. Furthermore, by expanding development projects and investments in neighboring regions through 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 expansionist behavior as protecting authoritarian regimes that violate human rights and engaging in neo-colonial practices that exploit poor countries. 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 seriously addressing China's energy issues, expressing concern about China's access to Canadian oil sands. In the same year, the US Congress opposed China National Offshore Oil Corporation's (CNOOC) bid to acquire Unocal, an American oil company, citing national interests.

In response to the possibility of an energy blockade by the US, China has redoubled its efforts to explore and enter overseas energy markets. In this process, it has concentrated investments in countries hostile to the US or subject to international criticism, such as Iran, Sudan, and Libya. 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 via Afghanistan, Pakistan, Myanmar, and Thailand, but this has been difficult due to US scrutiny. In fact, the sub-surface competition surrounding oil transport routes can be described as extremely fierce. It is no exaggeration to say that the strengthening of relations between China and Russia is largely related to energy. The fact that President Xi Jinping visited Moscow in June and announced the "Declaration on the China-Russia Comprehensive Strategic Partnership of Coordination for a New Era" with President Putin, and China's active investment in Russian fossil fuel resource development, can be understood in the same context.

One interesting point is China's purchasing dynamics of US oil. In fact, China had purchased almost no US oil products for a considerable period, but purchases surged starting in 2017, peaking in 2018 with imports reaching approximately 4.5 million barrels per day. However, as a result of escalating US-China strategic competition, these imports drastically declined in 2019. This aligns precisely 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 "Defense Strategy 2018," which identified China as a revisionist adversary challenging US prosperity and security. This indicates that China attempted to hedge against US pressure by using energy purchases as leverage, but ultimately failed.

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 tanker attacks by Iran clearly highlight the importance of oil transport routes for energy security. Compared to the US, whose energy security has been strengthened by the shale revolution, China's energy security is more vulnerable due to its high external dependence on oil, making the stability of maritime oil transport routes even more crucial. This may also lead China to adopt a more cautious stance, as military actions in the South China Sea and East China Sea could negatively impact its own energy security. Therefore, structural factors are also 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 continued to expand. In particular, the US's emergence as the largest oil producer and its increased control over oil prices superficially appear to place China, with its high external dependence on oil, at a disadvantage in strategic competition with the US.

However, the potential for this competition to intensify 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 suppliers provide it with strategic leeway to avoid direct competition with the US in the oil sector. Therefore, while 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 noted 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 the total 70 billion cubic meters (bcm) of liquefied natural gas (LNG) imported by China, imports from the US slightly exceeded 3 bcm. However, China's natural gas demand is steadily increasing, projected to reach 150 bcm around 2025. US LNG exports, which were 30 bcm in 2018, were also expected to increase to 130 bcm by around 2025. Consequently, many observers anticipated that LNG would play a significant role in US-China trade.

Of course, China had concerns about the US potentially using energy as a geopolitical tool, but given the rapidly increasing domestic demand for natural gas, it was impossible to meet this demand solely from existing suppliers, including Central Asia. China, already importing natural gas from Turkmenistan, entered into an agreement with Russia, which was in a difficult situation after the Ukraine crisis, to import pipeline natural gas (PNG). It also began importing Arctic LNG produced in Russia's Yamal region and has actively pursued policies to diversify and expand its natural gas supply sources, including increased imports from Australia and Southeast Asia. Nevertheless, China considered importing US natural gas to more actively utilize the projected future increase in gas demand. The background to this increase in domestic gas demand in China is as follows:

Internationally, the launch of a new climate regime, and domestically, severe public criticism regarding fine dust, have prompted the Chinese government to shift its energy mix towards greater use of natural gas and nuclear power over crude oil and coal. In 2014, the National Development and Reform Commission under the Chinese State Council established 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 achieve this plan, China sought to reduce trade friction with the US by shrinking its trade surplus and to reduce its excessive reliance on Australian natural gas and Eurasian natural gas from Russia, among other multi-faceted objectives, by actively pursuing imports of US natural gas. Following the first US-China summit after the launch of the Trump administration in 2017, China proposed increasing imports of US LNG as one of ten measures to address the US trade deficit with China. Discussions on joint development investments in natural gas between the two countries' companies also rapidly progressed, leading to an agreement on a US$43 billion joint investment project for Alaskan LNG development. Consequently, US energy companies began expanding their LNG export facilities. Furthermore, in February 2018, US company Cheniere Energy signed a long-term supply contract for a large volume of natural gas with China National Petroleum Corporation (CNPC).

However, the escalation of US-China strategic competition has intensified trade conflicts. In July and September 2018, China imposed additional retaliatory tariffs of US$60 billion on US imports. During this process, in July 2018, China imposed a 25% tariff on US energy products such as diesel, gasoline, naphtha, and LPG, and by the end of 2018, it imposed a 10% tariff on LNG. Consequently, 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 exclusively benefit the US. This prediction is deeply related to changes in the nature of the global natural gas market. The oversupply phenomenon resulting from the export of US shale gas is a well-known fact. However, a more significant impact is the gradual weakening of market practices that ensured supplier dominance, such as the "destination-restrictive clauses" that have governed the natural gas market. This is gradually transforming the natural gas market into a consumer-centric market, and low gas prices are also fueling this trend. Therefore, the US's position as a natural gas exporting country is structurally weakening. In this situation, losing an important customer like China, the US will undoubtedly increase pressure on countries like Japan and South Korea to compensate.

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

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

In summary, the cooperation between the US and China in natural gas, which had reached a considerable level due to the US shale revolution and China's increasing demand for natural gas, began to bear fruit with 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 to reduce the trade surplus. However, recent US-China strategic competition has thwarted the growing cooperation between the two countries in the energy sector, particularly in natural gas, thus darkening the prospects for mid- to long-term bilateral energy cooperation. The shift away from the trend of natural gas cooperation between the two countries, evident since the latter half of 2018, is clearly a result of strategic competition between them, but the possibility of this competition structurally escalating does not appear high. This is because China has numerous existing natural gas suppliers and new alternatives in Eurasia and the Arctic, and the changing nature of the natural gas market, shifting from supplier-centric to consumer-centric, will not create an environment favorable to the US.

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

The upheaval in global energy geopolitics, triggered 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 pointed to innovations in mobility, such as electric vehicles, the decentralization of energy systems like micro- and smart grids, and the rapid development of new energy technologies exceeding predictions, as game-changers in the energy sector in 2017. The energy market is undergoing drastic changes and facing numerous challenges in this era of energy transition. In particular, the challenges of energy transition, coupled with discussions on the Fourth Industrial Revolution, are leading to forecasts that various technological innovations will drive the era of 'Energy 4.0' based on a new energy paradigm.

The National Development and Reform Commission under the Chinese State Council also emphasized the need to change the economic model, which has relied on manufacturing and driven an average annual energy consumption growth 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 reflected in 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 important aspect here is replacing coal with clean energy. The share of non-fossil fuels, such as renewable energy and nuclear power, in the power generation sector is to be increased to 31%, and the share 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 proportion 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 cooperative agendas, including energy technology development, efficiency improvement, and environmental issues, were discussed extensively. In this process, the US strove to involve China in multinational energy R&D aimed at developing energy efficiency improvement technologies and transitioning to new and clean energy systems. Cooperation between the two countries in the energy sector 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 approach led to the activation of the "US-China Energy Policy Dialogue" channel, and energy cooperation was discussed as an important 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 is because advanced clean energy technologies were strictly controlled due to US measures to protect its technology, and the escalating US protectionism in energy technology hindered Chinese companies' access to the US market. Consequently, China has recently invested large amounts of 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 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, leading to sensitive responses regarding 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 imposing safeguards on US imports of solar panels in January 2018. However, China has achieved remarkable results in this area, and in some fields, such as solar power generation, it is considered to have achieved top-tier technological capabilities. This implies an intensification of competition between the two countries in the field of renewable energy technology in the future, and it is possible to predict that this new energy technology sector will be the area where the most competitive dynamics unfold 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 one of the core elements of US-China strategic competition, or potentially hegemonic competition, appears to have some credibility.

The recently announced "National Defense Authorization Act for Fiscal Year 2019" specifically names China as a country that appropriates advanced technologies and infringes intellectual property rights. It calls for the use of all legal means to prevent the outflow of advanced technologies 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 sector 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 start of full-blown hegemonic competition. 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.

In the energy sector, the repercussions of US-China strategic competition vary in degree and nature depending on the specific area. In oil sector competition, the US, thanks to the shale revolution, has emerged as 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 "Indo-Pacific Strategy," actively pursued by the US to counter China, has two main 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, among other means. In terms of economic containment, energy sector actions, particularly coercive measures by the US related to China's oil transport routes, have the potential to escalate into severe military tensions. Therefore, it can be inferred that restrictive conditions are in place on China's potential for military adventurism in the East and South China Seas that could provoke similar US actions.

Meanwhile, the cooperation in the natural gas sector, which showed potential for reaching a significant level between the US and China, has ultimately suffered considerable damage due to the repercussions of their strategic competition. However, natural gas is a sector where China is relatively less sensitive to US threats due to its diversified import sources and the existence of abundant alternative options. The situation is quite different, however, in the new energy and clean energy technology sectors, where cooperation also unfolded to a similar extent. In these fields, where the most comprehensive cooperation was discussed and attempted, the two countries are now competing for new energy technologies, and this point is likely to become a quiet but intensely contested battlefield. This is because the early adoption and dominance in energy technology can become conditions that have a greater impact on the outcome of strategic competition between the two countries over time.

Therefore, middle powers like South Korea, facing significant challenges in the current wave of US-China strategic competition, need to develop multifaceted strategies for their energy security and prepare for flexible responses. The competition in the energy sector is a prime example that encompasses both security and economic dimensions, making an understanding of the mechanisms by 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 depend on the success of multifaceted diplomacy, the establishment of efficient and advanced consumption patterns, and technological innovation. ■

■ Author: Beomshik Shin_ Professor of Political Science and International Relations, Seoul National University. He graduated from Seoul National University with a degree in Political Science and International Relations and holds a Ph.D. in Political Science from Moscow State Institute of International Relations (MGIMO). His main research areas include Russian foreign policy and Eurasian international relations. His major publications include "Challenges of 21st Century Eurasia and International Relations" (2006, co-editor), "Transformation of Energy Geopolitics and Northeast Asia" (2015, co-editor), "Understanding Global Environmental Politics" (2018, co-editor), and "Russia's Perspectives on International Politics" (2008).

■ Management and Editing: Seyoung Kim, EAI Research Fellow

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

■ About EAI Commentary: EAI Commentary is a commentary series planned to provide a platform for experts from various fields to offer in-depth analyses and policy recommendations on major domestic and international issues. Please cite the source when quoting. EAI is an independent research institute independent of any partisan interests. The claims and opinions expressed in reports, journals, and books published by EAI are not affiliated with EAI and solely represent the views of the individual author.