The energy world changes rapidly. Technology, social and economic patterns, emergence of new sources, and depletion of old ones can occur within a decade. But it is geopolitics that renders the energy world truly unpredictable.
Geopolitical risk is new neither to CEOs making decisions about investments in foreign markets nor to energy analysts. But because energy is a foundation of global economic and strategic power, geopolitics shapes energy in more profound ways than other commercial sectors.
In order to understand the relationship between energy and geopolitics, we must first examine the energy strategies of the current hegemon, the United States, and its challenger, China. While the United States champions both fossil fuels and renewables, it will seek to retain its dominant position in oil and gas and extend the hydrocarbon era as long as possible. China, on the other hand, is leading the world in renewables and the clean-energy transition.
These two competing energy strategies will shape the future of energy. But it is China’s challenge to U.S. hegemony that makes this energy competition viable and serves to accelerate the clean-energy transition. Without it, hydrocarbons will dominate for far longer.
Global hegemony and fossil fuels
Past energy transitions have occurred during times of intense geopolitical competition and reveal a relationship between global hegemony and dominance in the dominant energy source. In the nineteenth century, Britain had the world’s largest coal reserves and led in coal-based science and technology. Coal powered economic growth during the Industrial Revolution, while its coal-powered navy ruled the high seas.
Britain had ceded its dominance in coal to the United States in 1901. At the same time, Germany began to challenge British hegemony, prompting the latter to switch from coal to oil for its navy. The race for oil then intensified in the next twenty years, and included Hitler’s invasion of Russia and Japan’s of the Dutch East Indies to secure oil supplies.
The United States had led the production of oil and oil-related science and technology since 1860. The “oil edge” also helped propel it to a position of world hegemony after the Second World War. Though the Soviet Union eclipsed the United States in production in 1975 and thereafter, there was no power able or willing to challenge to the oil-dominant global energy system. The Soviet Union, after all, was just as invested in extending oil’s run.
The last ten years
The current-day energy transition to a cleaner energy regime that mitigates the social, environmental, political and economic costs of global warming started in earnest in the 2000s, just as China was beginning to hit its groove after joining the World Trade Organization.
Global production of oil was forecast to be on the verge of peaking. In fact, global production of conventional oil supplies did peak in 2006, but the unconventional (shale) revolution helped oil to surge again. The United States then reassumed the mantle of the world’s leading producer. At the same time, the country became a major player in producing and adopting solar and wind power technologies.
As China, meanwhile, continued its economic ascent, its energy strategies changed dramatically. In the 2000s and early 2010s, Beijing seemed destined to purchase every available barrel of oil – its demand growth was the major that oil prices rose in the 2000s and stayed high until 2014. Today, it is proactively reducing oil imports to limit its dependence on foreign supplies. It is also embracing renewables to mitigate health and environmental degradation from massive amounts of coal use. With these imperatives, China has become the world leader in production and science and technology of renewables.
The next ten years
U.S.-China rivalry has deepened, of course, since Trump entered office. The rivalry will likely to produce more volatility in global politics in coming years.
In recent weeks, oil markets have experienced considerable volatility driven by Trump’s canceling of the Iran nuclear deal and the continuing decline of Venezuela. These events have driven a large volume of analysis (here, here, and here, for example) about the risk of geopolitics to the oil market. These analyses are accurate but also myopic: geopolitics are constant factors shaping energy markets and appear, so far, to be mere tremors to which we have grown quite accustomed. Since the start of the Arab uprisings in 2011, the oil market has, in fact, been saturated by geopolitical risk.
The earthquake is how China’s geopolitical challenge to the United States will hasten the clean-energy transition. China will continue to develop renewables and move away from oil to the extent possible. There are already signs that its oil demand is set to sag. Trump’s policies are actually encouraging the energy transition. By focusing on increasing U.S. oil and gas production at all costs, he is playing a short game. China, meanwhile, is playing a long one. It has taken advantage of Trump’s energy policies to cozy up to Europe, whose energy interests are largely aligned with its own in seeking to increase renewables in the energy mix.
The pace of the current-day transition will depend on China’s success. The most likely outcome is that a single energy source will not dominate. Moreover, we are unlikely to have a single hegemon, which is good: a multi-polar energy world is certainly in the majority interest.