Source: New York Times
The recent global drop in oil prices has made winners of consumers in places like the United States and Japan, and losers of countries that depend heavily on oil exports such as Russia, Iran and Venezuela. China, a leading crude oil importer and the world’s largest energy consumer, has responded to the fall in oil prices—the steepest since 2009—by going on a buying spree to ensure that its strategic oil reserves at the end of 2014 were twice what they were the year before. Last month, in another move to bolster the country’s supplies, China’s top economic planning agency, the National Development and Reform Commission, directed domestic oil refiners to stock up on crude oil and to provide the government with monthly updates on their inventories.
Matt Ferchen is an associate professor of international relations at Tsinghua University in Beijing and a resident scholar at the Carnegie–Tsinghua Center for Global Policy. His latest research focuses on China’s energy sector and its political and economic ties to emerging economies. In an interview, he discussed how the decline in oil prices would affect China’s relations with other countries and its transition to a more energy-efficient future.
- Crude oil prices have fallen to a five-year low, and one response by China has been to build up its strategic petroleum reserves. How well is China handling this opportunity?
- Have lower oil prices benefited Chinese consumers?
- Are lower prices likely to cause China to trim back its exploration efforts for energy resources in the South China Sea and thereby reduce tensions with Southeast Asian neighbors that dispute China’s claims to these waters?
- With Russia in economic trouble, between Western sanctions over its actions in Ukraine and falling revenues from oil exports, will it move closer to China?
- What about China’s relationship with oil-rich Iran, which is under international sanctions because of its nuclear programs?
- How do lower oil prices change China’s incentives to make progress on renewable energy? Will they help China reach its goals on deterring climate change, which include seeing the country’s carbon dioxide emissions peak by around 2030?
- In a talk before the Foreign Correspondents Club in Beijing, you said that 2014 saw energy return to the top of the world agenda in a way not seen since the 1970s. Can you elaborate on the implications for China?
Crude oil prices have fallen to a five-year low, and one response by China has been to build up its strategic petroleum reserves. How well is China handling this opportunity?
China has relatively small reserves compared to the United States, and they can probably only last weeks compared to months in the U.S., so there’s a real need for China to add to those reserves. While other commodity prices have gone down as well, bringing down the overall price of Chinese imports doesn’t solve the long-term energy security problems that China faces. This is going to ultimately be to the detriment of the Chinese economy and to thinking about energy security.Have lower oil prices benefited Chinese consumers?
It should help to keep inflation down. However, I heard that the gas price is stable at the pump in China, which means the oil companies themselves have in some way increased profitability. I think the question of who is actually seeing the benefit of decreased oil prices is not clear in China, whereas it is obvious in the United States— it’s going to the consumers. But there’s also a downside to that in the U.S., because now people are going to buy gas at the time we’ve seen a greater push for energy efficiency and more fuel-efficient cars, so it seems this development will cut into that momentum in the U.S. right now.
So even if consumers do see lower prices at the pump in China, it’s not at all clear this is a good thing for China. The lower oil price comes with complicating effects as you try to make progress on energy efficiency.
Are lower prices likely to cause China to trim back its exploration efforts for energy resources in the South China Sea and thereby reduce tensions with Southeast Asian neighbors that dispute China’s claims to these waters?
I don’t think it’s going to ease the tensions. I think China will continue to explore for resources. A lot of it is still exploration just to see what’s out there. In some sense, there should be a disincentive for Chinese exploration when prices are this low, but I think state-owned enterprises have a different time horizon and face different economic incentives, especially when compared to private firms, and therefore will continue on with plans as they exist.
They don’t pay the costs, ultimately, in the same way that private firms do. For instance, if a lot of your exploration is built on credit, as it is in the U.S. with shale development, there’s a limited time horizon and eventually you’ve got to pay someone else back. Chinese state-owned enterprises don’t face that same problem.
With Russia in economic trouble, between Western sanctions over its actions in Ukraine and falling revenues from oil exports, will it move closer to China?
I think China’s calculations in terms of energy deals hinge on a more advantageous bargaining position over the price of oil, so that leads to greater interest by China to engage with Russia. And, to the extent that Russia now has limited alternatives, that will lead Russia to be willing to make more agreements. I think Russia has a continuing incentive to show that it does have alternatives in terms of markets and also that it has strategic, like-minded partners in a world that is portrayed as hostile to the interests of the nontraditional powers such as BRICS [Brazil, Russia, India, China, South Africa]. Russia, now under fire from sanctions and a drop in commodity prices, therefore needs a partner. I think that pushes the two sides together both in terms of substantive cooperation and also in an effort to enhance the image of renewed comradeship.
What about China’s relationship with oil-rich Iran, which is under international sanctions because of its nuclear programs?
I think the more interesting question is how China views what is and what isn’t stable in the Middle East in terms of political processes. Iran represents a country where the U.S. sees not only a problematic nuclear policy, but also a support for governments in the region including Syria and is therefore a major source of concern and instability in the region, whereas that is not the perception from China. China worries about the tensions between the U.S. and Iran and would prefer to see a negotiated outcome there.
When Chinese officials and academics speak about Chinese interests in the Middle East, they frequently mention the political stability of the region, the stability of energy production and flows and, to an increasing extent, the ways the region’s instabilities may tie in to domestic concerns within parts of China about separatism and terrorism. So if the U.S. and Iran can normalize their relations, therefore increasing flows of Iranian oil and inducing a more constructive role for Iran in reducing regional tensions, it’s possible that both the U.S. and China could see Iran as a force for the Middle Eastern stability that both claim to want.
How do lower oil prices change China’s incentives to make progress on renewable energy? Will they help China reach its goals on deterring climate change, which include seeing the country’s carbon dioxide emissions peak by around 2030?
I think the drop in oil prices can only be bad for renewable energy. If we see prices at the pump reflecting the change, then I think it would be negative for renewable energy as it would contribute to vehicle use and more people buying cars and contributing to poor air quality. On the other hand, if the government has benefited from lower oil prices and puts the surplus into other kinds of energy-efficient policies, that could be a good thing. They could use this opportunity to put in place healthier kinds of plans.
In a talk before the Foreign Correspondents Club in Beijing, you said that 2014 saw energy return to the top of the world agenda in a way not seen since the 1970s. Can you elaborate on the implications for China?
In the U.S. in the 1970s there was a remarkable convergence of public policy, academic and NGO scrutiny of the impact of multinational companies on U.S. foreign policy. Much, although not all, of this attention was focused on the role of U.S. energy and other extractive industry firms. Because of the two OPEC oil shocks of the 1970s there was heightened concern about U.S. energy security in general, and many began to ask whether the private interests of American multinational companies was synonymous with the overall U.S. national interest. In response, policy makers passed legislation like the Foreign Corrupt Practices Act, academics created the field of international political economy, and environmental and labor NGOs shined a new light on multinational companies’ behavior abroad.
In the last decade, China has experienced a boom in its own outbound foreign direct investment, especially in energy and other extractive industries. In a variety of countries, such as Sudan, Myanmar and Venezuela, the behavior of Chinese state-owned firms and banks has arguably created unanticipated and unwanted foreign policy headaches. The time, therefore, seems ripe for China to experience its own renaissance in how its government and citizens understand and govern how Chinese firms’ foreign behavior impacts the national interest.
This article was originally published by the New York Times.