China’s alternative to an American addiction

This blog first appeared on the Mail & Guardian Thought Leader website

Last week saw the launch of BP’s Statistical Review of World Energy, a rich seam of energy industry stats that journalists, analysts and academics will spend many hours mining for nuggets of data that support their chosen narratives.  The Financial Times led with “China becomes leading user of energy” – hardly a revelation to even the most casual industry observer, though undoubtedly a pleasing melody to those in the US who point to the rise of the Middle Kingdom as a reason to forestall domestic action on climate change.  

Noteworthy in BP’s latest tome is that crude oil remains the number one source of energy, contributing just over one-third of the global total.  In terms of growth, China again leads the way, increasing its consumption by 860 000 barrels a day, or 10.4% over the previous year.  Of course, in per capita terms, China’s oil consumption pales in comparison to the world’s largest economy: at 2.5 barrels per person a year, the average Chinese citizen consumes nine times less oil than its American counterpart.  Nevertheless, China’s growing thirst for oil represents a direct threat to US economic supremacy.  America may have been the first – and remains by far the largest – oil addict in the global village, but as others increase their appetite for the drug – the supply of which is increasingly concentrating in the hands of a relatively few volatile countries – the US must eventually face the prospect of weaning itself.  The only plausible alternative is to brace for military conflict.  

An urban legend goes that early in 2003 while Bush, Cheney and Rumsfeld fumbled around the Oval Office for a catchy moniker with which to rally the nation ahead of their planned invasion, they came up with “Operation Iraqi Liberation” – an obvious riff on the Iraq Liberation Act signed into law by Clinton in 1998.  Just in time, one sharp-eyed White House aide piped up that the initials spelled “OIL”, which was possibly too brazen even for the Bush administration.  With that, “Liberation” was dropped in favour of “Freedom”.  Mission accomplished.

As a thought experiment, let us suspend our voices of cynicism for a moment and imagine – as the urban legend would have us do – that the US-led invasion of Iraq was chiefly concerned with securing oil, specifically the world’s third largest reserves after those sitting beneath the deserts of Saudi Arabia (uncomfortable allies) and Iran (sworn enemies).  Indeed, the number one oil-consuming nation on Earth – reliant on imports for roughly two-thirds of its annual demand – has a strong vested interest in the affairs of the Middle East petrostates.  The Carter Doctrine leaves little room for doubt: the Persian Gulf region is vital to the interests of the US and will be protected “by any means necessary, including military force”.  Put simply, without cheap transport fuels moving people and goods across the urban sprawl and vast interstate network – themselves products of the nation’s now dwindling domestic petroleum bounty – the American economy grinds to a halt.  

Perhaps Jimmy Carter’s 1980 State of the Union speech was nothing more than Cold War posturing, designed to make the Soviets think twice before extending their Afghanistan incursion further westwards to the oil fields of the Gulf.  Taking Carter’s words out of their historical context is unfair; America wouldn’t really go to war over another nation’s natural resources, would it?  Dick Cheney provides a clue when, during his stint as chief executive of Halliburton – shortly before assuming the vice-presidency under Bush Jnr – he addressed an Institute of Petroleum conference in London: “Oil is unique in that it is so strategic in nature. We are not talking about soapflakes or leisurewear here. Energy is truly fundamental to the world’s economy. The [first] Gulf War was a reflection of that reality.”

As the occupation of Iraq winds down (US troops are supposed to withdraw by the end of this year) we might well ask ourselves: was it worth it?  In 2008, economist Joseph Stiglitz put the true cost of the Iraq war to the US at about $3 trillion; more recently he concluded this figure was probably too low.  For the sake of the exercise, we will avoid hyperbole and assume the original estimate of $3 trillion puts us in the right ball park.  Is that a lot?  To provide a sense of scale, consider that since the invasion kicked off in March 2003, the US has burned through roughly 60 billion barrels of oil at a cumulative cost of about $3.5 trillion.  That’s an extraordinary amount of money literally going up in smoke – it’s remarkably close to Stiglitz’s estimated cost of the war – but we are no closer to assessing whether the US will get a decent payback.  

Donald Trump’s recent suggestion to simply take the oil as compensation for the cost of the invasion makes sense from a narrowly-defined financial perspective.  According to BP’s latest data, Iraq’s oil reserves measure 115 billion barrels, which would keep the US ticking over for 16 years at current rates of consumption.  Translated into dollars at today’s oil price, Iraqi reserves are worth some $12 trillion, not including the cost of development. Now it starts to look more interesting: that represents a four-fold return on the investment!  Except of course that Trump’s proposition – a bit like a burglar justifying the theft of your home cinema system as recompense for the outlay on his crowbar, eye-mask, striped T-shirt, and hessian sack bearing the word “Swag” – is morally reprehensible to any right-minded human being.  

Setting aside grand larceny, perhaps another way to think about it is this: how else could the US have spent $3 trillion to address its eye-watering dependence on oil, simultaneously the cause and the result of decades of foreign policy negligence?  It is remarkable to ponder that for every man, woman and child in the US a whopping $10 000 could have been invested in measures to avoid oil consumption, such as developing the type of safe, clean, efficient and effective mass transit solutions that many European and Asian citizens enjoy, or investing – as China has – to establish a world-leading electric vehicle industry that by its nature is independent of oil, and by its far-sightedness will probably eat America’s lunch in the coming decades.  

Instead, during the 8 years of the war, US citizens set fire to some 1.15 trillion gallons of motor gasoline, much of it in obese “sports utility vehicles” with fuel economy ratings that should be a source of national embarrassment and would have finished Detroit were it not for the federal bailouts of 2008.  It was only fair: Washington was complicit in the predicament that Motown found itself in after years of profiting from feeble business-as-usual energy policy, while Beijing was busy plotting a domestic automotive industry based on electricity.  The astounding fact is that while it remains political suicide for a US administration to consider a meaningful tax on gasoline – thereby encouraging more frugal driving habits – it is politically acceptable to place at risk the lives of young American soldiers in the Middle East in order to secure flows of the very oil that it is impossible to tax back home.  

Impossible to tax transparently, that is.  The $3 trillion cost to the American taxpayer of projecting military force in Iraq translates to a phantom tax of $2.69 on every gallon of gasoline consumed in the US since 2003 – effectively doubling the average pump price to more than $5 a gallon over the period of the war.  To put it another way, if instead of agreeing to invade a sovereign state Congress had slapped a 100% tax on gasoline back in 2003, its citizens would be no worse off financially and the federal coffers would have been boosted rather than drained to the tune of $3 trillion.  With most Europeans already paying north of $8 a gallon of petrol and diesel, it is both difficult to sympathise with the American motorist and easy to appreciate why Europe’s automotive fleet is twice as efficient as that on the other side of the North Atlantic.  

Of course, all of this is simply a thought experiment based on the notion that Operation Iraqi Freedom was all about the oil.  To swallow that, you would have to believe the words of every US president since Lyndon Johnson, one by one gravely warning of the national security implications of dependence on foreign oil, while successively failing to offer any plausible means of addressing it beyond securing more resources at home and abroad.  

For the majority of global citizens living in the developing world, a straightforward question demands a straightforward answer: should we seek to emulate the oil-drenched model of economic development pursued by America and its allies for the last century and a half, thereby embracing a doctrine of expensive military interference in faraway desert lands?  Or might China – for all its shortcomings and pressing development challenges – offer a less dystopian vision of the future?  Returning to the BP Statistical Review we discover that not only has China surpassed the US in total energy consumption, it is also now the world’s leading generator of carbon-free electricity from wind turbines.  With its planned 45,000 km of high speed rail by 2015, burgeoning renewable energy sector and more than 120 million electric bicycles plying Chinese roads today, it is for good reasons that we are increasingly refocusing our attention from west to east.  

Are we starting to ‘get’ the oil question?

This article first appeared in the South African business newspaper Business Day on 7th April 2011

History doesn’t repeat itself, but it does rhyme.  A little less than three years ago, within the space of a few weeks, oil prices hit a record $147/bbl, Lehman Brothers collapsed into the largest bankruptcy in history, and the global economy fell into a ravine from which it has scarcely emerged.  A recent article by Jacob Weisberg in Slate magazine discussed the cause of the economic crisis by examining “the 15 best explanations for the Great Recession”.  Surprisingly, the price of oil did not feature in that long list of persuasive explanations.  It’s surprising because in the prevailing economic system oil is the economy.  

As unrest in North Africa and the Middle East enters a fifth month since the first sparks of the Tunisian Revolution last December, oil prices are starting to dominate the political discourse.  In the UK, Energy Secretary Chris Huhne warned of a 1970s-style oil shock that could cost the UK economy £45 billion over two years.  Closer to home, last week’s Financial Mail cover story on oil – the three letters that threaten economic growth – argued that a sustained high oil price threatens to completely stall the global recovery.  

Until quite recently, many economists and the mainstream financial media didn’t seem to ‘get’ the profound significance of oil.  True, it was widely acknowledged that economic slowdowns – particularly in the United States, the largest oil consumer on earth – tended to be preceded by spikes in the oil price.  But the clear correlation between high oil prices and recessions did not, in itself, prove any causal relationship.  As far as 2008 was concerned, surely Wall Street’s wizardry and former US Federal Reserve chairman Alan Greenspan’s laissez-faire approach to regulation were the real culprits.  Surely the rising oil price was just another ‘derivative’ of the bewildering world of credit default swaps and collateralised debt obligations.  Better still, by pinning it on these suspects we could even appear to be clever by pretending to comprehend the unintended consequences of ‘innovative financial products’.  

Though we live in an increasingly fast-moving, interconnected and complex world, it remains a truism that the simplest explanations are often the best ones.  First, consider that the economy is ultimately about the movement of people and stuff.  Expressed as GDP – the market value of goods and services produced – it is difficult to envisage economic activity taking place to any great extent without people and things moving around.  Whether it’s raw materials being hauled from the point of extraction to a processing plant, or from there being distributed onwards to retailers, whether it’s customers accessing goods, or employees getting to and from their places of work, very little of our globalised economic system functions without motorised transport.  

Second – and here’s the rub – worldwide, 95% of the primary energy that moves people and stuff from place to place – in cars, vans, trucks, buses, trains, boats, and aeroplanes – comes from a single source.  Transport is uniquely dependent on oil, meaning the economy is uniquely dependent on oil, or rather on the liquid transport fuels – such as diesel, petrol (or gasoline), kerosene – that we obtain from oil refineries.  So when the oil price goes up, the price of transport fuels increases and virtually everything that counts towards economic activity is impacted, either directly or indirectly.  Of course, in the case of oil companies, rising oil prices have a beneficial effect, at least in the short term… more of which later.  

Intuitively it’s easier to understand this effect on the cost of physical goods that actually get shipped around.  But why should high oil prices impact the service economy, and aren’t advanced economies more service-oriented than ever?  Again, the simple answer may be sufficient for our needs.  As household transportation costs increase – and, crucially, they are inelastic because most of us cannot or will not change our abode or place of work according to the forecourt price of petrol – all discretionary expenses experience downward pressure.  Food bills climb as oil-dependent agricultural commodities track the price of crude, an effect exacerbated by the gasoline substitution potential of corn-based ethanol in the US.  Debt repayments are more or less fixed, give or take fluctuating interest rates.  What remains is a shrinking domestic budget: quieter shopping malls, fewer evenings at the restaurant, one less trip to the hair salon.  Economic activity experiences a general slowdown – this is the very definition of recession, and not an ‘innovative financial product’ in sight.  

Anyone doubting the importance of liquid transport fuel to the health of the prevailing economic system – and therefore to maintaining social cohesion and political stability – need only recall what happened in the UK in September 2000.  Truckers and farmers protesting the relatively high pump price of diesel staged blockades of refineries and fuel terminals.  Diesel and petrol supplies slowed to a trickle as the public queued at forecourts to top up their tanks “just in case”.  Within a few days, 90% of filling stations were bone dry, just-in-time supply chains unravelled and people were fighting over loaves of bread among bare supermarket shelves.  The UK had staged a compelling if entirely accidental social experiment.  

Conclusion: five days of petroleum separate an advanced civilisation from savagery.  Note that we didn’t even run out of oil, we merely panicked!  

Returning to the companies that maintain our oil flows: perhaps uniquely in the global economic village, they do rather well when oil prices are on the up.  For instance, in 2008 – the year in which oil spiked to $147/bbl – ExxonMobil posted an annual profit of $45 billion, the largest in corporate history.  That same year, oil companies accounted for six of the seven largest global corporations, as measured by revenues.  (The outlier was Wal-Mart, an enterprise utterly symbolic of the economy’s dependency on relatively cheap and free-flowing transport fuel.)  

In this context, it should not surprise anyone that oil companies are somewhat reluctant to allow the Oil Age to draw to a graceful conclusion, as the transport system inevitably electrifies to become several times more energy efficient and compatible with the full range of sustainable renewable energy sources.  Not vested in the electricity generation game, oil companies continue to lead us astray.  BP recently argued that biofuels are “the only game in town”, the only major way to decarbonise road fuel, possibly contributing around 12% of the road transport fuel mix by 2030.  Or to put it another way, within twenty years if BP have their way the transport sector will be only 88% dependent on oil.  

BP is missing the point, of course.  The question is not only how we can decarbonise the transport sector, rather it is how we can achieve this while meeting the primary objective: gaining independence from oil.  How can we divest ourselves of turmoil in the politically fragile oil exporting regions of the world, and insulate our economic and social stability from events over which we exercise no control?  Ultimately, independence from oil means getting off liquid transport fuels, which won’t be achieved by shifting to 12% biofuels over the next two decades.  

To paraphrase BP, electricity is the only game in town.