June 15, 2016

CNAS Releases Report on Energy Markets and Great Power Politics


Washington, June 15 – The Center for a New American Security (CNAS) Energy, Economics, and Security Program has released a new report examining the intersection of great power politics and changes in the energy market. The report, “The New Great Game: Changing Global Energy Markets, the Re-Emergent Strategic Triangle, and U.S. Policy,” makes specific policy recommendations for how the United States can leverage its rapidly-growing energy assets for national security goals, particularly with regard to China and Russia. The report’s authors are:

Key policy recommendations in the report include:

  • Present a clear framework for the role the United States will play in promoting and protecting energy global market flows and efficient trading. Affirm that this is a paramount national security matter.
  • Adapt U.S. domestic energy policy for resilience and maximization of strategic interests.
  • Establish a new Pacific Energy Forum.
  • Expand bilateral energy cooperation between the United States and China.
  • Address Russian coercive energy market activities abroad by expanding cooperation with European and other partners to bolster European energy resilience.
  • Maintain security commitments in the Asia-Pacific to protect energy market stability.

The full report can be found here:

Please find the Executive Summary of the report below:
This report explores the interface between energy market changes and great power politics. With Chinese President Xi Jinping’s embrace of China’s rise as a major power and subsequent assertive moves in the South China Sea (SCS), and Russian President Vladimir Putin’s efforts to directly challenge U.S. aims in both Eurasia and the Middle East, the United States/ Russia/China “strategic triangle” is again shaping global politics. Energy issues are at the core of this new contest. This report focuses on China’s and Russia’s energy assets, vulnerabilities and strategic goals, and the extent of, and limitations to, their new energy-centered strategic partnership. The report lays out a pathway forward, and specific policy recommendations, for how the United States can leverage and strengthen its energy assets in the years to come to support its national security interests and foreign policy goals.
As recently as three years ago, energy markets were dominated by assumptions of continued rapid demand growth and doubts about the security of supply, especially given growing instability in the Middle East. These factors reinforced one another in placing continued upward pressure on energy prices. The “peak oil hypothesis” – the notion that the world was soon to reach the maximum point of oil production as the depletion of existing sources sped ahead of available new sources – shaped both financial and corporate strategies, and consumer country fears.
But enormous shifts on the supply-side in the United States and the demand-side in China have transformed global energy markets. Technological innovation gave rise to the unconventional energy boom in the United States in which crude oil and natural gas production increased by over 80 percent and 50 percent respectively in less than a decade. The Obama administration, in the face of opposition from environmentalists, recognized that the shale boom could be a source of economic growth and, given the lower carbon footprint of natural gas, create a global “bridge strategy” away from coal.
After accounting for 60 percent of total global energy demand growth over the past decade, the China energy surge is over as the country moves away from spending 25 percent of GDP in fixed asset investment through building hundreds of new cities. President Xi has put the country on a course to rebalance its economy from one based on manufacturing to services, investment to consumption, and exports to domestic spending. As a result, the growth targets for the Chinese economy have declined by some 40 percent, while its energy intensity is declining very rapidly. In turn, this depresses the pace of global energy demand growth.
These market changes have shifted the risks in global energy markets from consumers to producers, and have created major opportunities for both the United States and China. The United States is on the cusp of a new era as a major energy exporter, and has exercised its new energy leverage in promoting international sanctions on Iran that helped to bring Tehran to the negotiating table over its nuclear program. For China, new market conditions have eased concerns around supply vulnerability, creating new options for global energy partnerships and the context for China’s ambitious new Silk Road project that aims to connect East Asia to the Middle East and Europe.
For Russia, whose economy is highly dependent on its energy resources, the impact of these market changes are much more problematic, both in terms of falling prices and greater competition among producers. The changes in global energy markets coincided with Russia’s conflict with the United States and its European allies over Ukraine. In the aftermath of Russia’s annexation of Crimea, the West imposed a series of sanctions on Russia, most importantly on key technologies and financing streams critical to Russia’s energy production expansion. Putin refused to buckle to Western demands and instead announced Russia’s own “pivot to Asia,” especially to China.
Senior leaders from both Russia and China have met frequently, vowing each time to boost some aspect of their ties. Putin has stated that Russia and China have no major differences on key global issues, and the two countries have signed scores of high-level agreements. A number of huge deals to send Russian gas to China were closed, with the clear intention that China would become the major financier of Russia’s future energy development. In the military sphere, Russia and China held joint naval exercises in the Mediterranean, Sea of Japan, and South China Sea in 2015. Russia has also agreed to sell China critical surface-to-air missile technology and top-of-the-line fighter planes, which could enable China to project greater presence into the South China Sea.
But China-Russia energy ties have not played out so smoothly, tempering the possibilities for a true strategic convergence. Two years after the big gas deals, the Russia-China energy axis appears to have lost a good deal of momentum, despite continued memoranda of understanding and other agreements. Slowing Chinese energy demand, and proliferating Chinese natural gas options, have removed some of the urgency behind the Russia-China energy détente. The Chinese have not responded to the new opportunities for investment that Moscow put forward. In general, China is demanding more, including lower prices and control of timetables, from these deals, and the Russians have been unwilling to continue to give in, as they did on pricing in the large gas deals in 2014, and remain wary of becoming China’s “resource appendage.”
Rather than a quick pivot to Asia, Russia is coming to terms with its limited energy choices and the growth of stiff competition – and with them, continued dependence on European markets. Today, Europe and Russia are economically intertwined around oil and gas, which is unlikely to change drastically in the near future. Russia and Europe are mutually dependent on one another for exports and imports in the energy sector. However, given the recent friction between Russia and its neighbors, Europe – encouraged by the United States – is renewing its long-term effort to wean itself off Russian energy.
For its part, the United States is not yet well positioned to take advantage of the new energy market circumstances to advance many of its national interests. Unlike China and Russia, which reacted fairly quickly and are pursuing policies to counteract their energy vulnerabilities and expand resilience, U.S. leaders have been slower to grasp opportunities for advancing U.S. global leadership, balancing a tense relationship with China, and working to contain Russian foreign aggression.
The report argues that the United States needs to update its perspectives and policies to reflect the country’s new position as a major energy power. Such a new approach should seek to develop new norms, arrangements, and even institutions around market resilience, technological innovation, and global stability that will help reassert and convey U.S. leadership on energy on the global stage. It must approach energy security and climate change as two sides of essentially the same coin, rather than as distinct policy arenas. Despite the agreement last year between the administration and Congress to lift the 40-year ban on crude oil exports, energy trade policy and regulation in the United States lag well behind the emergence of the United States as a major oil and natural gas producer.
The rise of the United States as an energy producer and the weakening of China’s acute sense of vulnerability create the possibility of energy becoming a source of tension mitigation rather than exacerbation in the Pacific and beyond. But neither the United States nor China have yet developed a serious initiative to engage the other in a more cooperative manner on energy, nor are the countries able to place their shared energy interests in a broader regional framework with other East Asian nations. Shortcomings in U.S. leadership have contributed to confusion and a lack of confidence broadly in Asia about the role the United States will play as an energy power. This is particularly notable when it comes to Asian concerns about the role the United States will play in the sea lanes linking Asia with Middle Eastern producers, which have been crucial for the economic development of all countries in the region, and the degree to which U.S. regional allies will get caught in the U.S.-China power struggle.
In light of these concerns the report makes recommendations for U.S. policymakers to present a clear framework for the role the United States will play in promoting and protecting global energy market flows and efficient trading, and adapting domestic energy policy for resilience and maximization of strategic interests. It also urges U.S. leaders to establish a new Pacific Energy Forum with several East Asian counterparts and expand bilateral energy cooperation between the United States and China. Additionally, it recommends a strategy to address Russian coercive energy market activities abroad by expanding cooperation with European and other partners to bolster European energy resilience, and specific policies to maintain security commitments in the Asia-Pacific to protect energy market stability unilaterally and through international security cooperation.

Rosenberg, Gordon, Maruyama, and Sullivan are available for interviews. To arrange an interview, please contact Neal Urwitz at nurwitz@cnas.org or 202-457-9409.