China rises and America is nervous

President Donald Trump has insisted a trade war is winnable and pushed his officials to increase the scope of the target list and China has appeared anxious to avert a trade conflict but threatened a proportionate response to any unilateral US action.
John Kemp, Reuters energy columnist.

Rating: High school and post-secondary

Summary: Markham interviews John Kemp, a highly respected energy analyst, about the relative decline of the US and Western Europe as China becomes an economic and geopolitical powerhouse. The energy transition is playing a key role in the shift of global political influence, in part because China is planning to be the dominant supplier of key new energy technologies like solar panels, batteries, and electric vehicles.

Related links:

John’s column that we discuss on the show: China’s rise and U.S. fears about decline – Kemp

China spends big to boost domestic oil production, increase energy security

With trade war, U.S. and China stumble into the Thucydides Trap – Kemp

China surpassed United States as world’s largest crude oil importer in 2017

Technology and policy position USA as global energy leader

This interview has been lightly edited.

Markham Hislop: Welcome to another episode of Energi Talks, the podcast where we discuss global energy issues and trends with experts from around the world. I’ll be talking to John Kemp, the London-based Reuters energy columnist and someone whose work I’ve admired for many years.

Before we begin discussing your October 21st (2020) column, which is about China’s rise and American concerns and anxiety about a possible decline of the United States relative to China, let’s talk a little bit about your career. As a journalist who writes an occasional column once, twice a week is what I aim for, the grind of writing a daily column about energy is a tough gig. Tell us a little bit about how you go about it, how you pick topics and do you run into writer’s block?

John Kemp: Not anymore. I find writing is the easiest part, to be honest, and it takes very little time. The hard part is generating ideas. My usual process is actually to start playing around with data. I probably spend the majority of my day playing around with data and playing around with spreadsheets, building charts to sort of test out theories and then the writing is really on the back of that.

In many ways, I’m a chart geek and I then produce some texts to explain what the chart shows. I’m a big believer that charts, pictures really are a very information-rich way of communicating. I think charts have historically been underused in journalism. They’re a great way to communicate a lot of information very quickly.

That’s my writing process – data and charts first and then text at the end. The writing, I don’t find difficult anymore. It may surprise you that I had terrible writer’s block at university. I used to rewrite and rewrite the same paragraph over and over again. All I can say is I took a job after university writing. I had no choice, but to write or be fired and over 20-plus years, it became second nature, to be honest. That should give hope to anybody that you could get over it.

Markham Hislop: Well, I think you’ve described a process that’s similar to a lot of writers and certainly one that I followed. My technique is to read and then outline, develop the structure of a column. Then I find the information. It’s almost like paint by number now. Hopefully, I’m a little more creative and interesting than a paint by number, but you know, it’s kind of that process.

That’s a great background and a lead into the discussion of your column, which is China’s rise and US fears about decline. Now, if we had done this podcast before November 3rd, I think it would have been one conversation. But now that we have president-elect Joe Biden preparing to take office on January 20th, I think it’s a very different conversation. So I went back to Biden’s climate and clean energy platform, China is mentioned 11 times.

I’m going to read a paragraph that I think is really germane to this conversation. “Unfortunately today the Trump administration is allowing America to fall behind in the clean energy race for the future in 2017, China invested $3 in renewable energy for every dollar in America, giving China an edge on the technologies of tomorrow that will generate well-paying jobs. By 2030, the Biden administration will put the United States back in the driver’s seat, making America, the world’s leader in clean energy research, investment, commercialization, manufacturing, and exports.” And that seems to me to illustrate exactly what your column was about.

John Kemp: A bit of international competition is usually actually very good for technological innovation. You think back to the tremendous shock that the launch of Sputnik by the Soviet Union had on the United States and that really accelerated the space race and the development of all the technology around that. So a little bit of international competition is actually usually very, very good for technology innovation and for policy innovation as well. And I think for, for a period of time between 1945 and 1989, the United States had a clear competitor in terms of the Soviet Union with the demise of the Soviet Union.

Then you have a sort of a 20-year to 25-year period in which really the United States had no significant international competitor. And you might argue that that bred a sense of complacency. Now suddenly, the United States is very aware that China is catching up fast and that’s starting to sort of create that competitive international dynamic again.

Markham Hislop: I think you’re right. And one of the things that stuck out for me in that platform is Biden’s focus on clean energy. Biden really, I think, gets it, that there’s an energy transition underway and he particularly gets that the 2020s is a key decade. This is the decade of disruption where all those technologies that have been on the adoption S-curve for 10, 20 years, they’ve been in the market, maturing, dropping in costs, becoming more efficient, becoming more competitive during the 2020s. I think we’re going to see them really become the dominant technology.

Biden gets that, and he wants to spend a lot of money ramping up American technology, R&D commercialization, so it can catch up and pass China. Is that a fair summation of where you think Biden’s going?

John Kemp: Yeah, I think so. The United States has been very fortunate in that it has a tremendous endowment of fossil fuels; lots of oil, lots of gas, lots of coal, which has been a tremendous source of competitive advantage. China doesn’t have that benefit. China has a lot of domestic coal, but very little oil and, and relatively little gas that is at least accessible. The Chinese see dependence on energy importers is a key competitive disadvantage, is a key source of strategic vulnerability.

So it’s made the Chinese much, much more interested in an energy transition. They’re much more interested in electric cars and anything that can substitute for the oil and gas that they don’t have. So they’ve really embraced this sort of energy transition, invested in it very heavily, built in many cases a clear technological lead.

And now of course I think the United States is starting to see that technology lag and worrying about where that might lead, particularly in a world where we might be constrained in terms of burning fossil fuels. So the Biden platform is very much about trying to catch up with where the Chinese are and indeed to overtake them,

Markham Hislop: I want to put a bit of a Canadian spin on this because I’m based in Canada, follow the Canadian energy news here very closely. And there’s a big debate right now over the Keystone XL pipeline, for which Biden has promised to cancel the presidential permit. And there’s hope in many quarters of Canada that Prime Minister Justin Trudeau can meet with Joe Biden and cut a deal of some kind to save Keystone XL.

But when we look at it through the lens of the clean energy plan that Biden…I often make the point that Canada is rich in commodities, coal, oil and natural gas – it’s been a trading partner of the US a big one for decades and particularly oil and gas – but clean electricity is basically a technology. It’s not a commodity. And so the US could conceivably over time build enough of its own wind and solar and battery capability [that it doesn’t need Canadian energy].

Tony Seba makes this argument very clearly in his most recent study. So, what does it need Canada for then? Canada becomes a marginal supplier of maybe heavy oil or something like that. And I think that argument dooms Keystone XL.

And so I can see the point of the Chinese, you know, saying “if we continue down the road, we’re on, we’re vulnerable, our energy, our energy insecurity makes us vulnerable. Why would we not leap frog onto all of this new electricity generation technology, which then leads us into all sorts of ancillary technology like batteries and electric vehicles and all of that?”

It seems like a 21st-century economic development strategy to me.

John Kemp: Yeah, absolutely. In some ways if you think back between the early 1970s and the middle 2000s, the United States became increasingly worried about its dependency on oil imports. And then in the 2000s it’s increasingly worried about its potential dependency on natural gas imports.

Over that period of time, the top objective for policy was to try and develop more domestic resources, which they were never terribly successful at doing. And also to find ways of reducing dependency on oil and gas. So you have lots of research programs into coal gasification, wind, solar, etc.

So that was the position of the United States for four decades. Obviously with the shale revolution, which unlocks enormous domestic oil and gas resources the United States sense of energy insecurity has lessened, but China now finds itself in the position that the United States did then. It’s importing increasing volumes of oil and gas. That is a source of economic insecurity. If the price of oil spikes, then it will hit the Chinese economy very hard.

It’s also a source of strategic insecurity. Most of the oil is all arriving by sea from the Middle East, which leaves you very vulnerable to a blockade by the US Navy in say the Straits of Malacca. And much of the gas is coming from countries like Australia, who are allied with the United States and increasingly see China as a potential adversary.

So China has a strong economic and strategic interest in moving away from dependence on oil and gas. And you can see that playing out. Like the United States did in earlier periods, they have tried to develop their own oil and gas industry. They’ve tried to grow their output with limited success so far. The alternative is to invest very heavily in renewables and also possibly in the long term in coal combined with some sort of carbon capture technology

Markham Hislop: That raises the question of China’s Belt and Road initiative, which Biden addresses several times in his clean energy plan. And he singles China out for being a bad boy for helping other countries invest in coal power plants. He sees this as being inimical to, you know, climate action, but you can kind of see China’s point of view on this.

The first thing you want to do is help these countries which are your potential market. It’s like Latin America is to the United States. It’s a captive market, it’s your backyard and so you want them to develop their electricity infrastructure as quickly as possible because that’s where you’re going to be selling all of your clean energy technology, or that’ll be your primary market [for other manufactured goods].

Biden is talking about reigning that in. And he does it from a climate point of view and very cleverly, doesn’t talk about the economic point of view, but I think that that’s equally as important from an American perspective.

John Kemp: I think now countries are always concerned about security in their near abroad. In his case of the United States, that’s been Central America, the Caribbean, South America. In the case of China, it’s, it’s the adjacent parts of Eurasia and the Pacific. So that’s quite a natural, normal reaction for a major power.

And one of the ways that you build alliances, one of the ways that you improve the strategic environment is to offer investment usually coupled with a sort of soft power. That’s a fairly classic strategy. The Chinese are not doing anything with the Belt and Road initiative that the United States didn’t do before and the European colonial powers before that. So it’s a very normal, natural, system.

One of the areas where China actually does have tremendous technological advantages is actually in the electricity system as a whole. Not just coal fire power plants, but also ultra high voltage transmission networks. So I think one of the things that China is trying to do is to offer some of that technology to friendly governments. That’s what’s happening under the Belt and Road initiative.

There’s no evidence that the Chinese are particularly promoting the use of coal. What they’re doing is they’re promoting electrification. And if the simplest, cheapest choice for a particular country is to either burn domestic coal or import coal to generate electricity, that’s what the Chinese are offering them. If the choice is to do natural gas, then the Chinese will offer them a natural gas power plant, the expertise for that.

So I don’t think that China is particularly culpable in funding, coal-fired power plants. It’s just that this is an area, that the West has withdrawn from already, and the Chinese are continuing to offer that technology.

Markham Hislop: Let’s talk for a moment about us shale oil and gas, because you mentioned the enormous increase in production. The US is now somewhere around – did get up to about 15 million barrels a day of oil production? It’s somewhere in that range. And it seems to me that if I was President Biden and I knew that gasoline was going to be around for decades yet, we’re not going to get rid of it immediately, one of the things I might do as part of my climate initiative is to help some of these refineries that have transitioned to heavy crude oil processing – it costs about a billion dollars to convert a refinery – I might offer them money to convert back to light sweet crude.

So not only do I potentially lower the GHG emissions from refining gasoline, but I also free up maybe two, three, four or 5 million barrels a day of market for my domestic producers. What do you think of that idea?

John Kemp: That’s an interesting one. I hadn’t really considered it. I think that’s a very difficult one. I suspect that the focus is more likely to be on trying to improve or to maintain market access for the United States to export some of its surplus light sweet crude.

The Trump Administration was obviously pushing very hard to get that light sweet crude into Asia and I think the Biden Administration – while I think it will probably press less hard, particularly for say the Chinese – I think it will still want to keep the door open for US crude exports. I’m not sure that they’re going to want to try and reconfigure all the refineries.

If I’m honest, I think what the Biden administration is more likely to do is to say, “We see a gradual transition away from oil over say a 15 to 20 to 25-year period. And we just want to start running some of that capital investment down. We don’t particularly see it as a priority to support investment new investment in the refining sector, because we gradually see the capacity requirement declining over say a 20-year period.”

So I think that’s probably a more likely approach for them. And in the meantime, to try and support domestic crude production and allow any surplus to go abroad,

Markham Hislop: Fair enough. And I should point out, you recently wrote a column about how North American and European refining capacity was shifting to Asia as gasoline and diesel consumption declines in those mature markets.

John Kemp: I think that’s absolutely the direction of travel, that the the direction of travel implied by the Biden platform is gradually to have less domestic liquid fuel consumption and a smaller refining sector.

Markham Hislop: Let’s talk about the politics of US-China relations. They’ve been very contentious under Trump and he did that very deliberately and we’ve seen him basically bring the global economy to the brink of recession a few years ago because of trade restrictions. And you can see clearly that Trump was responding to some of the same anxieties that you talk about in your October 21st column. And presumably, Biden will be also responding to those kinds of anxieties. How might you think that a Biden Administration will handle the relationship with China?

John Kemp: I think people may be surprised that there’s a lot more continuity than change on the China issue from a Trump Administration to a Biden one. A tough policy towards China is perhaps one of the few areas where there’s a pretty widespread consensus in Washington DC. I think that consensus of confronting China, of taking a strong line, is something that will constrain a Biden Administration, even if it wanted to do something different.

I think what there may be is a change of style and there may be a slight change in strategy. So Biden, I think, is likely to want to try to redouble efforts, to try and build alliances to contain China’s rise. I think the Trump Administration has already been doing that in terms of tightening relationships with Australia, building new relationships with India in what it calls the Indo-Pacific theatre.

What I think the Biden administration will do is it will double down on those efforts. And then I think it will also try to rebuild relations with traditional allies in Europe to try and get them onside in this kind of – they didn’t call it this – but an anti-Chinese coalition, in a sort of in a broad coalition of like-minded democracies to confront China. So I think there will be a lot more continuity in terms of the basic direction of travel. I think there will be some change in style.

I think there is a potential issue here, which is, there is a long list of areas where the West has strong disagreements with China, everything from the Taiwan Strait, Xinjiang, Hong Kong, espionage, technology transfer, subsidies for domestic industry. There is a very long list of areas that have become flashpoints.

And there is no doubt as a result, the United States and its wider group of allies, see China now as not just a strategic competitor, but in many ways as a strategic adversary. So that has happened.

But there are areas in which the United States and its allies need to cooperate with China. Climate change is clearly at the top of that agenda. So part of that challenge is how do you have a competitive relationship, but also keep it constructive because there will be areas where you clearly need to enlist Chinese support.

One of the earliest instances of this is going to be next year with the next UN FCC meeting in London. And if you want to make progress on that, if you want to, show that you have an accelerated plan for reducing CO2 emissions, you’ve got to be able to bring China to the table. So balancing that strategic competition with some degree of cooperation will I think be the top of this challenge for the Biden administration.

Markham Hislop: Well, that raises an interesting question about where Russia fits into this new order. It’s pretty clear that the US will lead one coalition and China will lead another coalition. Where does Russia fit?

John Kemp: During the height of the Cold War, one of the top US priorities was to divide communist Russia from communist China as part of its strategy for containing the Soviet Union. So the United States improved relations with China to increase Russia’s isolation. I think the US strategy over the next 10 to 20 years will be the inverse of that. I think the top priority for the United States and its allies will be dividing Russia from China to increase the isolation of communist China.

That is complicated, I think at the moment, by the fact that the West has a long list of disputes with the government of Vladimir Putin. I think there has been some desire to improve that relationship mostly because of a desire to sort of increase the isolation of China and prevent any kind of Russian-Chinese Alliance.

But I think it’s proved very, very difficult because there is quite a long list of disputes with Russia that are very active and that has made it very difficult to sort of doing detente. But I do think that the overall direction of strategic travel here will be for the United States and its allies to try to improve relations with Russia in order to increase China’s isolation.

Markham Hislop: Biden says in his clean energy plan that, and it’s in the quote that I read at the beginning of our conversation, that clean energy technology exports will be high on his list of priorities. And it looks like that will almost certainly mean better trade relations with its allies. Trump has been difficult to say the least. Canada is the United States’ biggest trading partner and we have not been pleased over the last four years. So I would expect Biden to make a concerted effort to improve that.

Does that mean that we’ll see the United States go back to an emphasis on multi-lateral trade agreements or will we see it continue Trump’s emphasis on bilateral agreements?

John Kemp: There’s always been a tension between the diplomacy of trade and domestic politics. We’ve seen that for decades. We saw that in terms of the tensions between the United States and Japan during the 1970s and the 1980s that culminated in a series of sort of voluntary export restraints.

There’s always been a tension between promoting trade liberalization because it’s good economic policy and because it’s good diplomatic policy, and it’s a good way of cementing relationships with allies and, on the other hand, needing to protect vulnerable domestic industries from international competition. And that problem is not going to go away.

Joe Biden has won the presidency by very narrow margins in a number of states. He has to be attentive to the concerns of working-class Americans in some traditional heavy industries. He can’t simply lift all the tariffs and let them face full-blown international competition.

So it’s a tough one. It will be a tough one.

Again, I think what you will see is that there may be more elements of continuity between the Trump Administration and the Biden Administration than people currently think. I think there’ll be a lot more talk about multilateralism and that multilateralism will also be packaged up again as a way of creating a united front to confront China, and I would see that happening.

I think there will be much more emphasis on the need for international rules, enforcement of those rules, with the aim of constraining Chinese behaviour.

But at the same time, it runs up against the domestic political reality. You know, Biden has been elected with a wafer-thin majority in a number of states that either he or his successor as the democratic nominee will need to win again in 2024. And that means being very careful about trade measures that threatened domestic jobs.

Markham Hislop: Final question, John. I’m interested in your take on the pace of the energy transition. Are you in the Vaclav Smil camp, which says that energy transitions are very slow. Smil argues adamantly that too many clean energy boosters – perhaps Joe Biden would be in that camp – are out way ahead of the technology and ahead of the process. Or are you in the Tony Seba camp, which states that the technology is ready, it’s been on the adoption curve for 20 years, it’s now coming to the inflection point and the adoption of solar, wind, batteries and other related technologies are really ready to be adopted almost like the iPhone where you have a decade of rapid growth? And that transforms the very structure of the industry, as well as all sorts of related components of the economy.

Where do you sit on that?

John Kemp: My inclination is probably closer to Smil. I think he’s right, the economics of energy transitions naturally take very long periods of time.

We’re talking about a capital-intensive industry. We’re talking about very complex systems. They naturally change fairly slowly and it takes multiple decades in this particular instance. The question is, can we use political will and a conscious political decision to try to speed up a process that would naturally take multiple decades?

I think the real question here is: Does that political will really exist? And again, I go back to the point that it is not clear that climate change is a super high priority for a large part of the population. What I think we’ve had in the United States, for example, is an election in which people thought climate change was not one of the highest priority issues for most American voters.

And again, you’ve got, you know, the Biden administration has some very, very ambitious plans around climate change. It has the narrow majority in the house of representatives, it may not have a majority at all in the Senate, which constrains what it can do. It faces a potentially a very tough re-election battle in 2024, whether Joe Biden or his vice-president or another Democrat is the nominee in 2024. It has razor-thin margins in a number of key industrial states that could be hit very hard by climate change policies.

We know that economics favours a slow transition. We know that perhaps a strong political push could accelerate that process, but it’s far from clear to me that we have that strong political will at the moment, whatever the Biden platform might say.

Markham Hislop: Fair enough. And I want to close with just a bit of a conversation around the importance of displacement versus disruption because it seems like we don’t take this seriously. We take the Smil view and say, well, it’s going to take a long time and we have plenty of time to adapt. And I think that we miss the importance of disruption.

For instance, in oil markets where the downturn in late 2014 was caused by an oversupply of maybe one and a half, 2 million barrels in a hundred million barrel a day market, it was a tremendous disruption. And sometimes very small changes within the market can lead to very significant disruptions.

I think that’s what the 2020s are about. We’re going to see market penetration of [clean energy] technologies might rise from 3 per cent to 5 per cent or 5 per cent to 10 per cent, but that will be the thing that disrupts markets significantly and really accelerates change. What’s your take on that?

John Kemp: If you think about, you know, energy transitions at one level are quite slow. So they might play out over sort of 40, 50 plus year periods, but the average working lifetime is more than 40 years in any of the advanced economies. So, you know, the, the reality is that although the energy transitions actually happened relatively quickly compared to working lifetime people who are entering the job market now in a world that is dominated by oil, gas, coal, it’s very plausible that by the end of their working lifetime, the world will be completely dominated by wind/solar renewables and electric cars.

And that, I think is the key challenge that, you know, even though these transitions play out in some ways, quite slowly, compared to any one person’s working lifetime, any one voter’s working lifetime, any one, employees working lifetime, it’s pretty quick.

That’s not too scary if you are in your early twenties and you’re just starting out. It’s much more scary once you get to your mid-forties or your fifties and you have acquired a lot of industry-specific capital. Retraining and finding a new job is, is very hard.

So I think that for me, is the key issue that, you know, the transition could play out quite quickly in terms of people’s working lifetimes and be enormously disruptive.

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