Energy and the "Thucydides Trap"

Moisés Naím / World Energy & Oil

Thucydides is booming. In recent years, the ideas of this Athenian general and historian who lived around 450 BC have attracted renewed attention. He wrote on a variety of subjects, but the current interest in his work was sparked by his chronicle of the 30-year war between Sparta and Athens. Specifically, what has attracted the attention of contemporary politicians, generals and historians is his conclusion that “What made war inevitable was the growth of Athenian power and the fear which this caused in Sparta.” The prediction that worries modern-day analysts is that the ascent of a rival capable of challenging the dominance of the established power inevitably leads to war. Of course, what they have in mind is China’s ascent and America’s reactions to it. Will the current frictions between the two giant nations continue to escalate and lead to a confrontation that will change the planet or will they find a way to coexist in a tense and fractious but ultimately peaceful sharing of global power?

To allay the fears of war, China’s President Xi Jinping has said: “We all need to work together to avoid the Thucydides trap—destructive tensions between an emerging power and established powers.... Our aim is to foster a new model of major country relations.” 

The Thucydides trap applied to energy

While energy policy alone cannot fully countervail the forces that create frictions between China and the United States, it does have the potential to serve as a welcome lubricant that helps pacify the relationship, since complementarities between the two nations’ energy sectors are significant. However, these opportunities are limited, not only by the current trade war between China and America but also by underlying differences in energy and environmental policies. 

Obstacles to energy cooperation

A fundamental limiting factor in the potential energy sector collaboration between the two economic superpowers is the divergence between their avowed strategies. China’s long range energy strategy, as described in the Energy Outlook for 2050, published by the China National Petroleum Corporation, aims to a large-scale shift from coal and oil to natural gas and renewable sources of energy.  The ambitious goal is to supply 35 percent of its energy needs via solar and wind sources, and close to 20 percent by natural gas, by the year 2050. It also plans to reduce the shares of coal and crude oil in its energy mix by 33 percent and 15 percent respectively. China has expressed a strong commitment to go green and is already making strides in this direction.  

In contrast, U.S. energy strategy, as outlined in major policy addresses, such as the one by then Secretary of the Interior Ryan Zinke in September 2017, seeks to actively promote the development of fossil fuels. The Trump administration has also stated that it aims at achieving what it calls “global energy dominance” largely through the expansion of its oil and gas exports.

While the U.S. left the 2016 Paris Accords and has eliminated most of the environmental regulations adopted by the Obama administration, China has become one of the main champions of the protection of the environment.

As a result of these clashing strategic postures, tensions involving the energy sector started to appear even before the emergence of the current trade crisis.  In retaliation for the imposition in 2018 of higher import tariffs by Washington on solar panels made in China, Beijing immediately curtailed oil imports from the United States. From an average of almost 400,000 barrels per day during the first half of 2018, Chinese imports of U.S. oil plummeted to almost zero by September of that year.  China also postponed or cancelled outright the plans to import U.S. liquefied natural gas. The U.S. decision to increase tariffs on Chinese solar panels was driven by Washington’s perception that it needed to contain the inroads that Chinese solar manufacturers were making in the U.S. domestic market. The protectionist impulses were influenced by the closing down of more than a dozen U.S.-based solar panel manufacturers in recent years as well as the takeover of several U.S. solar technology firms by Chinese companies.

The Trump administration was also irked by the fact that in contrast with the rapid expansion of Chinese products and companies in the U.S. solar energy market, U.S. corporations at times faced insurmountable obstacles to enter or operate profitably in the Chinese solar market.  One exception that was much heralded was the 2015 investment by Apple in two 20-megawatt solar farms in the province of Sichuan to generate enough energy for some 60,000 Chinese homes.

Unfortunately, other such successful examples are scant. China’s restrictions to foreign investors in this sector have scared away American companies. China requires that foreign companies share their wind turbine technology and utilize no less than 70 percent of manufacturing components from local sources.

The current trade crisis has also slowed down—or perhaps even reversed—important oil and gas joint projects.  During President Trump’s visit to China in November 2017, a Memorandum of Intent was signed with the goal of promoting the development of shale gas as well as large chemical manufacturing projects. The plan also called for an investment of up to USD 83 billion by the China Energy Investment Corporation in West Virginia. The visit also led to the signing of a USD 43 billion liquefied petroleum gas joint venture in Alaska between the Alaska Gasline Development Corp. and the Chinese Sinopec Group. Another example is a USD 3.5 billion joint venture between the Yanguank Group and Air Products & Chemicals, Inc. to build a synthetic gas plant in Hohhot, China. All of these projects are now in jeopardy due to the escalation in trade tensions.

The American Petroleum Institute has warned that a U.S. loss of the Chinese natural gas market due to the trade war is not only bad news for the U.S. but also for the stability of the global economy.

Complementarities favoring energy cooperation

This bad news should not dim the view of the immense potential of a constructive and collaborative relationship in the energy sector between the U.S. and China. The International Energy Agency (IEA) estimates that during the next four years the U.S. will account for some 40 percent of all new natural gas production in the world, thus making it one of the top three Liquefied Natural Gas exporters (the other two are Australia and Saudi Arabia).

The IEA also estimates that China’s natural gas demand will be growing by a whopping 8.7 percent per year to 2022, largely as a result of Beijing’s commitment to improve air quality. Such an expansion of the Chinese demand for gas will require imports to double within the next three years. Although China will have options to import additional natural gas from neighboring Russia and other suppliers, U.S natural gas offers a unique opportunity for both countries to work together on a mutually beneficial arrangement.

The development of shale oil and gas reserves offers significant opportunities for cooperation given that China National Petroleum Corporation is finding important shale oil resources in northern Tianjin. According to the IEA, China now ranks third in shale oil resources, after the United States and Russia, and could certainly benefit from U.S. technological and operational support.

Unfortunately, however, these opportunities will be hard to convert into realities while the commercial tug of war between the United States and China continues unabated. The energy sector, by itself, does not appear to be critical enough to assuage the current fractious relationship. Both the Chinese and the American leadership seem set in their postures. President Xi Jinping has stated that “China will continue to hold high the banner of peace, development, cooperation, and mutual benefit and uphold its fundamental foreign policy goal of preserving world peace and promoting common development.”  In contrast, President Trump has doubled down on his America First posture. Speaking in Vietnam, in November 2017, he quoted from The Wizard of Oz: “There’s no place like home.” He has also been quite explicit that he hopes that the current trade war results in more products manufactured in the U.S. rather than imported.

Thucydides said in his chronicle of the Peloponnesus wars: “What I fear is not the enemy’s strategy, but our own mistakes.” If the current leaders heed this admonition there is a good chance that his trap will be avoided and that a road to cooperation between the two countries will be found, hopefully gas lit. The energy sectors in China and the U.S. cannot dismantle the Thucydides trap, but they can mitigate its effects.