“Energy Security and US-China Relations: States versus Markets” Matt Ferchen Tsinghua University, Associate Professor Carnegie-Tsinghua Center for Global Policy, Resident Scholar Enhancing U.S. – China Cooperation and Shared Security in the Asia Pacific Region Yinchuan, Ningxia, May 5-8 Panel: New Great Power Relations and Shared Security between the U.S. and China A recent Foreign Affairs article on energy and US foreign policy begins with the following observation: “The energy business has a way of making smart people look dumb.” The author was mostly referring to the domestic boom in unconventional gas and oil production that has been made possible by new application of “fracking” technology in recent years. But events in Ukraine have also underscored the potential for international level energy shocks and their attendant market and political volatility. Indeed, well before the US energy revolution began or before the recent outbreak of instability in Ukraine, China’s rapid economic growth and demand for energy and other global commodities were already a key source of concern for Chinese and international energy security analysts. As much as any other area of conventional or unconventional security, US-China cooperation on energy security provides a viable starting point for creating a “new form of great power relations”. If this new concept is to have any practical relevance to US-China security cooperation, and maybe more importantly to crisis avoidance and management, it must quickly generate areas for discussion and policy implementation on important areas of US-China relations. Energy security is a perfect candidate because it encompasses areas of already existing, but rapidly changing, US-China cooperation as well as conflict. At the same time, already existing western institutions for global energy governance such as the International Energy Agency (IEA) do not include China. Both the US and China have dynamic domestic and international energy interests, but very different approaches to the government’s proper role in governing those interests. Overall, American confidence in the power of markets to provide energy security is at a high point whereas China’s instinct to rely on state- owned oil companies and banks to maintain energy security remains strong, if increasingly open to criticism. Broadly speaking if the US is experiencing a moment of rising domestic energy security while China is increasingly anxious about its energy security both at home and abroad, now is a crucial time to explore bilateral and multilateral efforts at enhanced global energy security cooperation. Just a few years ago, especially in the wake of the US-centered global financial crisis, the conventional wisdom was that America was in decline. Of course such views have by no means disappeared, but in the last few years such pessimism has found a strong counterweight in discussions of America’s energy revolution. If it was unregulated markets that brought the US, and the world, low during the financial crisis, it is the almost magical power of markets (and America’s unique ability to foster them) that is fueling the surge in domestic US production of unconventional oil and gas. Not only has the fracking revolution contributed to major increases in domestic oil and gas production, but it has correspondingly reduced dependence on foreign imports and brought down levels of climate-polluting emissions. At a foreign policy level America’s dynamic domestic energy sector has also emboldened a new more self-confident and forceful approach to energy diplomacy. Under the guidance of Carlos Pascual, who since 2011 has served as President Obama’s Special Envoy and Coordinator for International Energy Affairs, the State Department has come out as a forceful advocate for how US governance of its energy market can serve as a global model for others (including China) to emulate and as a cheerleader for increased American energy exports to, and investment access in, Asian markets (again, including China). Recent American discussions about how US energy policy could possibly affect the dynamics of the Ukraine crisis demonstrate the new and more active, if still unsettled, approach to US international energy diplomacy. China, on the other hand, is increasingly anxious about energy security both domestically and internationally. Chinese analysts are generally anxious about America’s energy revolution both because of the geopolitical implications of rising US energy independence and because, despite evaluations of huge unconventional energy potential in China, China itself is unlikely to be able to emulate America’s energy dynamism in the near term. Domestically China is also facing rising concerns about the social and economic impact of the country’s addiction to low efficiency, high polluting heavy industries. Internationally, many of China’s biggest foreign policy challenges in both its near and far abroad are tied to energy security. The specifics of China’s conflicts with neighbors in East and Southeast Asia are all related in some way to access to underwater energy and other natural resources. And the entire logic of China’s maritime expansion (not to mention overland pipelines with Russia, Central Asia and Southeast Asia) is tied above all to Chinese concerns about securing access to energy. Finally, China’s rising outbound foreign direct investment (FDI) and state-sponsored loan behavior is heavily focused on access to global energy and other raw materials. While China continues to rely on its state-owned oil companies and policy banks for such activities, events in Sudan, Libya, Iran, Myanmar and now in Venezuela have increasingly caused anxiety in Beijing about the country’s “state capitalist” approach to global energy security. Given the importance of energy security to both the United States and to China, as well as the dynamic and often unpredictable nature of global energy markets, now is the time for America and China to deepen dialogue and policy cooperation. The question is how. Recently, the Chinese and British governments sponsored a study titled “Global Energy Governance Reform and China’s Participation.” The study highlights both the failure of current international energy governance institutions like the IEA to incorporate China and China’s abiding concerns about economic and political instability in international and domestic energy markets. Should China be incorporated into the IEA and, if so, how? What role should private versus state- owned energy companies play in providing energy security? What forms of maritime security are most conducive to stable flows of energy? Under the rubric of establishing 新型大国关系, the US and China should take the initiative in addressing these issues. No matter what the answers, and to avoid smart people on both sides looking dumb, both China and the US should maintain a healthy humility in the face of the inherent dynamism and unpredictability of global energy markets and politics.