How China won the Iraq war
by Economics Correspondent Seán Whelan @seanwhelanRTE
It seems the answer to the question “who won the Iraq war?” is – China. India might also be deemed an acceptable answer. But China looks like the real winner of the Iraq war. How come? Because if the point of that war was oil, as many critics have asserted, then China looks like coming away with the lion’s share of that oil – and without having to fire a shot.
According to the International Energy Agency, Iraq has loads of undiscovered oil, and unlike other countries in the region has opened up exploration to foreigners, many of them from China. Not only is the oil plentiful in Iraq, it’s also cheap to get at – 15 times cheaper than extracting Russian oil, 30 times cheaper than Canadian Oil sands.
In the view of the IEA, Iraq is going to become the number two oil exporter over the next couple of decades. And 90% of those exports are going to go to Asia – mostly China, then India.
Indeed much of the oil in the Middle East seems destined for Asian markets in the coming decades, setting up an interesting three way power relationship between Baghdad, Beijing and Delhi. That has profound geopolitical implications, according to the Chief economist at the IEA, Dr Fatih Birol, who gave a fascinating presentation of this year’s World Energy Outlook to the Institute of International and European Affairs in Dublin last week. Trade and Defence policies have a habit of closely tracking energy policy.
So what about the Americans, who did most of the fighting in Iraq? It seems they are headed for virtual energy self sufficiency – thanks to fracking. The controversial new extraction technology is going to make the USA the number one oil producer by 2017, according to the IEA. It may even start exporting oil.
The same fracking technology is also unleashing vast reserves of gas from shale deposits in the US, so much so that it may overhaul Russia in gas production sometime in the next decade.
But already fracking has had a major impact on the American – and world – energy scene. Firstly the spectacular rise of shale gas has led to massive price drops for gas users in the USA. So much so that electricity producers there have converted power stations from coal burning to gas burning to such an extent that two things have happened – over the past five years, the IEA says the US has seen the biggest drop in CO2 emissions of any country in the world – pretty amazing for a country with no climate change policy. Secondly, the price of coal has fallen to such an extent that Europeans have started importing cheap American coal to fire their own power stations. Europe has seen the second highest growth in coal imports in the world after boomtime China.
There has been one significant policy driver in the US which is also impacting on the global energy scene, and that is the CAFÉ fuel efficiency standards the Obama administration has gotten through the legislative mill. This will lead to a big average improvement in fuel consumption of the US vehicle fleet, reducing pollution and making their increasing fuel reserves last longer.
Up until recently, the Middle East region was exporting oil to both the East and the West on a 50/50 basis, but the IEA sees this shifting to a 90/10 split in favour of the East.
Meanwhile, the Chinese have become more concerned with energy import dependence, and are increasingly turning to alternative sources of energy and energy efficiency. Such is the vast scale of the Chinese market that, according to Dr Birol, when China decided which technology it will adopt, it will become the global standard because the scale effect will mean prices for that technology will plummet.
China, India and Europe are increasingly becoming dependent on imported energy: Japan has already reached 100% dependence on imports. Only North America is heading in the opposite direction, and moving towards self sufficiency.
The gas revolution – led by the US, Canada and Australia – is bad news for traditional gas producers like Russia and Algeria, who export to Europe in particular. Europeans are paying five times more for their gas than Americans (the Japanese pay eight times more!), largely because the contracts link gas prices to the price of oil. But the fracking revolution has decoupled those prices in the US. This price gap has been a present to European governments from the US , who now have some leverage to negotiate prices down. Which is, of course, bad news for the Russians and Algerians.
Not only will this major energy shift have implications for diplomatic and military relations between different regions of the world, they will also have big economic implications, especially for energy intensive industry.
The IEA estimates EU electricity prices will be 50% higher than US electricity, and three times higher than Chinese prices.
Why? For three reasons – firstly natural gas is more expensive. Secondly, Europe has significant subsidies for renewable energy sources like wind power. And thirdly, EU states have carbon taxes. The subsidies for renewable energy may be justified in building the critical mass needed to shift more production to this sustainable sector, and the Carbon Tax is driving technological change towards more climate friendly energy consumption patterns. But they do add to costs for energy intensive businesses in Europe, which may find themselves disadvantaged in their home market.
Indeed the high cost of energy was specifically mentioned by German chemical giant BASF and Bayer in recent decisions to increase investment in the low cost USA last month.
The IEA has taken a special look in this year’s report at Energy Efficiency, treating it as a fuel source in its own right. This is particularly important for European Countries like Ireland, which are very dependent on imports (and Ireland is one of the most dependent in the EU). The EU has a policy aimed at achieving a 20% improvement in energy efficiency by 2020. This involves all sorts of things, from low energy lightbulbs and electrical appliances to the virtual rewiring of the European electricity grid. But the promised gains are immense – a 20% improvement in efficiency would, according the European Commission, save the equivalent output of 1,000 coal fired power stations or half a million wind turbines. In cash terms, the annual saving is equivalent to the GDP of Portugal.
Ireland is pushing ahead with renewable energy investments, mainly in windpower. The Government is also trying to ramp up retro-fitting of Ireland’s housing stock to make it more energy efficient. Energy Minster Pat Rabbitte says the plan is to phase out direct grants for things like external insulation and more efficient gas boilers. Instead the Government and industry are working on a pay-as-you-save scheme, with the power utilities funding efficiency measures while consumers pay off the costs over the long term through savings in their monthly bills.
But according to the IEA, Europe’s ambitious policies only unleash about one third of the potential that energy efficiency has to offer. If the big energy using regions of the world went all out for efficiency by simply removing the barriers to using economically viable efficiency measures, energy demand would start to fall from the end of this decade. And it says the savings could push economic growth. The IEA thinks a $12 trillion investment in efficiency technologies would produce an $18 billion boost to GDP out to 2035. The biggest gainers in terms of economic growth would be India, China, The US and Europe.
And it would lead to cleaner air and might – just might – help to keep global warming within tolerable limits.