Global Energy Governance: Development Trend, Geopolitical Contest and Countermeasures

Yu Hongyuan

Senior Research Fellow and Director, Institute of Comparative Politics and Public Policy,?

Shanghai Institutes of International Studies

In recent years, profound changes have happened to principal actors and target of global energy governance, to its features, connotations and tools of governance, and to the main external challenges facing it and to its governance model and mechanisms. Causative factors for the changes include the changed international pattern in which the East ascends and the West descends, the fast moving structural revolution in energy and advancing energy technology, the power shift between the worlds energy-producing states and energy consuming ones and globalization of energy finance. Such new changes call for the emerging countries like China to take a more proactive part in changing the global energy governance system. Looking into the future, it is necessary for China to take precautions and prepare itself for playing a leading role in a new global energy governance system.

Trend and Effects of

Global Energy Governance

It is the core objective for global governance to establish institutional constraints, make clear and strengthen norms and put international affairs and actions by actors under effective control. It attributes to stability of the international system whether global governance is at a high level or a low one. As an important aspect of global governance, energy governance has important implications for international relations. As the developing countries attain increasing development results, the mainstay of energy consumption continues to shift. New changes like the transformation from high carbon energy to low carbon one, the Shale Gas Revolution in the United States (US) and the technological innovation for green energy have all pushed energy to transcend the traditional geopolitical realm and become a key area of global governance. In the age of globalization, a global energy market “based on fossil energy and covering all countries and regions” has been basically in place. However, in such a market there is serious mismatch between production and consumption of fossil energy with many related issues like energy security, price competition and negative externalities continuing to arise. In addition, as energy is a core area involving national security, sovereignty and strategic resources, the energy issues become public and complex by nature. Therefore, governments and other actors in energy governance, having gradually given up the mindset of zero-sum game, try to solve complicated issues like technological and rule-related problems in energy production, transport and consumption by international cooperation.

First, macro-background of global energy governance has changed. In an era when stability of the international system hinges on global governance, energy governance has gradually become a key area of global governance and, in turn, played a leverage role in changing the international system. At present, the global energy pattern undergoes profound changes. A) There is a tendency of the decline of the East and the rise of the West as far as center of world oil production is concerned, as under the impact of US Shale Gas Revolution, the position of the Organization of the Petroleum Exporting Countries (OPEC) in global crude oil market has gradually on the decline. Now, the US, Russia and Saudi Arabia are in joint dominance of the global pattern of oil production and supply, forming a complicated and delicate triangle-relationship. B) There is a development trend towards multi-centers in global oil production, including the development of pre-salt oil in Brazil and that of oil sands in Canada. Besides, replaceablility of oil has been raised by breakthrough progress in new energy technologies. C) The mainstay of global energy consumption is moving away from carbonization and towards de-carbonization. At present, 194 countries across the world have joined the Paris Agreement on Climate Change, having reached consensus to reduce the use of fossil energy and increase the proportion of clean energy in energy consumption structure in all countries across the globe.

Second, the global energy market has gradually entered into a period of low oil price. Since 2018, the international crude oil price has continued to decline, reaching a drop of about 30% so far. The reason behind the oil price drop is a sharp increase on shale oil production of the US and US sanction against Iranian oil. For the first time since 1973, the US has surpassed Russia and Saudi Arabia as the largest oil producing country of the world. In 2018, US oil production reached 2 million barrels per day. The figure is expected to increase further in 2019. In 2018, the US took a tough stance and pressured to reduce Irans oil exports to nothing, which led Saudi Arabia with a huge idle production capacity to raise its oil output to a historical high, reaching 11.1 million barrels per day in November 2018. At the same time, Russia also accelerated crude oil production. The US has now become the largest oil supplier of the world, and US “energy independence” boosted by the Shale Gas Revolution will recreate the international geopolitical energy pattern, impacting Russia that is highly dependent on energy and making it likely to profoundly change the Middle East energy pattern.

Third, as the global energy supply pattern is subject to profound geopolitical influence, the position of the OPEC has been weakened. The interests of the energy supplying states rest with keeping energy price high, making energy export channels stable and unimpeded and achieving the greatest possible pluralization of energy export destinations. The energy supplying states tend to adopt common energy producing policies through coordination for synergy to influence international energy pricing. As the worlds most important organization for oil producing states, the OPECs international position and world influence has always been in fluctuation. At present, the OPEC is in face of the most serious challenge since its founding. The OPEC countries jointly raise international oil price through taking collective action in setting up price and production quotas, but between them there are interest conflicts which give rise to a long-term energy geopolitical struggle, centering on competition for shares in the international energy market. Such interest conflicts increase the heterogeneity between the OPEC countries, greatly reducing the effectiveness of their collective actions and leaving the OPECs influence oil pricing far less than ever.

Fourth, the most important change in global energy governance is none other than that in demand-supply structure. In regard to demand for energy, the greatest change is the shift of energy demand to the East. A major proportion of increase in energy demand is taken by the developing countries, and especially the emerging economies have greatly increased their demand for energy while that of the developed countries is on structural decline. In regard to energy supply, at present, the US vigorously pursuing energy independence has impacted the current global energy pattern and geopolitics. Against the backdrop of the Trump administrations return to traditional energy policy, the US will increase its revenue by US$36 billion in ten years to come through exporting energy resources, selling energy infrastructural facilities and supporting oil and gas development. Besides, specific fund will be given to extraction of oil and natural gas, which will make a US$1.8 billion return to the US Government by 2027. At present, traditional fossil energy has made growing external problems for the environment. However, as renewable energy technologies advance fast and their production costs continue to decrease, renewable energy is gradually becoming a new growth point of the world economy.

Fifth, global energy financial governance continues to be led by the Western countries. At present, energy and oil in particular assumes outstanding financial property. The initiative of oil pricing can be taken through financial derivatives of energy. The development of energy industries has, at the same time, promoted financial innovation and demand for pluralized financial services. Against the background of rapid development of international financial market, financialization of energy has gradually come into the limelight. Since the futures market came into being, energy has gradually detached from commercial property and attained increasing financial property. At present, as energy spot market and financial derivative market interact and affect one another, the worlds major energy exchanges are monopolized by the US-led Western countries. Among them, more than half of global energy derivative trading volume on energy futures and energy options is done in the New York Mercantile Exchange. In the charge of speculators of the Western countries, the pricing for energy products like oil is seriously deviated from supply and demand relationship, which enlarges fluctuation of world energy prices (see Figure 1).

Almost all the prices in the global financial market for commodity trading like oil are fixed in US Dollars. The West Texas Intermediate Crude Oil (WTI) and the London Brent Crude Oil, being of the largest trading volume and with most extensive influence, are priced in US Dollars, which leads the trading of almost all of the OTC energy financial products to by priced likewise. The fact that oil has been long priced in US Dollars enables the US to influence the fluctuation of international oil price by changing its financial policy.

Geo-Contest on Energy Still

Affects International Political and Economic Pattern

Profound changes have taken place in the global energy structure. As the center of gravity of world energy trade is shifting to the emerging economies and the developing countries, the degree of external dependence on energy of the Asian-Pacific region is on the increase, which will further affect national strategies of the energy supplying states, competition on energy prices and, in turn, global energy geopolitical contest.

The global energy structure, market and technologies affect the global geo-economic position, geopolitical situation and the say of major countries. Major countries proactively use new changes in the global energy governance pattern to advance their own interests in geo-economic and geo-political contest. The countries traditionally rich in fossil energy resources like Russia and Saudi Arabia heavily depend on fossil energy for income; the Shale Gas Revolution has brought about great economic benefit to the US and increased its dominance in the international energy market. Therefore, the countries represented by the US and Russia expect to maintain the dominance of fossil energy in the worlds energy pattern whereas the countries represented by the EU and China vigorously promote the dominance of renewable energy there. As major changes happen to dominance by different types of energy, the major countries are in energy geopolitical contest centering on energy pricing and dominance of different types of energy.

First, Energy pricing is the focus of contention between energy supplying states and energy consuming ones. Centering on the international energy pricing, a complicated political, economic, diplomatic and even military struggle is waged between energy suppliers and energy consumers. The former try to keep the international energy price high by jointly controlling production whereas the latter try to secure a reasonable and stable energy price by managing demand for energy through developing new technologies. Besides, energy is an important means for both energy suppliers and consumers to achieve political, economic and diplomatic objectives, for which energy consuming states can strike at hostile energy supplying states by place sanctions on them like energy export embargo while energy supplying states can strike at hostile energy consuming states by cutting off energy supply.

Second, the fight is on over dominance of fossil energy or over dominance by either fossil energy or renewable energy. Traditional energy producers represented by the US and Russia still lead the worlds energy pattern. But more and more countries have begun to consider promoting the dominance of renewable energy in the world energy pattern so as to ensure energy security and sustainable development for environment and to reduce political instability arising from traditional competition on fossil energy.

With the arrival of the Shale Gas Revolution, the position of the Middle East region in US energy strategy is on the decline. Oil exporting states in the Middle East are in search for emerging energy markets, resulting in the increasing influence of emerging markets like China and India on geopolitics in the Middle East. The EU and Japan still somehow depend on the Middle East for energy but in general secure their energy interests by following US strategy. Emerging markets like China and India are highly dependent on the Middle East for energy supply, their political influence on the Middle East region is also on the increase.

In the struggle over the dominance of fossil energy, control and counter-control are going on between the worlds major countries and centers for energy supply. As fossil energy is rare and its geographical distribution is unbalanced, control over energy transportation corridors is an important area of major-country rivalry. Traditional fossil energy depends on ocean shipping, pipelines, roads and railways for physical transport whereas renewable energy that turns into electricity is transmitted on power grids. Energy transportation corridors are an important target for geopolitical contest and especially the world major countries rival for dominance over narrow corridors on long sea-lanes. Strategically important maritime energy transportation corridors are a key area of rivalry for control between the world maritime powers. At present, almost all of the major sea corridors are controlled by the US and its alliance system. Over the years, the US has forcefully controlled maritime energy thoroughfares and related islands and, based on this, sought world hegemony. On the one hand, the US keeps strong military presence along strategic sea lanes. It sets store by the role of “strategic islands”. Based on the “strategic islands”, the US is able to achieve strategic objectives of global strike, global engagement and global reach. On the other hand, the US includes concerned countries into its security system through controlling strategic energy corridors and, in turn, exercises control over strategic sea lanes through cooperating with its allies. Many other major countries also seek influence on international strategic sea lanes, especially those major countries with a huge demand for energy and of heavy external dependence. For instance, the Indian Maritime Doctrine put forward the vision of “eastwards, westwards and southwards swivels” in Indias naval strategy.

Geopolitical contest over oil and gas pipelines is mainly a struggle sometimes overt and other times covert between the US-led Western countries and Russia and among major energy consuming states like China, India and Japan. For instance, Russia has, for long, insisted on including the direction of Caspian energy export pipelines into the “Northern route” in order to control energy supply to the West and safeguard its own security and economic interests. To control energy lifeline and constrain traditional Russian influence in the Central Asia-Caspian region, the US-led Western countries have strongly promoted the “Western route”, to build pipelines running directly from Baku, the capital of Azerbaijan to Ceyhan, a Turkish port city by the Mediterranean.

Actively Participating

and Leading Changes

in the Global Energy

Governance System

At present, macro-background of global energy governance has changed considerably. Under the new situation, actors in global energy governance and in particular major countries and key regions should innovate on governance model and mechanisms, improve capacity of participating in global energy governance and proactively address problems and challenges in the global energy governance system. China is an important participant and contributor to the process of global energy governance. On the one hand, it has taken an active part in multiple mechanisms of energy governance, conducting all forms of cooperation with all other actors in energy governance. Against the backdrop of eastward shift of US strategic focus, China has continued to increase its political and economic input in the Middle East region. However, to the contrary of the means of intervention in US-style, China does not interfere with internal affairs of the Middle East region. Nor does it seek military influence there. Instead, it has mainly strengthened energy cooperation with various oil producing states.

On the other hand, China participates in global energy governance, mainly through dialogue, exchange and policy coordination. To stand for dominance of international clean energy governance is a necessary route for China to take in influencing the international energy system. To this end, it is necessary for the country to build an energy governance system on diplomatic plane that combines efforts home and abroad, that is, according to the requirements of General Secretary Xi Jinping, to revolutionize Chinas energy consumption, supply, technologies and structure and to increase Chinas role and influence on the global energy governance system.

First, China can unite with the EU to play a more proactive role in global energy governance. Second, it should endeavor to promote global energy governance through major governance mechanisms such as the International Energy Charter. Third, it should ensure supply of energy resources, especially security of energy transportation corridors. Its emphasis on building China into a maritime power is not to seek US-style maritime hegemony but to upgrade open seas anti-access capabilities on the basis of offshore waters defense for the security of its maritime energy transport lifeline. Moreover, it needs to actively implement energy import pluralization strategy (see Figure 2). Fourth, it should develop new energy technologies and promote dominance of renewable energy in the world energy pattern. Fifth, it should enhance public diplomacy on energy security, giving full play to multilateral mechanisms in areas like global clean energy.

There are sharp contradictions in the global energy governance system, whose problems of low governance efficiency and insufficient governance capacity continue to prop up. Therefore the emerging countries like China should take an even more proactive part in changing the global energy governance system and actively guide global energy governance. On the one hand, it is necessary to deepen domestic reform, develop more advanced energy technologies and promote transformation and upgrading of energy consumption structure. As one of the largest energy producing and consuming states of the world, a China that enjoys institutional advantage and broad space for market development can bring about thriving development of low-carbon energy. On the other hand, through cooperating with the EU, safeguarding energy supply pipelines and conducting public diplomacy in multilateral mechanisms, China should take an active part in building global energy governance system and increase its say there.