Geopolitics of energy and Korea’s choice (19)
By Chae Hee-bong
There are several forthcoming important changes in geopolitics of world energy and climate change issues that require attention. First, China’s presence in the global energy market will be evident in the next three decades. China is already ranked first in the world in terms of total energy consumption. It is forecast for China to account for around 40 percent in the increase of world oil consumption over the next three decades.
Prominently increasing China’s presence in the world energy market will certainly bring some significant changes to world energy geopolitics. It is already scrambling for oil and gas in Africa and the Middle East to satisfy its explosive oil demand. Chinarobust demand will function as a main factor for driving up international oil and gas prices for at least the next three decades.
China will also try to increase its political and military capability to improve energy security because it’s relatively vulnerable to sudden interruptions in the supply of oil, especially in terms of sea lane transportation. About 85 percent of oil imports pass through the Malacca Straits and the Indian Ocean and any blockade of these transportation choke points could be disastrous for China’s oil security. The building of its first aircraft carrier on the unfinished Soviet carrier Varyag shows Beijing’s anxiety over oil security and its determination to develop as a naval power to protect oil transportation sea lanes, challenging U.S. maritime supremacy.
There is also an energy motive in China’s move to claim its sovereignty of the Parcel Islands (Xisha Islands in Chinese) and Spratly Islands (Nansha Islands) because they are rich in oil and natural gas reserves.
China’s rise in the energy sector will bring significant changes in Sino-U.S. relations and geopolitics of world energy.
Fierce competition between the United States and China to secure limited oil and natural gas may cause political and military tensions. Before China turned into a net oil importer in 1993, the two countries were joined at the hip because there were not rivals in terms of scrambling for oil.
After China became a net importer, it has adopted three important strategies to secure oil. First is to diversify its sources of oil imports other than the Middle East. This strategy reflects China’s perception that The United States could easily use Middle Eastern oil as a weapon against China if the two nations ran into conflict. China’s sources of oil imports have extended to regions other than the Middle East, such as Sudan, Iran and Venezuela.
Second is to boost the proportion of oil imports through inland transportation. This is the reason why China is trying to import oil from Kazakhstan by building an oil pipeline which passes through Atyrau in Kazakhstan and Xinjiang.
China’s third strategy is to take advantage of state-owned enterprises (SOEs) like China National Petroleum Corporation (CNPC), PetroChina and China National Offshore Oil Corporation (CNOOC) in securing equities in foreign oil and gas fields. This outward policy also encouraged China’s oil SOEs to make bold investments in oil-producing countries
Forthcoming developments we need to pay close attention to are related to Iran’s nuclear development activities. Iran has consistently denied allegations that it is seeking to develop a nuclear bomb.
It maintains that nuclear facilities are being built for the purpose of power generation and that it has the legitimate right for the peaceful use of atomic power. However, the United States and Israel suspect Iran is concealing its intention to develop nuclear arms capabilities.
Israel is anxious over Iran’s nuclear arms development because it will pose a serious threat to its safety. Saudi Arabia, which historically has competed for the status of the regional power in the Middle East, has also expressed questions over Iran’s nuclear development, judging the move as a covert military strategy to rise to the fore in the Middle East.
The United States is trying to thwart Iran’s nuclear ambition with sanctions aimed at reducing its allies’ oil imports from Iran. In response to threat from the United States, Iran is threatening to block the Strait of Hormuz through which 40 percent of the world’s oil trade passes. Increasing military tensions between Israel and Iran could cause military clashes which might lead to another war in the Middle East. This would cause serious upward volatility to world oil prices, with them rising to over $200 per barrel in this eventuality.
Last but not least, forthcoming developments are about climate change. Climate change as a result of the use of energy is demanding the human race change how it produces and uses energy. The Intergovermental Panel on Climate Change (IPCC) said the maximum temperature increase that the world can sustain without causing irreparable damage is about 2.5 degrees centigrade by 2050.
Even though the Copenhagen Climate Change Conference failed to reach a concrete and fruitful agreement with legally binding emission reduction targets at a global level, individual country’s efforts to reduce carbon dioxide emissions will be stepped up and implemented at a national level.
However, expanding the role of low-carbon energy in each country will be politically difficult. To reduce carbon dioxide emissions, the use of renewable energy and nuclear power, along with the efficient use of energy through conservation, should be promoted. The price of renewable sources like solar photovoltaic energy or wind power is relatively high when compared to conventional fossil fuels like coal and oil. Consumers of electricity have to shoulder additional costs when power generation companies increase the portion of renewable energy in their energy mix by following renewable portfolio standards which regulate the minimum portion of renewable energy in their total generation amounts.
In the case of nuclear power generation, it appears its popularity as an effective way to reduce the level of carbon dioxide emissions is waning in the wake of the Fukushima nuclear disaster on March 11 last year. The disaster has prompted fierce political debate in Japan and Germany and has led many countries questioning the safety of nuclear power generation.
Energy and climate change
What will be the major implications of the future development in the geopolitics of energy and climate change and what does it mean for Korea?
First, high oil prices will be inevitable considering China’s energy demands and the increased use of renewable energy. China’s light-duty vehicles are likely to increase from roughly 25 million to nearly 230 million through 2030.
Oil use for transportation in China will rise five-fold by 2030. The burgeoning number of its middle class and strong demand for oil will be main driver for high oil prices.
High oil prices will also cause domestic conflict in Korea, as it is heavily dependent on oil and gas. The oil intensity in primary energy use was 40 percent in 2010.
Steep hikes in oil prices will affect a significant number of people across various economic sectors including transportation, residential and industrial sectors. Low income families that use a higher proportion of their income to pay for energy will be most severely damaged by oil price increases, considering the fact that Korea’s social programs to protect low income families from such hikes are very limited.
Second, political instability in the Middle East will also function as a main factor to increase the volatility of oil prices. They have already shown volatility as the poorly-regulated crude oil derivatives market provides profit only from price changes expanded. When compared to the Iraq War, a U.S.-Israel confrontation with Iran would have a much bigger impact on oil prices considering the Iran’s military capability and a possible blockade of the Strait of Hormuz. Along with the financing of oil markets, the political instability in the Middle East would increase the overall volatility of oil prices.
Third, political instability and resulting disruptions in world oil security might pose a serious threat to Korea. Currently, Korea is importing 80 percent of its oil from the Middle East and in 2010, it imported 10 percent of its oil from Iran.
If military clashes between the U.S.-Israel and Iran break out in the Middle East and Saudi Arabia fails to function as a swing producer, Korea’s oil security will be in peril.
Fourth, Korea will come to growingly realize the difficulty of securing equity and stakes in foreign oil and gas fields because of the U.S.-China rivalry in competing for foreign oil.
The United States has maintained a strong presence in the Middle East, especially in Saudi Arabia. China is scrambling for oil and gas in Africa and Central Asia to meet its exploding energy demands.
Oil-producing countries already reinforced their control over profits in oil and gas fields. It is already rare to find concession agreements or product sharing in oil and gas contracts which are favorable to foreign participants.
A growing number of oil-producing countries are taking advantage of their national oil companies to maximize profits.
The Korea National Oil Corporation (KNOC) still lacks the technical capability to act as a main operator in oil projects even though it has aggressively invested in foreign oil fields with the help of government money.
Energy strategy in the 21st century
In order to address challenges in energy and climate change issues in the 21st century, it is essential for Korea to adopt three strategies for energy policies: transition to a low-carbon economy; integrating energy infrastructure with North Korea and Northeast Asia; and rising to a major global player in the world energy market.
First, it is important for Korea to transform into a low-carbon economy. The government should take bold measures to increase the use of renewable energy.
In the case of broadband networks in information technology industries, the nation succeeded in building extensive high-speed Internet infrastructure by making aggressive investments.
The expansion of renewable energy has been relatively sluggish because of the fear of rising energy costs. The Korean government should persuade consumers to accept the increasing role of renewable energy and corresponding burden of increased energy costs. In this process, a social program to alleviate the burden on low income families should be expanded.
The role of electric vehicles should also be expanded in order to reduce carbon dioxide emissions. Electric vehicles will be crucial in not only transforming the transportation sector into an environment-friendly one in terms of carbon dioxide emissions but also in reshaping the competitive structure of the world automobile industry. Buyers of electric vehicles should be given strong incentives including procurement subsidies and tax breaks.
In the case of nuclear power generation, Korea should decide which model to follow between the French and German one. The French model emphasizes the role of nuclear power in its energy mix dates back to Charles de Gaulle.
De Gaulle, the French statesman famous for his Politics of Grandeur, held the view that France should continue to pursue the course of a major global power and should not rely on other nations for its national security and prosperity. During his first term as French president, he tried to secure a full nuclear cycle and nuclear capability as a strategy for being a regional power in Europe and the world.
In contrast to France, Germany, which was not permitted to have nuclear arms capabilities and utilized nuclear power only for peaceful purposes, has decided to phase out all 17 nuclear reactors by 2022 while stepping up efforts to increase the capacity of renewable energy in its energy mix.
A growing number of Korean people, especially from liberal blocs, are strongly opposed to extending the operation of old nuclear power plants and the construction of new units in the wake of the Fukushima nuclear disaster.
Proponents of atomic power, mainly conservatives, maintain that nuclear generation should be promoted as an effective way to reduce carbon dioxide emissions. Some conservatives also argue that Korea should have the right to reprocess spent nuclear fuel, forbidden under the Korea-U.S. Nuclear Agreement.
Second, more substantial efforts to link South Korea’s energy system with that of North Korea and Northeast Asia should be made to increase the South’s access to vast energy resources in Russia.
Russia is ranked first in terms of natural gas reserves and eighth in terms of oil reserves. In this regard, importing Russian natural gas through the pipeline that passes through the North is vital for the South’s energy future.
The project will enable South Korea to import relatively cheap Russian gas through a pipeline. South Korea currently imports all its natural gas in the form of expensive liquefied natural gas (LNG).
Natural gas can also function as a bridge fuel in changing from oil to renewable energy. Increasing imports of natural gas will help Korea reduce carbon dioxide emissions in the energy sector.
Many barriers should be removed in order to finalize the Russia-North Korea-South Korea natural gas pipeline. Solving the issues of Pyongyang’s nuclear missile program might be a prerequisite condition before Seoul makes a final decision on the natural gas contract with Russia.
When an agreement on North Korea’s nuclear issues is reached, related countries’ cooperative mechanisms such as the North East Energy Development Bank may be needed to help build energy infrastructure in North Korea.
Third, Korea should rise to become a major global player in the world energy market. Unlike the semiconductor or shipbuilding industries, Korea has not succeeded in rising to a key player in the world energy market. In the age of Capitalism 4.0, energy is a very important factor in overcoming resource restraints and expanding the frontier of capitalism. The role of state-owned enterprises like KNOC and Korea Gas Corporation (KOGAS) should be promoted as we have seen in the case of Chinese SOEs like CNPC.
Currently KNOC (oil) and KOGAS (gas) are operated separately and the separation of oil from the natural gas business is rare in companies. Putting these two firms under the umbrella of a holding company or merging them could produce a synergy effect.
In tackling the above-mentioned energy and climate issues and Korea’s energy strategies, presidential leadership is very important in that energy security is crucial for Korea’s security and a president’s ability to persuade people is crucial in the process of setting a course in energy policies.
In September 2007, the Department of Energy of the United States and the National Development and Reform Commission of China signed the Memorandum of Understanding for Cooperation on Industrial Energy Efficiency; On the fifth Strategic Economic Dialogue in December 2008, the United States and China agreed to include energy efficiency as an area of cooperation through the U.S.-China Framework for the 10-Year Cooperation on Energy and Environment (hereinafter referred to as the “TYF”).
In July 2009, the Department of Energy of the United States and the Ministry of Housing and Urban-Rural Development of China signed the Memorandum of Understanding for Cooperation in Energy Efficient Buildings and Communities. In December 2008, the Export-Import Bank and Trade and Development Agency of the United States and the National Development and Reform Commission and the Export-Import Bank of China signed the Memorandum of Understanding on Cooperation in the Areas of Energy Conservation and Environmental Protection, and in July 2009, the Export-Import Banks of both countries agreed on the Implementation Plan for Energy Efficiency and Environmental Exports.
Chae Hee-bong has been at the Knowledge Economy Ministry since 1990 during which time he was engaged in a number of energy-relatted bureaus, including director of energy policy. Chae went to Yonsei niversity and did his Master’s at Vanderbilt University. He is now director general of the Presidential Committee on Regional Development. Previously, he was an energy specialist at the Inter-American Development Bank in Washington, D.C.