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January-February 2011

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Books of Note: January/February 2011

CHINA'S STRATEGY TO SECURE NATURAL RESOURCES: RISKS, DANGERS, AND OPPORTUNITIES

Theodore H. Moran, Washington, D.C.: Peterson Institute for International Economics, 2010.

T. Boone Pickens is one oil man whose comments unfailingly grab public attention. So what is one to make of the observation, in his recent co-authored (with Dan DiMicco) column, that “[a] global race for energy is on—and China is way out in front”?1 In fact, such alarmist sentiments reverberate more widely. The more restrained New York Times employed a battlefield metaphor—labeling Chinese investment in an Argentine offshore oil venture as a “beachhead”—to characterize such an apparent contest.2

The leitmotif in these and similar accounts is China's perceived effort to gain preemptive control over—i.e., to “lock in”—needed resources, particularly critical ones like energy, in which the country is deficient. Taken to a zero-sum extreme, success in such an effort would presumably occur at the expense of other countries.

Before such emotive notions get transmuted into conventional thinking, it would be well for readers to consult this timely and compact study by Theodore Moran (a Georgetown University professor of international business and finance). It is an astute analysis of the variety of factors that, demonstrably or more speculatively, are at work in China's energy-acquisition activity—analysis suggesting that the zero-sum paradigm is neither intuitively nor empirically apparent. (While oil and gas dominate Moran's discussion, his survey also treats an emerging concern with rare-earth minerals that have important applications in advanced energy technologies. Ironically, that concern is heightened by China itself having large indigenous quantities of those resources. But in this review, I concentrate on the energy story.)

An indispensable background to this topic is the importance of not conflating two distinct worries: on the one hand, the scarcity of a resource, signaled by real costs and market prices; on the other, a threatened shortage of such magnitude as to prompt a consuming country to try and gain dominant command over that resource; or, failing that, mount an effort to develop a viable substitute (as in the case of Germany, whose limited access to oil during World War II compelled the country's aggressive coal-liquefaction initiative).

Yes, the prospect of continuing rapid economic growth (in China, India, and numerous other countries) could strain the world's oil-supply capacity, necessitating higher real prices to bring demand and supply into balance. (DOE's International Energy Outlook 2010, released last July, sees inflation-adjusted world oil prices rising by around 30 percent over the next 25 years.) But such higher prices will confront all consuming countries—China included—whether or not their oil needs are satisfied by domestic production or imports and whether or not such imports originate in their own overseas assets.

In this context, it is worth citing a 2006 DOE report, which pointedly observed that “Even if China's equity oil investments ‘remove’ assets from the global market, in the sense that they are not subsequently available for resale, these actions merely displace what the Chinese would otherwise have bought on the open market.”3 The related notion that China could tap its foreign oil holdings at a knockdown price for its domestic users means only that it would thereby be willing to subsidize domestic oil prices—no favor to economic-efficiency principles—or else forfeit the higher revenues available through sales on the world market.

Still, having laid out a picture with few qualifiers, let me step back and offer some caveats. China's policymakers, after all, don't need the Moran monograph or this reviewer's comments to appreciate the ABCs of world resource markets. So, what are some considerations that may weigh in China's overseas investment decisions?

Diversifying away from low-yielding U.S. Treasury bills to more attractive earnings from foreign oil properties may be a prudent financial—never mind solely natural-resource—strategy. And were oil prices to rise, their increased cost to the Chinese economy could be cushioned by such profitability “upstream” – in effect, a hedging strategy.

Don't overlook a possible political dimension. Thus, China's passive stance at UN Security Council deliberations on Sudan's human rights record may be the flip side of securing preferential concessionary exploration and development rights in that country's offshore waters. Similar deals have been reported of arrangements in which China lends funds to (and perhaps makes friends with) oil producers under an agreement to service such a loan with oil.

An overseas presence with joint equity partners may provide China with enhanced export opportunities and technological expertise.

It is important to note that Moran's nuanced analysis covers a number of scenarios of oil-market structure that allow for variations in the somewhat idealized competitive model to which I've confined myself here. But with tens of billions of dollars by now invested in various Chinese overseas energy investments, Moran observes that the “evidence from the 16 largest Chinese natural resource procurement arrangements shows that Chinese efforts predominantly help expand and diversify the global supplier system. … In the sector most crucial for China's procurement strategy—access to international oil—Chinese companies have not diverted oil supplies toward the Chinese domestic market but instead sold the supplies they controlled predominantly [in] international markets.”4

China, it hardly needs noting, is not lacking in pursuit of effective energy options. There are the all-important imperatives of enhanced efficiency in the use of energy and development of renewable and cleaner energy to displace the fossil-based ones (especially coal) that now dominate. But as to the question of whether there are unilateral investment, trade, and other policy options that China can usefully take to limit, at the expense of other countries, its vulnerability to a world market characterized by greater resource scarcity and costs, the broad message from Moran, obvious in the passage just quoted, is one of considerable doubt. And the hyperbolic expressions cited in my opening paragraph simply don't comport with historical evidence.

Last but not least, in the matter of China's concern with energy-resource adequacy, environmental considerations may appear to be a tail-wagging-dog afterthought; indeed, those considerations fall largely outside the scope of Moran's exposition. But is it not reasonable to expect that investment-and-trade strategies will over time become more and more intermingled with environmental issues? Take, for example, the April 2010 agreement by China's Sincopec to purchase from ConocoPhillips a 9 percent (or nearly $5 billion) stake in Canada's major oil-sands producer, Syncrude.5 Can China avoid reckoning on the possibility of greenhouse gas emission restrictions in Canada that could alter the economic and strategic rationale driving such an investment decision?

After all, China finds itself under rising international pressure to improve its own environmental performance—never mind that at least some of its polluting industrial activity serves to manufacture and market products demanded—in all “innocence”—by green Western consumers. A recent 20-year, US$60 billion agreement to supply Chinese electric generating plants with Australian coal fits that mold, especially if it rests on a bet-hedging strategy by Australian coal interests against the prospect of emission curbs in Australia that may be enacted earlier and be more onerous than restrictions likely to be adopted any time soon in China.6

As noted, the absence an environmental dimension is no reflection on Moran's important contribution. But it does underscore the importance that analysis of investment and trade issues, which are his focus, will increasingly deserve to be integrally linked to their explicit and implicit environmental ramifications.

GLOBAL GOVERNANCE OF HAZARDOUS CHEMICALS: CHALLENGES OF MULTILEVEL MANAGEMENT

Henrik Selin, Cambridge, MA: MIT Press, 2010.

Nation-states are reluctant to recognize authority over their decisions or interferences with their sovereignty. Consequently, as countries seek to regulate and control hazardous chemicals and pollutants, there is no single governmental entity to which to appeal in order to achieve generic or more specific goals. This problem is especially pressing in the case of toxic chemicals, some of which are persistent, bioaccumulating, and biomagnifying (their toxicity increases as they move up the food chain). Released in one country, they can easily contaminate beluga whales in the St. Lawrence Seaway, Tasmanian devils, harbor seals of the northern latitudes, or the people that live there. What is the world to do? Henrik Selin's book introduces the reader to this untidy but critical topic.

Controlling toxic substances within a nation is difficult enough. For instance, the United States, with a largely reactive legal structure for toxicants, has very little toxicity data on the vast majority of industrial chemicals in commerce. And postmarket laws (that permit products into commerce without any testing for their toxicity) ensure that this will not only continue for the foreseeable future but be exacerbated. Still, at least coordinated efforts are easier than in the international area. Trying to obtain some measure of control and regulation of hazardous substances when there is no one government to coordinate action is orders of magnitude more difficult.

Selin indicates there are two generic international approaches to controlling risky activities. A “convention-cum-protocol” approach has been used to protect against ozone depletion or to prevent decreases in biodiversity. Under these approaches, nation-states adopt a “convention” that they agree to, which is then followed by more detailed policies “codified in protocols.” A second strategy is the “chemicals regime” that is used to try to control hazardous chemicals. This amounts to four main nonhierarchical international agreements (none is legally superior to the others). Although legally independent, Selin points out that they are “legally, politically, and practically dependent.” The latter approach is more complicated and messier.

This book provides an historical perspective on global chemicals and their use and management (Chapter 3). It discusses the Basel Convention on the disposal and transport of hazardous wastes internationally (Chapter 4) and the Rotterdam Convention on trade in hazardous chemicals (Chapter 5). Two other parts of the international quartet are the Convention of Long-Range Transboundary Air Pollution (CLRTAP) for persistent organic pollutants (POPs) (Chapter 6), limited to Northern Hemispheric countries, and the Stockholm Convention and global controls on POPs (Chapter 7). The book concludes with a discussion on some positive and negative facets of multilevel governance of hazardous chemicals (Chapter 8).

While describing the untidy relationships between the different chemical regimes, Selin also notes their substantial limitations. There have been improvements in controlling hazardous chemicals since the 1980s, but safety is far from achieved and steps to date address a tiny aspect of the problems. Selin argues that four steps would improve their effectiveness: Increase ratification and implementation of existing regulations under the different conventions, expand risk assessment and controls, raise awareness of the problems and improve management capacities in the different countries, and reduce the generation of hazardous wastes. He also correctly notes the retroactive international approach to toxic chemicals, which should be modified to be similar to those now followed in Europe. Achieving none of these goals is easy, and despite increasing awareness of the health and environmental costs of not addressing hazardous chemicals better, one cannot be terribly optimistic.

1. “Long-Term Vision Should Include Offshore Drilling,” Politico, July 21, 2010, p. 36.

2. “Deal for South American Oil Fields Extends China's Quest for Energy, New York Times, March 15, 2010, p. B10.

3. US DOE, Energy Policy Act 2005, Section 1837, National Security Review of International Energy Requirements, Feb. 2006, p. 28.

4. Moran, p. 46.

5. Greenwire, April 13, 2010.

6. ClimateWire, Feb. 16, 2010.

Joel Darmstadter is a Senior Fellow, Resources for the Future, darmstad@rff.org

Carl Cranor is Distinguished Professor of Philosophy, University of California - Riverside.

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