China and its flagship project, the New Silk Road, have moved the world and realigned global energy trade.
With the integration of Eurasian power and gas grids, the impact of China’s globe-spanning initiative will be felt in world energy markets and in Europe.
New security risks are emerging with the integration of Eurasian power grids, east and west. Some risks have significant implications for Europe’s energy trade with the rest of the world.
1. China connects with the world. Now the world is connecting with China.
Chinese energy trade is becoming increasingly global, putting China at the center of global energy trade movements.We see this in the rapid growth of new trading centers like Shenzhen in China, which previously had little significance. Such cities have flourished as a result of China’s continued progress in trade and industry. This development required all the energy resources they could find. China has a limited number of energy sources relative to the size of its population.
Increasingly, these resources had to be found outside China. For a time, oil and gas deposits, especially crude oil and coal, could be found in sufficient quantities in China. Due to tremendous growth, more of these resources had to be imported. This trend of importing more and more energy resources continues to this day. This trend is fueled by the proliferation of trade networks spreading from and into China’s east coast. Southeast China is particularly well suited for trade and benefits massively from international energy trade in oil and gas, coal and metals. The gigantic quantities of energy raw materials and metals such as iron ore are needed to overcome technical challenges and perform feats of engineering.
Southeast China, the east coast of China, has benefited significantly. These shiny new trading hubs seem to have sprung out of the ground, they are a symbol of China’s growing economic cloud in the Asia-Pacific region and on the Asian continent. We have fostered this idea in an article detailing the electrification of the whole Asian continent and the concomitant rise of East Asia as center of the energy world. But the drive for industrialization has shifted from east to west.
The commitment stems from China’s desire to industrialize the core regions, which have more difficulty than the eastern provinces in accessing the energy resources. Their desire to industrialize is as strong as that of the eastern provinces. How can they gain access to energy resources? Even if the provinces in China’s interior are rich in oil and coal, this will not be enough to meet the growing energy needs of the entire country. These domestic resources are rapidly diminishing due to peak oil. Peak oil certainly does not make energy policy decisions any easier. This may explain the propensity with which China is expanding trade along its periphery.
Countries along this trade route adapt to global trade according to their own needs and desires. We witness the expansion of the Silk Road into Turkey and the development of rail links via Khorgos. There is growing interest in the Silk Road initiative. Central Asia now connects the European Union with China.
We have been thinking a lot about how the China’s New Silk Road project will affect each of the countries participating in it. In general, container shipping will move by rail through the Eurasian supercontinent and through major rail terminals. Major investments are already being made in new infrastructure in Central Asia. However, it should not be forgotten that China is investing heavily in the construction of new port facilities.
By now it is well-known that the Chinese shipping company COSCO has a lease contract with the Greek port of Piraeus in Greece and holds shares in the project management company managing port operations. But that is not all. The new Silk Road is not just about goods deliveries in the physical sense. The new Silk Road also has a lot to do with intangible goods, such as the cultivation of solid, long-term business relationships.
One of the main reasons for the New Silk Road project is to get a grip on global energy trade. In our opinion, China is using its economic cloud to integrate Eurasia, which will help China reduce energy costs in developing the central and western parts of China.
2. China is playing global energy markets like a skilled violinist, leveraging its economic potential and uplifting the economies of neigboring countries
In our opinion, China will be able to direct a large part of the global energy trade to the Chinese market. This will most likely further increase China’s economic footprint in the region. As a result, other market participants in the global energy business will have to reorient themselves – to varying degrees – and instead choose to do more business with China in order to maintain their market share.
At present a very substantial amount of raw materials are being transported through the Strait of Malacca, and in our estimation more goods will be transported across the Strait of Malacca in bulk. But there will be other alternatives in the future. So it is not just rail terminals in Central Asia. Among other things, China is expanding the new port of Gwadar. This would mean that Pakistan will become a major supplier of oil and gas, passing these commodities on to China from the Middle East to the Chinese province of Xinjiang.
This will enable China to develop alternative routes to energy bottlenecks and be able to avoid bottlenecks in the global energy supply chain such as the Strait of Malacca which is unavoidable if one is to pass from the Indian Ocean into the Pacific with valuable goods. Energy supplies through Pakistan will flow into the western provinces of China and will be much cheaper and, above all, safer to transport. This is partly due to piracy, the difficult navigation routes in the Indonesian archipelago and the geopolitical distortions in the region.
This will allow East Asian oil importers to bypass India and the strategically important Strait of Malacca for energy imports. In addition, Western Chinese provinces will gain in stature in international trade and as network hubs for handling goods, as from these hubs will spring forth the trade networks of the 21st century, to link Europe via the rail network will gain in importance. Container loads are handled in Central Asia and the export and import of Chinese and European products will increase.
China will progressively open up new trading routes in order to grow trade, and to import ever more energy commodities and channel them into Chinese territory. As a result, preeminent distribution hubs for global energy flows, like Singapore, might loose out on business opportunities in the long-term. I haven’t even considered the effects of the Northern Sea Route around Russia which could potentially undermine business at the Strait of Malacca.
Depending on exact figures for Chinese economic growth, countries located in Southeast Asia such as Malaysia, Singapore and Indonesia, and to some extend Australia, could be adversely effected. This could come about as a consequence of a reduction of sea-based goods exchange, and an increase of land-based trade. If out of interest, you might also be interested in Singapore’s energy policy in the Southeast Pacific and Indian Ocean.
Europe will be at the western edge of this giant economic superstructure. The key for European countries is to leverage their unique position becoming a center of commerce and industry at the edge of the North Atlantic trading with the Americas and Africa. For those of you who are interested, I have written an article on Africa’s energy policy in the years to come, as well as an article on the America’s energy policy.
At the same time, Europe is uniquely positioned to benefit from the New Silk Road and the growth of the New Silk Road. The New Silk Road will also yield opportunities for Europe’s trade with Russia and Central Asia. If European businesses enter into some sort of agreement with the countries and businesses along the New Silk Road, they could reap economic benefits from it. This also means European energy policy 2020 – 2030 will have to embrace the west and the east.