Low Oil Prices May Drive U.S.-China Energy Cooperation

by Dennis C. Blair
September 23, 2015

On the occasion of President Xi’s visit to the United States, NBR is collecting and sharing the thoughts of some leading Americans on issues critical to success in the business sector. In this “Americans Speak” contribution, Admiral Dennis Blair, a former U.S. Director of National Intelligence and a member of NBR’s board of directors, points out the unique opportunity that low oil prices present for the Asia-Pacific to address its broader energy security ambitions and urges the United States and China to work together to seize this opportunity.

Low oil prices are presenting the Asia-Pacific with a $100 billion opportunity. Lower oil prices are expected to contribute that tidy sum to growing the region’s GDP in 2015.

Yet the period of lower prices will not last forever. Rising prosperity and sustained economic growth in Asia will continue to drive global demand for energy higher—not just for oil but for gas, coal, and every other fuel type. The Asian Development Bank (ADB) now estimates that energy demand in developing Asia will double in the next fifteen years. We should anticipate that in the long run, energy prices, including petroleum, will rise again.

We have a limited window of opportunity. The costs—both financial and political—of strengthening our energy markets have perhaps never been lower, and may never be so low again. Meanwhile, the long-term costs of inaction are dire for both our economic and our environmental security. According to the ADB, if we take a business-as-usual approach, market distortions and short-sighted policies will continue to waste both government funding and precious energy supplies. CO2 emissions in the Asia-Pacific will triple by 2050, and the costs of responding to climate change effects will shave tens of billions of dollars off the Asia-Pacific’s GDP every year.

Rather than complacency and inaction, we need energetic leadership and smart policies. Global policymakers can capitalize on this unique moment to advance a range of forward-looking energy policies from subsidy reform to new efficiency standards—while minimizing the net costs to governments and consumers.

In May 2015, I joined more than 200 policymakers, energy industry leaders, and environmental experts in Beijing to co-chair a discussion at the 2015 Pacific Energy Summit on how to strengthen markets to address energy and environmental concerns. During this week’s U.S.-China summit in Washington, these two major powers who are the world’s largest energy consumers can seize the opportunity that low oil prices provide.

Already, we have seen a U.S.-China partnership in energy arenas, including technical cooperation on mechanical fracturing, renewable energy, the development and deployment of clean coal technology, and renewed commitments to limiting greenhouse gas emissions and the use of coal. There is more to be done unilaterally, bilaterally, and on a regional basis in East Asia.

We need to provide the right incentives to consumers and industry to make sure that current low oil prices do not lead to rises in oil consumption or reduce incentives for improving energy efficiency. We will also need to diversify the power sources in the transportation sector—electrifying vehicles in our fleets and making sure that every drop of oil is used wisely.

Both countries can take actions to ensure our long-term energy security. This includes building up strategic petroleum reserves in Asia to buffer against future supply shocks and planning for the use of those reserves in regional rather than simply national terms. The United States can make the global oil market more efficient by moving forward with lifting its prohibition on crude oil exports, making the world energy market more market-driven without sacrificing energy security. Meanwhile, numerous countries across the Asia-Pacific region will need to tackle high energy subsidies that distort market signals—and in doing so free up state resources to advance policy goals of updating infrastructure and expanding universal access. Finally, we must sustain big-picture structural reforms, such as those that China is currently undertaking to reshape its energy mix, support a more sustainable energy future, and build energy security through supply diversity.

Ultimately, achieving these goals will take time, resources, and commitment. Yet as our experiences working together and the Obama-Xi agreements on climate change have underscored, if the United States and China act together, we can move decisively.