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U.S.-China Energy Policy: Toward Closer International Partnerships

Daniel S. Sullivan, Assistant Secretary for Economic, Energy, and Business Affairs
Beijing, China
May 20, 2008

Introduction
Thank you for that introduction. Distinguished guests, Chinese government officials, General Jones, U.S. government officials: I’d like to start out by extending the heartfelt condolences of the United States Government and the American people to the people of China regarding the horrible loss of life and tragedy resulting from the earthquake in the Sichuan province area.

The American people have watched with deep, deep sadness as the stories and images have come to us over the past 2 weeks, revealing the magnitude of this disaster. We have also watched and been inspired by the courage and heroic actions of the Chinese people in these difficult times. At times like these we are reminded again that we are all part of the same human family and need to assist each other in such moments of tragedy.

The U.S. Government has already donated financial assistance to the International Red Cross Federation for the relief effort, and is working on other types of assistance as we speak. Dozens of American companies have committed millions of dollars toward the relief effort. And private American citizens are donating much more in terms of assistance and actions.

As President Bush said recently, “The thoughts and prayers of the American people are with the Chinese people, especially those directly affected, and the United States stands ready to help in any way possible.”

I also want to take a moment to congratulate NDRC’s Energy Research Institute, the U.S. Chamber of Commerce’s Institute for 21st Century Energy, and the East-West Institute on this important conference, which I believe will highlight not only the energy security challenges China and the United States face, but also the opportunities for cooperation – both new and ongoing – that the U.S. and China must take advantage of in order to realize our common energy security and climate security goals.

I also want to take a moment to single out General James Jones, the CEO of the Institute for 21st Century Energy. As a Marine Corps officer myself –still in the reserves – I have watched with pride the General’s unrivaled example of service to his country. General Jones has served over 40 years as a Marine Corps officer, with combat tours in Vietnam; as Commandant of the Marine Corps; with the Supreme Allied Commander Europe; in charge of NATO (a first for a Marine Corps officer); as Special Envoy to the Middle East; and now, as CEO of the Institute for 21st Century Energy. Thank you for your service, sir. Semper fi.

A Time of Challenges
I address you today at a time of historic energy challenges for the United States and China. The price of global oil – the lifeblood of our transportation systems and of a significant portion of our economies – is more expensive now than it has ever been, having doubled in price in a little over a year. These unprecedented price levels put significant pressure on our economies, contributing to inflation, hampering economic growth, and causing economic hardship for our citizens.

In the context of today’s challenging global energy environment, there are some who view the rapid growth in China’s energy demand as being on a “collision course” with the energy needs of the United States. From this perspective, China’s energy needs are viewed as a problem that must be confronted. However, our view is different.

Growth in energy demand is a natural consequence of economic growth, and China’s economic growth over the past 30 years has brought prosperity to hundreds of millions of its citizens and new opportunities to countries around the world. Energy security is a common challenge, and with challenges come opportunities. We look forward to cooperating with China more closely on a bilateral and multilateral basis to address the challenges and take advantage of those opportunities together.

This morning I’d like to first highlight for you the similarity of the situation in which the U.S. and China find ourselves in 2008, and, given today’s oil prices and other energy security challenges, to emphasize the urgency of the need for that cooperation; not only with each other, but with the world’s other major energy importers.

Similar Energy Profile
Though very different countries in many ways, the United States and the People’s Republic of China nevertheless find ourselves today at a very similar place from an energy perspective.

  • First – and many people forget this – we are both among the world’s top oil producers. Together we produce almost as much oil as Saudi Arabia. In terms of refinery capacity, we are number 1 and number 3 in the world.
  • Second, we are the world’s largest electricity generators. Together, we generate over one third of global electrical output.
  • Third, we both heavily depend on coal to generate that power. China is the world’s largest coal producer, and the U.S. is number 2
  • Fourth, in part because of that coal use, we are the world’s two largest greenhouse gas emitters.
  • Fifth, our demand for oil is such that we are also two of the world’s largest oil importers: the U.S. is the world’s largest, and China is close to overtaking Japan as the second largest.
  • Sixth, the U.S. and China are the largest energy consumers in the world. Just 3 years ago, U.S. energy demand was more than one third larger than China’s. But within a few years, China is expected to overtake the United State to become the world’s largest primary energy consumer.
  • And finally, as the world’s largest energy consumers we face challenges together that go beyond today’s oil prices.
Those challenges are familiar to everyone here: tight global supply and demand balances; geopolitical challenges in major oil production centers; strong growth in global energy demand; and our shared concern over the impacts to the global environment which our energy use creates. And more than most other countries, we depend on world oil markets to function properly in response to economic rather than political forces.

Areas of Cooperation
I applaud the wisdom of Mr. Zhang Guobao, NDRC Vice Chairman and Director of the National Energy Bureau, who, in his speech delivered at the “High-Level China Development Forum” earlier this year, called for a “vigorous strengthening” of China’s international energy cooperation as one of several key reforms to China’s energy policy. I believe Vice Chairman Zhang is exactly right: energy security has to be a collective goal, rather than an individual one.

It would not be overstating our influence as the world’s leading energy consumers to say that global energy security depends significantly upon the degree to which the U.S. and China cooperate on these matters. To be sure, China and the United States are already engaged in a number of different bilateral cooperation mechanisms where energy is a focus. These dialogues are a high priority for the U.S. and I’d like to briefly touch on them here.

Energy features prominently in the ongoing, semi-annual Strategic Economic Dialogue (SED) between our two countries. I had the honor and privilege of traveling to China with Secretary Paulson on his first trip here as Treasury Secretary when he was laying the groundwork for the launch of the SED, and also of representing Secretary of State Condoleezza Rice at the first SED in December of 2006 in Beijing. From the outset, energy and environment were key areas of cooperation. So when the SED convenes again next month in Annapolis, Maryland, we will again discuss ways our two countries can contribute to the proper functioning of the global energy markets upon which we increasingly depend.

As Director General Han mentioned, as part of our strategic economic dialogue, the U.S. and China have agreed to design and implement a ten year plan of energy and environment cooperation to enhance our work together on these vital issues. I agree fully with General Jones about the importance of the private sector’s involvement in these initiatives.

We also have the annual U.S. – China Energy Policy Dialogue, initiated in 2004, which includes discussion of energy efficiency, carbon capture and sequestration, oil and gas markets, and the effective management of strategic petroleum reserves. The State Department also has a very productive dialogue with the NDRC which regularly discusses energy in the context of overall economic development. And in fact, we just had excellent meetings on these issues 2 months ago in Washington.

The United States and China also cooperate in a number of multilateral fora that address energy issues. For example, the Asia-Pacific Partnership on Clean Development and Climate includes the U.S., China, Korea, Australia, Canada, India, and Japan. In this partnership we work together and with private sector partners to implement projects that bring technology and best practices to bear on challenges of enhancing energy security and reducing pollution and greenhouse gas emissions.

This year, Japan is hosting the second five country energy ministerial, which in addition to the U.S. and China, includes Japan, India, and Korea. This is a Chinese initiative which we have strongly supported. Chinese leadership was critical to the success of the first five country energy ministerial, which took place after the SED, and focused on ways these countries could cooperate on common energy security goals.

Japan is also hosting the G8+3 Energy Ministerial, which will feature China, India, and Korea in addition to the G8 countries. This ministerial will highlight the areas of agreement among all 11 nations on important energy security and clean energy goals and initiatives. These include freer and more transparent energy markets to promote energy sector investment, energy diversification, and energy efficiency. These are principles the G8 leaders agreed to at the St. Petersburg summit in 2006, and we believe it is in the interest of all major energy consumers to endorse them.

Another important multilateral initiative occurred a year ago this month when President Bush announced the major economies process, which gathers the countries that together represent over 80 percent of the world’s economy and 80 percent of the world’s GHG emissions, including China and India. Through this process, we are seeking consensus on a series of recommendations for a Post-2012 Climate Framework to be agreed in the broader UN negotiations. Specifically, we are calling on leaders of the 16 major economies to reach agreement on a long-term global GHG reduction goal, as well as defined mid-term goals based on individual national plans. This would be a historic achievement which we hope will be agreed to at a meeting of the MEM leaders on the margins of this summer’s G8 in Japan.

In his speech at the High Level China Development Forum, Vice Chairman Zhang spoke about the need for energy diversification: more nuclear power, more renewable energy like wind and hydro, more clean energy alternatives, and clean coal. We believe these are important initiatives for the United States as well, and we fully support China as it seeks to implement these priorities and goals.

Indeed, one way to expedite the achievement of these goals is through Chinese support for a U.S.- EU initiative as part of the Doha negotiations, which calls for all WTO members to agree by the end of this year to eliminate tariffs on key “climate friendly” technologies identified by the World Bank. Global trade in the goods covered by this proposal was $613 billion in 2006, with an average tariff of around 10 percent, with some WTO members charging duties as high as 70 percent. A World Bank study suggests removing tariffs on such goods could increase trade in them by an additional 14 percent annually.

Thus, by removing such tariffs, we believe this will not only mitigate GHG emissions through diffusion of clean energy goods and services, but will also increase global prosperity and foster innovation.

What I have described for you is a brief snapshot of just a few of our ongoing energy cooperation initiatives, both bilaterally and multilaterally. This, of course, is in addition to the ad-hoc, working level cooperation that occurs every day. It’s vital that this cooperation continues and expands if we are going to be able to maintain energy security, address national and global environmental challenges, and continue to grow our economies.

The IEA
But I would like to highlight for you this morning one important area for international energy cooperation that China has the opportunity to more fully exploit and take advantage of. Vice Chairman Zhang also stated in his speech that China would work to establish an effective mechanism for international energy cooperation. But these mechanisms already exist; in fact there are two main ones.

Over 40 years ago, many of the world’s major oil exporters joined together to form the organization of petroleum exporting countries, or OPEC. OPEC endeavors to represent their oil-exporting members with one voice, and consequently wields significant influence. For many years the world’s major oil importers did not have a similar counterpart with which to speak and act collectively.

That changed when the International Energy Agency (IEA) was established in 1974 in the wake of the Arab oil embargo.

It was U.S. Secretary of State Henry Kissinger who brought major oil consuming countries together at the State Department for what became a contentious but successful “Washington Energy Conference.” In his book, Years of Upheaval, Kissinger describes how the United States led consumer countries to accept a necessary paradigm shift. Consumer solidarity and collective emergency response would replace the pursuit of bilateral deals between individual oil consumers and their suppliers, and the IEA was formed, as Kissinger writes, because “We thought it essential that those nations that consume and import 85 percent of the world’s energy meet first, because they have a common problem . . . that is manageable by cooperative effort only; and that will surely lead to the ruin of everybody if it is attempted to be settled on a unilateral basis.”

The IEA was thus created to coordinate management of the Strategic Petroleum Reserves (SPR) by major oil importing countries, and has twice orchestrated SPR releases by its now 27 members in response to sudden disruptions in oil supplies: the first time was during the first Gulf War in 1990; the second time was following hurricanes Rita and Katrina in the U.S. in 2005.

The SPR release in 2005 was orchestrated within 24 hours after the U.S. advised the IEA of the full extent of the hurricane damage to U.S. oil production and refining infrastructure. Some 60 million additional barrels were made available to the market by IEA members, helping to stabilize prices until some production could be restored. This helped calm oil markets, which benefited the U.S. as well as other major oil consumers like China.

But even without being deployed, the IEA network of strategic petroleum reserves is a powerful insurance policy that helps to positively moderate oil markets by its very existence. Since its inception, the IEA has grown to take on responsibilities beyond its founding function of collective emergency oil supply response through strategic petroleum reserves. The IEA has also become the premier multilateral organization for energy policy analysis, as in its annual World Energy Outlook, as well as the collective voice of the world’s major oil importers and consumers on oil market issues.

The IEA has expanded its focus beyond oil markets. At the request of its members, it has produced much more work on markets for natural gas, coal and renewables, including the policy barriers to sufficient investment in various energy sectors. It has become a world leader in analyzing the policy changes that can help drive deployment of clean energy technologies, and has developed an extensive series of recommendations for its members on increasing energy efficiency.

In addition, the IEA has for over a decade been providing rigorous, objective analyses on the energy dimensions of climate change and the energy implications of the United Nations Framework Convention on Climate Change (UNFCCC) and its Kyoto Protocol.

And perhaps most importantly, the IEA offers a venue for regular exchanges at both the technical and policy level between major energy importers that might otherwise feel more anxiety over their potential competition for critical energy supplies. Interaction at the IEA helps reinforce the understanding that member countries face common problems and can work together to solve them.

While it has had a relationship with the IEA for years, China is not yet a member of the organization. Consequently, it does not have a voice at the table where the world’s major energy importers regularly discuss new developments in energy markets and strategic stock coordination, as well as energy policy and energy technology matters.

I believe it is important for China and other key economies such as India to prepare to eventually join the IEA as full members. As the official representative of the United States on the IEA governing board, I also believe this is important not only for China and India, but for the IEA itself, as well as for global energy markets.

When the international energy agency was created against the backdrop of the 1973-1974 oil crisis, its member countries were consuming three times as much oil as the rest of the world. At that time, China was a net oil exporter, and total energy demand in China was less than a third of what it is today. But by 2020 – not many years from now – current IEA members are expected to be consuming less oil than the rest of the world. This is a significant shift in the global energy demand landscape, and much of it is the result of the recent rise of Asian economies. This in turn means that China and India have increasingly more at stake in the reliable functioning of energy markets, and increasingly more exposure to the impact of any sudden disruption of oil supplies.

The IEA’s management of a collective strategic petroleum reserve response system offers more security than any single nation’s reserves can do alone. That is why the United States helped to found the IEA and has remained a very active participant all these years. We have the 2005 experience to show how much the IEA system can help us and other consumers around the globe.

From the perspective of an IEA member like the United States, China’s participation in the IEA’s collective emergency response system would make the system stronger, which will enhance U.S., Chinese, and global energy security.

Increasingly, it appears that China is developing similar views. For example, the joint U.S.-China communiqué from SED III made the following statement: “The U.S. and China agreed to strengthen cooperation on construction and management of strategic oil stocks, including cooperation with the International Energy Agency. Coordinated use of strategic petroleum reserves increases energy security for net oil importing countries during times of significant supply disruption.”

This is also a view increasingly shared by many of the world’s leading energy experts. One of my favorites, and most well-respected, is Dr. Daniel Yergin, author of the Pulitzer-winning book The Prize and founder and head of Cambridge Energy Research Associates. In testimony last year before the U.S. House of Representatives’ Foreign Affairs Committee, Dr. Yergin underscored that bringing China and India into the IEA system is one of the fundamentals for achieving global energy security - not just U.S. energy security, but Chinese and world energy security. Let me read to you a small portion of what he said:

“The primary concern for both China and India is to ensure that they have sufficient energy shortfalls that could trigger social and political turbulence. And so India and China should be brought into coordination with the existing IEA energy security system to assure them that their interests will be protected in the event of turbulence, and to ensure that the system works more effectively. There is much talk of a clash between the United States and China over oil. But there is nothing inevitable about it. Commercial competition need not turn into national rivalry. A fundamental reason for establishing the international energy agency in the 1970s was to modulate that mad scramble to preempt barrels. This contest threatened not only to rip apart the western alliance, but also sent oil prices – after the Iranian revolution – to their highest levels ever. The innovations of the 1970s transformed the scramble into more durable cooperation. That same kind of approach is needed now with the emergence of these two huge (and anxious) consumers, China and India, in the world market.”

I agree with Dr.Yergin. The IEA created a system of cooperation rather than competition between the world’s major energy consuming nations. The world has changed since the IEA was created, and what we need today is a renewed IEA that includes the new major energy consuming nations like China. The U.S., therefore, welcomes China’s continued engagement with the IEA and a deepening of that engagement. Thus, for example, China has been invited to participate in next month’s IEA emergency response exercise. China’s involvement in this exercise would benefit China and the IEA.

China should consider a declaration that it plans to pursue membership in the IEA. This could help ameliorate the anxiety expressed in some quarters over China’s intentions as it pursues greater energy security. We look forward to the process of ever greater energy policy interaction with China both bilaterally and through the IEA, for the mutual benefit of our two countries and global energy markets.

Finally, I’d like to note that our interest in engaging China more deeply in the IEA is part of a broader U.S. policy to work with China and support its deepened engagement with a variety of key global economic institutions, whether the IEA, WTO, World Bank, IMF, or Inter-American Development Bank, just to name a few. As the U.S. Deputy Secretary of State, John Negroponte, said just last week when testifying before the U.S. Senate Foreign Relations Committee, the United States Government believes that “as China becomes more integrated in international and political institutions, its ability to contribute to global stability is growing.”

This was also a theme of our former Deputy Secretary of State, and now World Bank President, Bob Zoellick, when he discussed China’s role as a “responsible stakeholder” in the international system – and noted that as a responsible stakeholder, China would be more than just a member – “it would work with the U.S. to sustain the international system that has enabled its success.”

As Secretary Rice has stated, the U.S. welcomes a confident, peaceful, and prosperous China. We believe that continuing to strengthen our energy ties and cooperation bilaterally, multilaterally, and through the IEA can help lead to these important goals.

Thank you.



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