China and Global Energy Security: Inevitable Conflict? (2)

The embrace of “走出去”, or go global strategy by China’s energy policy makers has touched on the second Chinese myth about energy security: many Chinese government officials believe that guaranteeing energy security can be accomplished primarily through adjustments to regulations and administrative controls.

China is right to be concerned about international energy security. China is understandably concerned about global political risks that might impact energy supply, including US policies and how the US may use its economic and military power. Yet, in recent years China has not experienced a single international related supply interruption. There have been serious energy supply interruptions (e.g., Guangdong oil products; electric power everywhere) in China, but these have been the result of domestic policies, not international factors.
Chinese officials are also wise to be concerned about price volatility, inflation, and their effects on stability in this period of massive transition -- these problems defy simple solutions derived from neoclassical economics. The difficulty is that the stop-start nature of market reforms in energy may simply postpone, or even exacerbate, volatility and negative spillovers, rather than avoid them. The scale and “wisdom” of markets and consumers both globally and in China tend to produce unexpected and unwelcome results each time the Chinese government attempts to “control” the marketplace.

In principle, it is better to put in place wise market rules, and then allow markets to adjust. Examples: natural gas pricing and inefficient use of natural gas, electric power pricing and the recurring cycle of power capacity construction delays, coal prices and the need for both new coal investment and the need to reduce pollution, wholesale and retail oil product price policies and supply interruptions… these are all stories of dislocation and unexpected outcomes that arise from well-intended policy intervention… Gradual and steady market reform may help, rather than a stop-start interventionist approach.

The essence of energy security is ensuring access to resources in a timely fashion, at affordable prices. Cost must be an element in the energy security calculus. This is best ensured through diversification of both fuels and supply sources, and through allowing market prices to reflect true, total costs, then allowing those price signals to help guide supplier and consumer behavior.