Monday, September 17, 2007

Common Interests

An op-ed in today's Washington Post got me thinking about the ways that the US and China would benefit from greater cooperation on energy. As energy security increasingly becomes a global, rather than merely national concern, there are big incentives for the world's two largest oil consumers to work together. Mr. Mallaby is right that both countries share a common interest in ensuring stable, affordable oil supplies for our economies, though he neglects to mention the opportunities created by the very different stages of development reflected in each. Applying US technology to China's energy challenges could help address our own.

On the supply side, while China produces significant quantities of oil--about as much as Iran or Mexico--its oil industry is not as mature as America's. China's large territory has not been explored to nearly the same degree as ours, nor has the latest technology for finding oil and gas been applied to the same extent. That means that there is still some upside in China's own production, even as the country seeks to secure supplies abroad. And while the rapid growth of its oil imports, relative to production, makes the idea of Chinese energy independence as elusive as it has been here, every extra barrel they produce is one for which they will not have to compete in the global market, driving prices up.

More importantly, the relative size of China's current installed base of energy-using devices--cars, appliances, etc.--is still modest relative to its ultimate potential. Efficiency technologies introduced now would have dramatic effects on future consumption, because the key factor is still growth, rather than turnover. 2007 car sales, estimated at 9 million units, will contribute between a quarter and a fifth of all the cars that will be on their roads next year. US car sales haven't had that kind of leverage on the characteristics of the total fleet since at least the 1950s, with current sales running at less than 7% of existing vehicles. If every new car in the US and China were a hybrid starting tomorrow, within five years China's fleet would be mostly hybrids, while ours would still have a large majority of less efficient vehicles.

The debate over US fuel economy regulations remains brisk, because auto makers face large investments to improve a vehicle attribute that has been a low priority for consumers until quite recently. However, if those investments could be spread across both the highly-competitive though slow-growing US car market, and the rapidly-growing Chinese market, the cost/benefit balance would shift. GM's plug-in hybrid (PHEV) technology, eagerly anticipated here, might be just the thing for China's big cities, particularly if, as some claim, the architecture GM has chosen reduces vehicle cost below that of conventional hybrids, and perhaps eventually below traditional cars. Buick is already the top brand in China, and PHEVs could cement that lead.

In that context, negotiating with China to align our respective CAFE standards might be a good way to reduce global oil demand, create opportunities for US companies, and attack climate change, all at the same time. Trade deals with China aren't exactly the flavor of the month, right now, so it's not obvious that expanding the issue this way would improve the political prospects of tougher CAFE standards in the Congress. But reframing it to address a broader definition of energy security, recognizing the common interests of consuming countries when OPEC's hold on oil markets seems unassailable, might look like very savvy leadership.

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