Meghan L. O’Sullivan, the Jeane Kirkpatrick professor of the practice of international affairs at Harvard Kennedy School and adjunct senior fellow at CFR, discusses how new energy markets are affecting U.S. foreign policy.
FASKIANOS: Good afternoon from New York and welcome to the CFR Academic Conference Call Series. I’m Irina Faskianos, vice president for the National Program and Outreach here at CFR.
We’re delighted to have Meghan O’Sullivan with us to talk about new energy markets are affecting—how they’re affecting U.S. foreign policy. Dr. O’Sullivan is an adjunct senior fellow at CFR. She is also the Jeane Kirkpatrick professor of the practice of international affairs and director of the Geopolitics of Energy Project at Harvard’s Kennedy School.
Her expertise includes the geopolitics of energy, decision-making, and foreign policy, nation-state building, counterinsurgency, and the Middle East. Between 2004 and 2007, Dr. O’Sullivan was special assistant to President George W. Bush and deputy national security adviser for Iraq and Afghanistan during the last two years of her tenure. Prior to that, she served as senior director for strategic planning and Southwest Asia at the National Security Council, political adviser to the Coalition Provisional Authority administrator and deputy director for governance in Baghdad, and chief adviser to the presidential envoy to the North Ireland peace process. Her most recent book, Windfall: How the New Energy Abundance Upends Global Politics and Strengthens American Power, was published in September.
So, Meghan, thanks very much for being with us today. I thought it would be great if you could begin by telling us why you wrote this book and then transition to, you know, talk about the energy markets and how they affect foreign policy decision-making.
O’SULLIVAN: Great. Thank you very much, Irina.
And it’s a pleasure to be speaking with this group. I teach a course at Harvard on energy and geopolitics and I always find that really fun, so I’m looking forward to this hour as well.
You asked, you know, why I wrote this book called Windfall, and the reason is that over the last 10 years I have increasingly become convinced that it’s impossible to understand what’s going on in the world today without understanding energy markets. But at the same time, I realize that my life, I kind of have a dual personality in the sense that I go to a lot of foreign policy gatherings and a lot of energy gatherings and there’s a fairly small number of people who populate both. And so I still feel that, although more and more people are appreciating this point that you have to understand energy to understand foreign policy, there’s still a long way to go. So my book is intended to convince people of that—of that reality.
And so I’ll just say a few words about the book and the general thesis, and then I look forward mostly to our conversation.
So the idea that you need to understand energy markets to understand foreign policy, I would say, has always been true, but it is especially true today. And as many of the people on this call will be aware, there’s been a big revolution in energy over the last 10 years or so. This has been very, very noticeable in oil and gas, it’s also happening in renewables.
I’ve tended to focus more on oil and gas—and my comment initially will be focused on that—for a couple of reasons because those energy sources, at least for now, tend to be the ones that influence geopolitics more for two main reasons. One is, as many people are not aware, but 81 percent of the world’s energy demand today is actually still met by fossil fuel, so that’s oil, gas, and coal, so these fossil fuels are still meeting the overwhelming majority of the world’s energy resources. And secondly, because renewable energy is often produced and consumed in the same country, that trade in international energy is almost exclusively oil, gas, and coal, so, again, fossil fuels kind of dominate that. So that’s the reason for the focus on it when we’re talking about geopolitics.
But as I will conclude with, you know, that is due to change and I’m happy to talk about that as well.
So just a couple of words on what has actually happened, for those of you that are new to energy, is that in the last 10 years there have been some technological innovations which have effectively made huge quantities of oil and gas commercial. So it’s essentially we’ve always known that America and other parts of the world have big resources of what we call tight oil and shale gas, but we didn’t know how we could extract them at a price that made sense. And these technological innovations made that possible.
So that has led America to go from being a huge importer of oil and a potentially big importer of natural gas to being the largest producer of the two resources combined in the world and has actually gotten America to a place where it is already an exporter of oil and an exporter of gas. And so this has changed America’s economic situation pretty considerably and it has also obviously made a big difference in our energy balance.
But the main argument of my book is actually it’s been good for economics, good for energy trade, but it’s really been great for American geopolitics. And so the idea is that this boost in energy production, which has its epicenter in the United States—but, you know, this resource is not limited to the United States, so we can talk about that—but that this has shaped the world, shaped the kind of international environment in ways that it’s beneficial to the United States. You know, there are some ups and downs, but on the whole I would say it’s good from a U.S. perspective.
So let me just give a couple of examples before we open it up to a conversation. And again, I want to give you three examples that make my point that unless you understand energy markets your chances of understanding these new geopolitics of energy are going to be greatly diminished.
So the first is the Middle East. I think if you ask most Americans, well, what do you expect to change politically because we’re now a big producer of oil and gas, they would say, well, hopefully we won’t have to devote so many resources to the Middle East, we won’t have to get engaged in costly and controversial endeavors in that part of the world. And that would be welcome, I think, by most Americans. They’ll say, look, if the U.S. doesn’t need to import Saudi oil or Iranian or Iraqi or really any oil it chooses not to, that’s got to mean that we can be liberated from those complicated politics.
Now, that’s a good argument until you look at the market. If you look at the market, you understand that the market is a global market, meaning that everyone is tied to the same market—America, Iran, Iraq, Saudi Arabia—and price is determined where that global supply meets global demand. So even if America’s not consuming any Middle Eastern oil, if something goes badly wrong in that part of the world and disrupts oil supply, that’s going to influence the price that Americans pay at the pump. And so, in short, while some things have changed in our relationship in the Middle East, a lot of it is not as dramatic as people have thought it would be because we’re still connected through this global market.
My second example is about Russia. You hear a lot of talk these days about, well, the U.S. is now an exporter of natural gas, why doesn’t it just direct this gas to Europe and allow Europe to be free from its dependency on Russian gas, which has brought with it a lot of political complications. Now, that might happen in the future, but right now, if you look at the map and you look at the numbers, you’ll say, hey, Russia is still exporting a huge amount of natural gas to Europe. And you might say, well, all of this is American bluster, that actually American natural gas exports are, at least at this point, very minor to Europe. And you would be correct, but, again, you have to look at the market.
And what you would find is just the fact that America is no longer consuming natural gas imports and it is starting to export. It has had a big effect on natural gas markets. And I could go into in detail what it has meant, but it basically has meant for Russia that Russia can still export a large amount of gas to Europe, but it does so under a very different set of market conditions. And it means that the Russians have a lot less leverage. They have to adhere to different regulations, they have to bargain over price, and so it’s a lot less possible for Russia to use its energy export as a political weapon.
And then my last example has to do with the environment. I think it’s a legitimate concern of people that this greater production of oil and gas could be harmful to environmental goals. And certainly there are cases in which that would be true. A lower price usually means higher consumption and we’ve definitely seen that. The world is consuming more oil and gas this year than it was a few years ago when the price was higher.
But there are a lot of other things we have to look at the way the market works and that would at least introduce some other possibilities into the conversation. One is looking at the substitution effect and looking at how the lower price of natural gas has really meant that America at least has switched from such a reliance on coal to a much heavier reliance on natural gas. This is simply because of market dynamics, simply because it’s cheaper to burn natural gas than to burn coal in the United States. This has been great for emissions and the environment. And the real hope and ambition is that maybe this could happen in other parts of the world like China and India.
Another thing to think about is—and we can talk about this—what would the world look like today if oil was still $149 a barrel and natural gas was correspondingly expensive? You know, we would be in a situation, as we were in 2007, where the American Congress might once again be talking about something it was talking about that year, which is, how to support a technology called coal to liquids. Now, that would have been good from a commercial perspective, good from an energy balance perspective in 2007, but it would have been horrible from an environmental perspective. So again, when we look at the markets, we have to look at all kinds of ways in which this energy boom has affected the environment.
So I’ll just close by saying about the future—we can talk about this in our Q&A—but my theory, I think, will prove true in the future as well, which is that if there’s a big change in the world of energy, we can expect that there will be a big change in global politics. And so we’re experiencing this huge boom in oil and gas today and we are looking at a future where a slower revolution is going on, but a revolution, I think, that will have even more dramatic consequences and that, of course, is the move to a more sustainable energy future. And in a world that’s more dependent on renewables, that will have a major impact on the reordering of politics globally as well. And I’m happy to talk about some hypotheses as to what that might look like if people are interested.
So with that, Irina, if I could just close. I look forward to the conversation.
FASKIANOS: Wonderful, thanks so much, Meghan.
Let’s open it up to the group for questions.
OPERATOR: Thank you. At this time we will open the floor for questions.
(Gives queuing instructions.)
Our first question comes from Prairie View A&M University.
Q: Hi, good morning. Thank you for having us.
I actually have two questions regarding the opening statement about 81 percent of world energy is still met by fossil fuels. Could you talk about the trend in that? What was the percentage 10 years ago, 20 years ago? What do you expect the percentage to be 10 years from now?
The second question relates to your second statement regarding global supply and demand of renewables is not as affected—well, renewables is not as affected by global politics because much of that is domestically produced and consumed. But can you talk about the production of materials that are used for things like wind turbines. Where are those produced? And are those sold on the global market and do those have an impact on the global energy market? Because I’ve heard that the wind turbines are produced mostly in China, which, does that make us vulnerable to global issues if we want to move to more wind production?
O’SULLIVAN: Great. Those are two great questions. The first one, it’s going to be a little bit depressing because—and actually, I was just in Houston and Fatih Birol, who is the head of the International Energy Agency, was talking about this. Thirty years ago, the percentage was 80 percent, so exactly the same.
Now, there have been times where people thought that at this point, actually, fossil fuels would make up even more of global energy demand, but, you know, 30 years later it’s still hovering around 80 percent. Of course, there’s much greater energy demand, so there are other energy resources that are in there in an absolute sense providing energy, be it renewables or other alternative forms of energy, but still the world has a very long way to go to whittle down that 80 percent. I think it’s going to get there because the fastest-growing energy resources are actually renewable energy resources, but they’re starting from such a low base that it will be some time before they, you know, get those larger percentages in terms of overall primary energy demand.
Your second question is exactly right about renewables. So I highlighted the reasons why, at least when we look at geopolitics today, fossil fuels matter more, but, you know, did want to highlight that that will not necessarily always be true and that renewables and our dependence on renewables will bring with it different geopolitical issues, but advantages and complications, but they’ll just look different from the ones we have today.
And so there are two areas that you mention, which I certainly think will be relevant, and one is you talked about windmills, kind of the physical mills, but I would just say, in general, the whole question of technologies. And maybe solar is kind of the best example because right now China has invested so heavily into solar panels that the world, you know, is benefiting, but also becoming increasingly relying on China for that kind of technology. And with that, I do believe will come some geopolitical power.
I was just speaking with several officials who come from the Persian or Arabian Gulf region and one of them said to me, look, China’s going to be important to the Middle East for lots of reasons and, you know, he gave a list of some of the obvious ones, that China buys a lot of its oil from the Middle East. And then he said and, look, the Middle East is going to want to buy a lot of its renewable energy technologies from China, so you can imagine that that will bring geopolitical leverage for China.
There’s also the question, and I’ll end—(audio break)—inputs into some of these new renewable technologies and concerns that some of those inputs may be, you know, finite in nature or, more specifically, they may be concentrated in certain parts of the world. So the best example is cobalt. The overwhelming majority of where we know cobalt is in the world today is in the Congo. And so the question is, you know, is the world going to care more about what’s happening in the Congo because that is the source of cobalt which is something that people, you know, need for certain renewable technologies? So there’s the question of lithium and other rare-earth material type things. So I do think that there will be a geopolitics of renewable energy in the future.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from University of New Mexico.
Q: Good morning?
FASKIANOS: Go ahead, we can hear you.
Q: Oh, fantastic. First of all, good morning and thank you so much for giving us the opportunity to speak with you, Dr. O’Sullivan. It’s been an absolute pleasure.
I just wanted to ask—I’m certain that there will be some tension in the transition, but assuming that states are able to make a transition from primary use of fossil fuels to renewables, where do—what’s your perspective on where the sources of contention will be in a world where energy is essentially more ubiquitous and much cheaper?
O’SULLIVAN: Great. I think there’s a whole range of places, I’ll just give a few to kind of build on what I was talking about before. But first, thank you for calling in and being part of the call. I’m grateful to everyone who is on the line.
I think one thing that we’ll need to think about more in this world that’s more heavily reliant upon renewables is just the fact that there will be greater electrification of everything. So imagine that, you know, right now there are certain things that we get our power from through electricity, but in a world where renewable energies are much more pervasive, more and more will be electrified. You know, the easiest example to think about is just transportation, that right now virtually all transportation runs on some kind of petroleum-based products. But if we electrify that and that electricity is produced by renewable energy resources, then, again, that will have consequences.
And what does that mean? It means that grids are going to be even, you know, much more important than they are now. And those grids are going to be subject to some geopolitical issues. So the most obvious one is maybe cyber issues are going to become very, very relevant.
Secondly, a lot of countries may find that they need to put the grid to a larger scale in order to be most efficient, so we may be looking at more and more what are called super grids. So these would be grids that cross international boundaries, so maybe you don’t have solar energy crossing boundaries, but you have electricity produced by solar that’s going across boundaries. And, you know, my first look at this whole question of super grids, with some help from my own students at Harvard, is that, you know, they’ve been slow to progress, that there are lots of parts of the world that want to have these super grids, but they’ve been slow to progress because a lot of countries don’t trust their neighbors as much as they need to in order to link their electricity grids together because they feel like that’s sharing certain vulnerabilities. So I think those will be some geopolitical tensions.
And then the last thing that I haven’t touched on, but I also think it’s important, is that if you look at any projection about the world, what’s it going to look like when renewable energy is much more prevalent, you’ll still find that there’s a very healthy part of the energy mix which is met by oil and gas. And that, I think, is an important thing to acknowledge. It also underscores the importance of a technology called carbon capture and storage because that could make the use of fossil fuels carbon neutral.
But if in a world where we’re still using oil, but not as much as we are today, not nearly as much because we’re using more renewable energy, what does that mean for the Middle East? Most people think, oh, that’s disastrous for the Middle East, but the reality is, if we’re using a lot less oil, the price of oil is likely to be a lot lower than it is now and places that produce oil where it costs a lot to produce oil are no longer going to produce it. So those are going to be all the non-OPEC countries, that’s Brazil, Norway, the United States, Canada, Australia. These places will stop producing oil in a very, very low-cost environment and that means that the oil that the world does consume, much of it if not, I mean, I’d say all, but that’s probably hyperbole, will come from the Middle East. And so that will bring with it is own types of geopolitical vulnerabilities.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from St. Edward’s University.
Q: Hi. Thanks for having us.
So you definitely answered my first question with that last comment, which was very nice to hear.
So then my second comment comes from, if renewables, such as solar and wind, they require a huge amount of acreage to power an effective amount of energy versus something with nuclear that may have a smaller acreage, what’s going to be the most effective renewable energy source to go after in terms of these, like, super grids or these energy per acre?
O’SULLIVAN: Sure. I think it’s a—it’s a very good point and it’s certainly one of the factors that I think will be taken into—or has to be taken into consideration when a country is trying to figure out, you know, would it make sense, would it be feasible to do in terms of generating its own alternative energy.
You know, my guess is that over time that whole question of how much acreage is needed is going to shrink. So if you look right now at Morocco where you have the biggest solar fields in the world, I mean, this is huge, stretching, you know, as far as the eye can see, they can do that because this is vast quantities of desert land. But you have a country, say, like Scotland or, you know, even Germany heavily populated, that there are different, you know, constraints. But I think, you know, you’re going to find innovations and technologies that will allow us to concentrate that, but there will always be some kind of space constraints.
I think if you’re comparing solar and wind to, say, nuclear power, you know, space would be one issue that people would think about, but there are a lot of other issues that might even be more relevant, and I would say cost is probably the big one as well as storage.
So if you’re—say you’re comparing these two things, nuclear and solar, right now what you would say is, well, on the one hand, nuclear energy is so much more expensive to produce at the beginning, you know, because it takes a lot of time and permitting and safety regulations and building this plant. It’s very, very expensive upfront. And then it’s virtually, you know, it takes—it costs very little to produce energy afterwards. So on the one hand, it depends on your cost structure.
But the second thing that you’ll think about is storage. Like for nuclear power, that plant can be constantly running day or night, sunny or cloudy, windy or, you know, a calm day, whereas solar and wind, still we don’t have enough battery capacity to make those—(audio break)—you know, be able to meet energy demand for all times of day, so they currently right now need some kind of backup.
So those would be the things I think that factor into those kinds of decisions right now, although acreage, I wouldn’t dismiss it. You know, it definitely will have its role to play in decision-making.
Q: Thank you very much.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from Naval Postgraduate School.
Q: This is Dan Nussbaum, Naval Postgraduate School. Thanks for your presentation.
Peter Zeihan argues in two books, the most recent one being The Absent Superpower, that the U.S. public is about to get tired of supporting the world in the Bretton Woods agreement. We’re self-sufficient in fuel, so we back away and the rest of the world has a tough time of it. So he has put out a provocative thesis and I wondered if you had seen it or had a comment about it. If not, I have another question.
O’SULLIVAN: Sure. No, I definitely a response. So I haven’t read that particular book, but this is commentary I think that I’ve heard from a lot of smart people. So there’s certainly this idea, as I mentioned, OK, if the U.S. is less reliant on the Middle East or other parts of the world for energy that we can be—we’re just focused on our own concerns and needs.
The first thing I would say is that we need to be careful about the terminology that is used. So you said self-sufficient in fuel—and I think you’re quoting the author—but a lot of people say energy independence. And if I could just spend a moment on that concept because it has been so pervasive in our political discourse. You know, politicians love the idea of energy independence and Americans love the idea and we probably have a different sense of what it means and we probably have a lack of understanding about whether or not we’re actually there.
So on the one hand, the most common perception of energy independence is, hey, we’re an energy island, we don’t need to rely on anybody for any of our sources of energy. And there’s some real satisfaction in that idea. If that’s your definition, the U.S. is not there. And in fact, the U.S. is getting further and further from being an energy island because we’re being more and more integrated into the global economy. We’re not just an importer, we’re also an exporter. And when it comes to different energy sources, we’re self-sufficient in coal, we’re virtually self-sufficient in natural gas, but in oil we’re still quite far from it.
Now, we’ve become much less dependent on imports. We’ve gone from net-import dependency of about two-thirds of what we consume to down to, say, closer to 20 percent, but that’s still, you know, 20 percent and that means that we are looking to the rest of the world to supply that oil.
So, again, you might say, well, OK, where is that oil going to come from? Some people feel better, like, well, we can probably just get that oil from Canada and Mexico. And we could, but the real question is, are we or are we not part of the global market? And as long as we’re part of that global market, we care about what happens in the rest of the world. I would argue we care about what happens in the rest of the world for lots of other reasons as well, but certainly for energy. We’re not really at the point where we can dismiss the rest of the world.
And you could, you know, you could say we can elect some leaders who have that as their number-one priority, but in order to get there—and I look at this in the book in quite a lot of detail—in order to get there, we’d have to put in place a lot of policies which would be inefficient and costly. So if you just think about it, we would have to say, OK, we’re going to produce—we’re going to produce oil let’s say in Texas and we’re going to ship that oil to wherever it needs to be in the United States, maybe we have to ship it all the way up to the Northwest corner, to Washington state, rather than importing oil just across the border from Canada, so that would mean consumers are paying a higher price and essentially that there’s less efficiency to the overall system.
So, one, I would say we’re not self-sufficient and I think—I call it in my book, this whole idea of energy independence, is America’s unrequited love. You know, we’re always pursuing it, but it probably is a bad thing for us anyway. And two, you know, as long as we’re part of the global market, we’re going to care about what happens in other energy epicenters in the world.
Q: Thank you.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you.
(Gives queuing instructions.)
Our next question comes from University of Toronto School of Global Affairs.
Q: Got it. Hi. We are students at Toronto School of Global Affairs, and we just had a question: How does energy intertwine with the augmented strongmanship and recent tide of nationalism? And what does this mean for the world order which has largely been led by democracies, in your opinion?
O’SULLIVAN: I’m sorry. Irina, would you mind repeating that if you—I couldn’t catch all of that question.
FASKIANOS: I couldn’t—I couldn’t get it either.
I don’t know if you’re a little bit far away from the phone or if you can just repeat it. Sorry.
Q: No worries. Can you hear me now?
FASKIANOS: Better, yes.
Q: So our question was mostly, how does energy intertwine with the augmented strongmanship and the recent tide of nationalism? And what does this mean for the world order which has largely been led by democracies?
O’SULLIVAN: OK, a really interesting question there. I would say, when I look—when I look around the world—and this is actually why I think my book as a whole is an optimistic book and why I think this development is, on the whole, a positive one from an American perspective. You know, there are definitely downsides to politics that come with this new energy order. But I think, in general, from an American perspective, there’s a lot of positive things going on.
So if you think about strongmen—I’m just going to say two things that I think affect the global order. First, directly to your question about strongmen and nationalism. And if we look around the world and we think, OK, who kind of embodies that, you probably think Putin, maybe Maduro in Venezuela, you know, some people would say that the regime in Iran is authoritarian, depending on your perspective. If you think about a lot of those countries, they are actually negatively affected by this energy boom because it has resulted in lower prices and these are non-diversified economies.
So let’s take Russia because that’s maybe the best example. You know, Putin has been weakened by this energy boom because it has effectively meant that his and Russia’s primary source of revenue, which is oil and gas exports, are worth a lot less than they were 10 years ago. So 10 years ago, Russia was riding completely high on its ability to export natural gas and to extract, you know, very high prices for it under the conditions that it felt was most appropriate. Now the influence has really shifted from the producer, Russia, to the consumer for market changes, reasons that I talked about in my opening comments. So I think on the whole it has weakened some of these strongmen around the world.
The second thing, which I find even more interesting, you mention the world order, like, what does this mean for the world order? And I’ll try to make a complex idea kind of short and sweet, which is there are all kinds of challenges to the world order today. And I would say maybe the one that as an American I worry about the most is from the Chinese, because the Chinese maybe have both the desire to change the order and they have maybe the influence and power to do so.
And so the question is, well, the Chinese may—they’ve benefited a lot from this world order, so perhaps they’re still trying to decide, do we just need to modify this world order or do we need to remake it entirely to be more conducive to our interests? And I think this new energy environment is at least a vote in favor of the first, a vote in favor of, hey, let’s keep this order because we can meet our interests in this order.
And the reason I say that is that this energy boom has really increased Chinese confidence and their ability to get energy resources through the markets, that China used to feel like it had to circumvent the market in order to get access to energy. And this led to a lot of investments in Africa and Latin America outside market structures just to make sure they could get the energy. Now in a world that’s a lot more plentiful when it comes to oil and gas, they feel like they can rely on the market. And the market, of course, is one of the big things underpinning the liberal international order today.
You know, secondly, a lot of the things that the Chinese used to do in Africa and Latin America in terms of propping up strongmen and big equity investments in oil were done for energy purposes. And in this new energy-abundant environment, the rationale for those types of behaviors just isn’t there any longer. And so China might feel it doesn’t need to challenge the system of international norms and institutions in a way that it has in the past. And so they may be less inclined to do that in an energy-abundant world.
So, again, there are lots of things that determine where China goes on this question, but energy, I think, will be a helpful thing from a U.S. or Western perspective.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from University of Central Florida.
Q: Hello. My name is Jessica Dalmau, I’m with the Global Perspectives Office. Thank you for your time.
My question is, do you think we should model the EU’s approach to new energy and become less dependent on traditional energy and traditional energy exports?
O’SULLIVAN: Another great question. So the EU has—I’m going to talk about the EU as one bloc, but as you and maybe some other people on the call are aware, energy policy is actually something that isn’t done at the EU level, it’s still done by states and that’s because different countries feel pretty strongly about energy as being a national security issue. So they’re really reluctant to tell Brussels, OK, you can make all our decisions for us. So it’s, you know, you can’t just talk about Europe as a whole, even though I’m about to do just that for the sake of simplicity.
But the EU has, in general, you know, especially the big states and Western Europe has really decided that a shift to more sustainable energy is one of its main priorities. And as you know and your question implies, they’ve made enormous movement in that direction.
Whether the U.S. should emulate that I think depends on a few things. One is the question of economic competitiveness. So it’s been one of the prices that Europe has paid for its shift towards renewables is that in some places, because the price of electricity is so much higher than it is in other parts of the world, that European industry is a lot less competitive than it would be otherwise. So you could actually see that there’s some, say, German manufacturing that’s moving from Germany to the United States because the inputs of electricity and power are so much cheaper in the United States because of the cheap price of natural gas. So there is an issue of how economically competitive it is to move that aggressively. And the Europeans, I think, have decided this is their priority and, you know, have stuck with it.
The second thing is that America and Europe have such a different energy situation in the sense that Europe—again, I’m generalizing here—but Europe is not a big producer of energy. It produces some of its own natural gas, a little bit of oil, depending on where you are—you know, certainly Norway produces a lot in the North Sea—but in general as a whole, Europe is a net consumer of oil and gas and all forms of energy. And this is in stark contrast to the United States, which we’ve been talking about is the world’s largest producer of oil and gas. And so for America to move away from that at this juncture in time would come with it, you know, a loss of strategic standing in the world and other things.
So I guess the short way of answering the question is I think America will need to get there. I think the whole world will need to get there. I think we have to think very rationally about what’s the best way to get there, what’s the timeline to get there, both from the perspective of what’s good for economics, what’s good for the environment, and what’s good for America’s strategic standing in the world.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you.
Our next question comes from George Mason University.
Q: Hi. Thank you so much.
My question was just related to the interplay of the Paris Climate Accord and kind of your opinion. So first, do you think this will have the eventual return, as some scholars think, of the U.S. to the Paris Climate Accord and the possibility of it becoming legally binding one day? Do you think this has a significant impact on world energy markets? And are academics and economists concerned about this? And third, do you think this will have an impact on soft power and the U.S.’s soft power globally?
O’SULLIVAN: Great. As your question implies, I think there are lots of different angles to look at the withdrawal or the intention to withdraw from the Paris Climate Agreement that the Trump administration has made.
And I would say—I would say this was a particularly damaging move by the Trump administration. It’s not clear to me what was gained by the United States across economic or strategic levels.
As you know and maybe most people on this call know, the commitments that America made and other countries made, these are called the INDCs, these are voluntary, nationally determined constraints on behaviors. So, you know, even if, as some Trump advisers have argued, even if they felt that these targets were going to be impossible to reach without some kind of draconian measures to the economy—which I think that’s very debatable—but even if they felt that way, they might have revised the commitments that America was making rather than to withdraw from the whole agreement.
So I think, to take just the two points you raised, you know, what is this going to mean for climate, America’s withdrawal, and that’s assuming that we do withdraw—there’s been quite a bit of chatter in the press over the last few weeks that the Trump administration might stay in the Paris Accord. And I hope that’s true. I think that would be a good thing for the United States and for the world.
But if it does withdraw, what does that mean for climate? I think a lot of us were worried initially that America’s intention to withdraw would undermine the commitment of other big powers to this accord. You know, we were particularly worried about China, maybe India, other, you know, big economies whose ability to rein in carbon emissions is really critical to the overall global emissions level. But so far, we don’t have any evidence of that.
China, I think, has actually relished the fact that it’s the obvious sole leader standing on this issue. So thus far, we don’t see countries saying, look, if the U.S. is going to back out, we are, too. So the U.S. is more isolated in that regard.
Can states and businesses and even individuals make up, and in the United States, make up for the federal government not being committed to this? I think that’s also an interesting question. And the answer, I think, is, to be vague, is somewhat, you know, that certainly there can be efforts outside of the federal government that can help America move in the direction of meeting its climate goals, even if the Trump administration is not supportive of it.
Where I think it’s hard for states or businesses or individuals to step in is just on things like research and development for renewable energy, that requires huge sums of money that I think the government at the federal level is best positioned to offer. So I think, yes, there can be some mitigation of the damage done, but I don’t think it’ll be complete.
And then lastly, just closing on your question about soft power, I think this is exactly right. I think it was an unnecessary loss of soft power in two ways. I mean, one, climate change is a very controversial issue in the United States, but we should appreciate it’s not that controversial an issue in most other countries around the world. In fact, you know, nearly every country in the world came together to make a commitment to try to rein in its emissions should say to the United States, hey, this is an issue that most of the world cares about. And America under the Obama administration was perceived as taking a serious and a leading role on this, and I think that was welcomed by a lot of countries, which—you know, which in a sense was American sensitivity to something that they thought was extremely important. And I think we really we lost that momentum, we lost that leadership, and we lost the soft power that came with it.
And lastly, even more importantly, I think that we lost, by claiming or intending to withdraw, we lost an area of common interest with China, which I think had great and strategic importance. So U.S. and China, I think that’s the most important bilateral relationship. And on the whole, there are very few areas where these two countries see eye to eye or have constructive relationships and climate was one of them. Climate was a place where the U.S. and China had worked together, had established relationships between people, modes of interacting, of communicating, and those relationships and modes of communication might have proven useful or served as models for more thorny issue areas. And by basically withdrawing from Paris we’ve removed that important way of communicating with China, and I think that’s to our detriment.
Sorry for the long answer.
FASKIANOS: But an important answer.
Next question please.
OPERATOR: Thank you.
Our next question comes from Center of Global Affairs.
Q: Hi. I have a two-part question for you. So the first is, I’m hoping if you could speak to the geopolitics of rare-earth elements as it relates to this scaling up of clean energy technologies. And secondly, if you could speak to the relationship within the U.S. between the absence of rare-earth extraction and restrictions on uranium and thorium extraction, and if you see that changing so the U.S. can navigate the Chinese hold on the rare-earth market. Thank you.
FASKIANOS: Meghan, are you still there?
O’SULLIVAN: Sorry, I was on mute.
FASKIANOS: No problem.
O’SULLIVAN: I am still here. I was just saying that I thought our questioner might actually know even more about this than I do, so I would welcome any additional thoughts.
But as I suggested earlier in the call, I think this is an area of concern as we move to a world where renewable energy is much more dominant. And if we look at the geopolitical elements of this, I referred earlier to the fact that I think China is in the best position of any country to really exert geopolitical influence on account of this shift towards renewables. And there’s lots of reasons for that, but one of them is, at least as of now, that a lot of the supply chains for renewable energy technologies, China has a dominant position in them.
And so the caller referred to rare-earth elements and a lot of these elements are produced largely in China or, in some cases, exclusively in China. But the reasons for this are somewhat interesting and they bear relevance to our policies, which I think is the implication of the question, that it’s not that rare-earth elements are only found in China, it is that China has decided to produce them and to try to produce them so cheaply that it just hasn’t been economical for other countries to produce these rare-earth elements. And in some cases, these rare-earth element production is seen as environmentally problematic.
So a lot of the world has been pretty OK with relying on China for access to these rare-earth elements. Now, as those rare-earth elements become more and more critical in the manufacture of certain technologies, my guess is that the world will become less and less comfortable with China having such a dominant role. And we’ve already seen this, to some extent. This is an issue that has come up for the U.S. Congress and the Congress has—and this is in, I would say, in the last decade or so—the Congress has looked at this question, has sought to encourage some mining of rare-earth elements because of this concern about China having a lock on these—(audio break)—given—
FASKIANOS: Meghan, can you just repeat that last? Your line cut out.
O’SULLIVAN: Sorry. I just went through a tunnel.
Irina, are you there?
FASKIANOS: Yes, we’re here. Just for full disclosure, as everybody probably knows, we’re having a nor’easter and Meghan is doing this on the train from New York back up to Boston because she could not get snowed in in New York. So we’re lucky to have gotten this far. Now I’m going to jinx us. (Laughs.)
So if you could just repeat that last bit.
O’SULLIVAN: (Audio break)—call, I’m feeling good.
FASKIANOS: I know, I know, it’s been great. We’ve had, knock on wood, pretty good—pretty good sound.
O’SULLIVAN: Right. So I was just—to finish up this answer about rare-earth elements, one thing I think that’ll be interesting to watch is, as these technologies become more and more important to the world, the extent to which people invest in procedures or processes that allow us to recycle some of these either rare-earth elements or just other minerals—so lithium is a good example that part of the U.S. government is already looking into, can we recycle lithium—so you can imagine how that will change some of the potential geopolitical dynamics is if lithium is either a finite resource or if you can recycle lithium. Then I think any geopolitical implications could be quite different depending on which of those two scenarios we’re looking at. Thank you.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from University of Houston.
Q: Hello. Yes, thank you, Dr. O’Sullivan, for your time and bringing up this topic.
My question is, as states increasingly depend on renewable energy, do you see a decline in both the resource curse as well as—(inaudible)—effects, particularly in states in the Middle East and Africa? Thank you.
O’SULLIVAN: Great. And for those of you that may be less familiar with it, the resource is basically the established phenomenon that countries that are well-endowed with natural resources have tended to grow more slowly than countries without them. This is—you know, you’ve had a lot of studies of this, econometric studies looking at things. And basically, this finding has proven true, although it’s, you know, some people claim stronger or weaker depending on their analysis. But it’s an interesting phenomenon and it’s often been associated with particularly the extraction of oil just because the rents surrounding oil are so high, meaning the difference between how much it costs for you to produce the resource and how much you can sell it for.
So the fact that these rents exist have, in many cases, influenced the development of the political institutions. I think the easiest way to illustrate this, even if it’s a bit simplistic, is simply to say that in many countries where you have huge oil deposits, you basically don’t need to have taxes because the government is able to take those rents, that difference between the price they sell the oil for and the price they have to pay to produce it, and actually meet the needs of citizens. Now, that, of course, is changing in interesting ways. And again, if people are interested in talking about the oil and gas boom today, we can certainly talk about how that has influenced the politics in Saudi Arabia and the Gulf and other parts of the world.
But the question is, if we’re moving to a world with more renewable energy, what does that mean for the resource curse? So I would say, yes, on the one hand, we’ll have less of a resource curse associated with oil and gas. And then the question is, OK, is there a resource curse associated with renewable energy?
And here, I think, you know, my first instinct is to say that there will be less of that—there will be less of that problem with actual renewable energy because there are probably fewer rents associated with renewable energy. But also, because renewable energy by its nature is not finite, there’s a totally different nature to the resource than to oil and even to natural gas.
Where there could be—there could be resource curse-like phenomenon is countries that have great quantities of these minerals and rare-earth materials we’re talking about. But again, if you really look at the resource curse literature, you’d see that in order for the resource curse to really be—you know, in order for the sale of a particular resource to really be dominant in the development of a country’s political and economic system, you know, that country needs to be largely dependent on the sale of that commodity to the world.
And so I think, you know, the question really is, how many countries would be completely transformed in their economies by the sale of a particular commodity? So maybe Congo with cobalt, maybe a place like Bolivia with lithium. So maybe there would be some instances, but I don’t think it would be the same prevalence of the phenomenon as it has been with oil and gas.
FASKIANOS: Thank you. Next question.
OPERATOR: Thank you. Our next question comes from Pitzer College.
Q: Thank you very much for your presentation.
My question is based on what has been asked already regarding the notion of world order. And I would like you to say a little more about what the Trump administration is doing to the world order, the post-World War II world order, whether his policy of U.S. first, “America first,” is going to lead to distraction of that world order.
O’SULLIVAN: Sure. And I can do my best to try to tie that answer to energy, but I think it’s a broader question just about international politics, which I’m happy to give you my view on.
I think when we—when we look at the Trump administration foreign policy, there isn’t really a doctrine we can evaluate, per se. But increasingly as time has gone on—it’s been now 13 months or so that President Trump has been in office—I think we really see America’s role in the world being shaped by three things that the president feels strongly and, you know, believes that he brought into office with him. And one is an aversion to trade, particularly multilateral trade. Two is a suspicion of alliances and the commitments that go alongside them. And then the third one is basically he has this admiration for strongmen. So if we have those three things together and it’s shaping America’s role in the world, we find that America is really moving away from the role that it’s played under all Democratic and Republican presidents since the end of World War II and that’s a place where America has been a defender and a promoter of the liberal international order that has existed, more or less, since that time.
And so I think we’re starting to see, from my perspective, the real damage that that position is doing to American standing in the world and how it’s reverberating throughout the different regions of the world in different ways.
So just very quickly, if we look at Asia, I think this “America first” position is basically lubricating China’s rise, it’s creating a lot of open space for China to emerge as a global actor. And it is also encouraging a lot of Asian countries to make accommodations with China that they might not make if it weren’t for the fact that they’re uncertain about America’s reliability in the part of the world.
In the Middle East, there’s no question that America has really, I would say, almost abdicated its traditional role of being a powerbroker or a guarantor of regional security and Russia has actually filled the vacuum there to a very dramatic extent. And that happened very quickly.
In Europe, I think there’s, you know, it’s more of a mixed picture, but there is a lot of nervousness about how much America is going to continue to play the role of the big brother, the partnership between Europe and the rest of the world, in pursuit of common values and interests. So overall, I would say that, you know, these firmly held views of the president are translating into an American positioning in the world that is detrimental to the order that’s existed for 70 years and, when we talk more specifically, that’s adverse to a lot of American interests in different parts of the world.
FASKIANOS: Thank you very much. I think we are at the end of our time. And actually, maybe we can squeeze in one last question.
OPERATOR: Thank you. Our next question comes from Daniel McNum (ph) with Naval Postgraduate School.
Q: Hi there, and thank you.
So with the cost of renewables going down and oil also at a low cost, and renewables not requiring the infrastructure to transport oil and gas that’s required by—or, you know, not required by—or that’s required for oil and gas, how do you see developing nations or emerging economies electrifying their infrastructure? Which route do you think they’ll favor? And how does that play out for larger powers that are still looking to either preserve or expand their influence?
O’SULLIVAN: Sure. Thanks. And just given the hour, I’ll be fairly brief on this.
I think there’s a different calculation for developed countries and developing economies in the sense that if you don’t have the infrastructure right now for oil and gas and fossil fuels, then renewable energy technologies, I think, appear even more attractive because you don’t have to be—you know, you don’t have to have the price of renewables be even cheaper than fossil fuels minus the cost of, you know, putting aside infrastructure that could still be used, if that makes sense.
So I would say, on the one hand, there’s some real possibility that in parts of the world like Africa and India in particular that they may move right to renewable energy resources. The downsides are, as I mentioned earlier, the fact that without adequate storage it’ll be very hard to rely on renewable energies as a sole source of energy. And that will mean that there will be limitations to, you know, how much industry that you can build around renewable energy.
But in certain parts of the world, you know, they’re not thinking necessarily first and foremost about can they build a manufacturing plant, they’re talking about, can we charge cell phones? You know, can we light homes? Can we do things that increase productivity and increase standard of living dramatically, even if it’s not a 24-hour-a-day source? So I do think there will be quite a bit of that.
But I think in other parts of the world, like China, you know, there will be a need to use natural gas and to use renewables to both meet growing energy demand and to basically move in a direction of decarbonization, because getting rid of coal is going to require such an effort that it won’t be able to be exclusively renewables, that natural gas will certainly have a role to play as well in that transition.
FASKIANOS: Thank you, Meghan, very much for being with us today, for sharing your insights. We really appreciate your taking the time and we’re happy that we didn’t lose you on Amtrak there.
Thanks to all of you for your wonderful questions. We really appreciate it.
Our next call will be on Wednesday, March 21st at 12 p.m. Emma Sky from the Yale Jackson Institute for Global Affairs will lead a conversation on “The Future of the United States and Iraq.” So I hope that you will join us for that.
And again, I commend Meghan O’Sullivan’s new book to you, Windfall: How the New Energy Abundance Upends Global Politics and Strengthens American Power and to follow us on CFRCampus.org. You know, this is our website. Follow us on Twitter, @CFR_Campus, for information on new CFR resources and upcoming events.
So thank you all again.
O’SULLIVAN: Thank you, Irina, and thanks everybody on the call.