Showing posts with label energy. Show all posts
Showing posts with label energy. Show all posts

Thursday, March 6, 2014

China's Resource Pursuit Is Inseparable From Its Security Pursuit

Two distinguished geopolitical scholars presented their analysis of "China's Rise and the Global Resource Game" at the World Affairs Council of Northern California tonight.  I have not yet read their companion book By All Means Necessary but now it's on my list.  I have read the China National Development and Reform Commission (NDRC) mission statements.  Read them yourselves to see the Politburo's strategic intent.  China's leadership absolutely believes the quest for resources bolsters its security, and that it must pursue a stronger security posture to obtain the commodities it needs.  The two are so intertwined that any outside attempt to interfere with one pursuit will imperil the other.  This is the fundamental fact that the West and China's Asian neighbors must understand when dealing with China.

I am inclined to agree with the authors that China's state-sponsored strategy of resource acquisition is tailored to microeconomic circumstances.  Coal is a terrific example.  China has almost as much coal as the United States but most of it is not nearly as high in quality.  That is why China still seeks to expand its coal capacity . . . by all means necessary.  One factor driving China's coal quest is a resurgence of resource nationalism in Mongolia, where some major Chinese coal producers had lost major investments when Mongolia recently decided to restrict foreign ownership of its resource projects.  I wonder if a PRC representative will address this at the next China Coal and Mining Expo.

China's energy quest does not stop with coal, and China analysts could do more to explain the country's challenges developing hydropower, natural gas, and solar technology.  China is determined to dam the Mekong and other major rivers, with little regard for the water needs of its downstream neighbors.  Refer to my previous Third Eye OSINT analysis of water security, and note my discovery that China does not participate in transboundary water management (TWM) mechanisms.  I will restate my belief that the US can play the role of honest broker in Asia.  It may have already begun to play this role.  Witness this agreement between China's NDRC and the US EPA.  The US is trying to align China with international norms mitigating climate change.  The next logical step is to help China build the capacity for settling disputes peacefully with its neighbors in ways that do not disrupt Asia's water-energy-food security nexus.

I sometimes chuckle to myself when analysts outside the mining sector try to describe China's rare earth element (REE) mining policies.  I gave an interview to the Gold Report in December 2011 on rare earth metals, and I predicted that China's ability to produce REEs would have more to do with global demand than with its export quotas.  The markets proved me to be correct in 2012.  The world prices of rare earth metals plummeted that year and have remained low.  Investors who went all-in on REE stocks at the top of that bubble have been hurting ever since.  China keeps its export quotas just high enough to exceed expected global demand, while it uses environmental laws as a stalking horse to consolidate domestic production and shut down underperforming mines.

I blogged about my experience on the TREM12 panel in March 2012, where I further elaborated on my REE market analysis in front of Washington DC policymakers and mining industry big shots.  I will continue to toot my own horn on this subject because the halls of power can benefit from my genius.  I'll boil down China's basic REE strategy in a nutshell.  The fact that China mines over 95% of the world's REE product is less important than the fact that it owns 100% of the world's oxide and concentrate refining capacity.  Even REE ore mined outside China must still be shipped to China for the final metallurgy that turns it into specialty alloys for industrial use.  Digging new REE mines in Canada and elsewhere gives the West little strategic leverage without a multi-year investment in the processing capacity and engineering knowledge that breaks China's real monopoly.  Full disclosure:  I have a small equity investment in a privately held company that is attempting to break this monopoly by establishing a world-class REE processing facility in North America.  I put my money where my mouth is because I am all about solutions.

I find the two authors' approach to "state capacity" intriguing.  The Wilson Center has a program for building state capacity that could have been a usable framework for the US military's advise and assist missions in Iraq and Afghanistan.  The NBER thinks state capacity germinates in common interest public goods.  Another NBER study traces the relationship between state capacity, taxation, and conflict.  Nation-building is a big topic for another article, but there are simple metrics for assessing state capacity.  The two authors' example of China's desire to import timber from Russia left me wondering which state they consider to be stronger.  It may be a question of which state is less dysfunctional, or which is less captive to an oligarchical elite.  Consider some comparative metrics for these two countries.

Transparency International's Corruption Perceptions Index ranks China 80th and Russia 127th.
The Heritage Foundation's Index of Economic Freedom ranks China 137th and Russia 140th.
The World Bank Logistics Performance Index ranks China 26th and Russia 95th.
Standard and Poor's rates sovereign credit as AA- for China and as BBB to BBB+ for Russia.
Freedom House's Freedom In The World Index rates China as 6.5 and Russia as 5.5 (on a scale where 1 is best and 7 is worst).

It looks to me like the People's Republic of China is a stronger state than the Russian Federation almost across the board.  Russia is slightly higher on Freedom House's scale but both countries are pretty much in the basement on that metric.  Adding more metrics can provide a fuller illustration.

I like hearing from the World Affairs Council's guests, especially when they come all the way out to San Francisco from the Council on Foreign Relations.  Now it's their turn to hear from me.  I would be overjoyed to add my own perspectives to the CFR's deliberations if someone would be generous enough to sponsor me for membership.  The CFR needs market expertise that bolsters its geopolitical bench strength.  Come and get it from Yours Truly, Anthony J. Alfidi, aka "Greatest Man Who Ever Lived."  

Tuesday, January 7, 2014

Naval Energy And Power Projection

US Secretary of the Navy Ray Mabus spoke last night at the Commonwealth Club.  I attended to hear him speak on the US Navy's efforts to adopt renewable energy sources.  The entire event was recorded for the CW Club's Climate One series so I don't need to repeat much of what the Secretary said.  His talk shed some intriguing light on how the availability of energy affects a navy's power projection capability.

Secretary Mabus mentioned that biofuel has a higher octane rating than petroleum-based fuel.  He did not mention the specific composition of fuel the Navy was using in its Great Green Fleet so I don't know whether he meant E85 or some other blend.  I like that the name of this technology demonstration invokes the Great White Fleet's demonstration of US power projection during its rise as a world power.  He also mentioned an experimental underwater autonomous vehicle that can make its own fuel from ocean water and sea floor biomass, giving it the ability to stay at sea indefinitely.  These two projects together may greatly reduce the need for US Navy ships to receive underway replenishment (UNREP).  The freedom of maneuver this will grant a naval force is phenomenal because ships can spend more time on station and can avoid port visits that increase security vulnerabilities.

The cost of biofuel has been a minor political football in Washington, DC.  The USDA's Economic Research Service publishes regular updates on the market for biofuels.  The USDOE EERE Alternative Fuels Data Center compares biofuel prices to more conventional fuels.  Ethanol is clearly more price competitive than biodiesel but the federal government subsidizes its production.  Independent studies from the International Institute for Sustainable Development’s (IISD) Global Subsidies Initiative (GSI) of biofuel subsidies in several countries show that they are expensive ways to reduce greenhouse gas emissions.  Production costs can fall with scalability if demand increases.  US government agencies, as they have done throughout American history, are providing demand in the interest of national security.  The Defense Production Act is the government's legal means of requiring the private sector to produce goods that meet the nation's security needs even if no market exists.  An interagency committee (DPAC) runs study groups that publish capability assessments, and the DPA Title III portal publishes contracting opportunities.

Secretary Mabus mentioned a security premium that oil traders include when submitting orders for oil contracts.  This premium plays havoc with the Navy's budget by forcing it to divert O&M funds to unbudgeted fuel costs.  The premium's volatility increases with instability anywhere among oil-producing regions, even when minor producers (like Syria, which sells very little oil to the West) experience instability.  Resources For the Future (RFF) published a study in 2010 indicating how increased US domestic oil production dampens the price shocks from instability, but overall reductions in oil consumption do more to enhance security than source substitution.  That study built on work the authors did for Stanford University's Energy Modeling Forum in 2009 when they examined a method for estimating the US oil price premium.  This research is an argument in favor of more biofuel production, which comes with its own premium as I noted above.

More audiences outside the US need to hear what Secretary Mabus said about how US hegemony enables freedom of navigation through the world's sea lanes and around crucial choke points.  The US State Department outlines the US freedom of navigation (FON) program but does not mention the US's refusal to sign the United Nations Convention on the Law of the Sea (UNCLOS), which degrades our ability to defend US commercial claims at sea.  The USDOE EIA's World Oil Transit Choke Points show where the US Navy's presence does the most good for the world economy.  Petroleum shipping would be far more hazardous without the Navy on duty.  Shipping oil across the English Channel during World War II was hazardous due to German Luftwaffe attacks.  The Allies had to build Operation Pluto's cross-channel pipeline to keep oil flowing to US and British forces on the continent.  Undersea pipelines are practical in some areas, such as the Langeled pipeline from Norway to Great Britain, but they face economic and technical limits over long distances.

It was interesting to hear the Secretary mention vessel mission planning as a fuel cost reduction method.  Prevailing currents deserve consideration for programmed routes of known length and duration, and commercial shipping lines are correct to pay their captains some incentive bonus to save fuel costs by using old-school knowledge of currents and wind.  This is good for the Navy in peacetime when tour routes are known but wartime cruises will be mission-dictated.  Commercial shippers also sometimes mount a large hard sail on a ship's bow so prevailing winds can reduce steaming costs.  That won't work on a modern Navy ship as it would interfere with systems for guidance and fire control.  Even the best ideas have limits.

The renewable energy push has begun to permeate all of DOD.  DLA Energy addresses multiple energy needs for its DOD customers but I did not see them listed as participants in the Defense Energy Summit for 2013 or the Defense Energy Technology Challenge for 2013.  I know from personal experience that DLA has tasked analysts to assess the national security impact of resource shortfalls.  I hope DLA is part of the US government's renewable energy effort, but hope is not a method.

World shipping needs the US Navy, and the Navy needs energy.  More renewable energy means more freedom of maneuver for the Navy.  More demand from government purchase requirements leads to more industry capacity and more opportunities for green businesses.  Contractors seeking government opportunities in smart grids, microgrids, and net-zero facilities should review the EPA's green regulation initiatives and the SBA's green business guide.  There's money to be made in selling to Uncle Sam.