Foreign Affairs

The 2008 war taught Georgia that confrontation with Russia is futile and that it needs Western support.

Two years ago, I argued in these pages that America was suffering from political decay. The country’s constitutional system of checks and balances, combined with partisan polarization and the rise of well-financed interest groups, had combined to yield what I labeled “vetocracy,” a situation in which it was easier to stop government from doing things than it was to use govern­ment to promote the common good. Recurrent budgetary crises, stagnating bureaucracy, and a lack of policy innovation were the hall­marks of a political system in disarray.

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In the wake of the financial crisis of 2008 and the Great Recession that followed, many economists worried that even if the U.S. economy improved, unemployment would remain high for years to come. Some warned darkly of a “jobless recovery.” Those fears have proved unfounded: since peaking at ten percent in October 2009, the U.S. unemployment rate has fallen by half and is now lower than it was in the years leading up to the crisis. Beyond the basic unemployment rate, a broad range of evidence shows that the labor market has largely returned to good health. Compared with earlier in the recovery, far fewer workers are underemployed or underutilized. Long-term unemployment has fallen steadily, from an all-time high of four percent of the labor force in early 2010 to just over one percent today.

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In spite of China's new two-child policy, the trauma of China's one-child policy continues to linger.

Speeding up Georgia’s integration into NATO will leave Moscow unhappy, but losing Georgia would be far worse. 

Beer, wine, and spirits have shaped United States history from the voyage of the Mayflower in 1620 to President Nixon’s drunken diplomacy and beyond. Booze has left an indelible mark on the nation’s culture, and has been intertwined in its trajectory from day one.

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World headlines blare the news that negotiators in Paris have reached a global climate change agreement. Yet underneath the soaring rhetoric were hard politics that can tell a lot about the longevity of the agreement.

As the developing world continues to get richer, global inequality will continue to fall. But there is more to the story than this: economic globalization has also increased inequality within individual countries, partially offsetting the effects of the convergence of the rest with the West.

The United Nations should not be held responsible for the failures of its members. Yet the world body still faces pressing challenges of its own. Seven decades after its founding, the United Nations presides over an ever-expanding agenda—and in trying to do too much, it risks doing little well.  

Presidential ExtraEssays for the PresidencyRebooting Republican Foreign PolicyGetting the GOP's Groove BackThe Clinton LegacyRenewing American LeadershipRising to a New Generation of Global ChallengesReengaging With the WorldToward a Realistic PeaceSecurity and Opportunity for the Twenty-first CenturyAn Enduring Peace Built on FreedomA New RealismAmerica's Priorities in the War on TerrorBridges, Bombs, or Bluster?A Strategy of PartnershipsForeign Policy for a Democratic PresidentCampaign 2000: Promoting the National InterestCampaign 2000: A Republican Foreign PolicyCampaign 2000: New World, New Deal: A Democratic Approach to GlobalizationA Republican Looks at Foreign PolicyA Democrat Looks at Foreign PolicyAmerica's First Post-Cold War PresidentA Republican Looks at Foreign PolicyA Democrat Looks at Foreign PolicyThe 1988 Election: U.S. Foreign Policy at a WatershedAmerican Foreign Policy: The Bush AgendaThe 1988 ElectionForeign Policy and the American CharacterAfter the Election: Foreign Policy Under Reagan IIThe First Term: From Carter to ReaganThe First Term: Four More Years: Diplomacy Restored?The First Term: The Reagan Road to DétenteBeyond Détente: Toward International Economic SecurityFor a New Policy BalanceThe End of Either/OrAsia After Viet NamPolicy and the PeopleThe Presidency and the PeaceTwo Years of the Peace CorpsU.S. Policy in Latin AmericaA Democrat Looks at Foreign PolicyPutting First Things FirstThe Senate in Foreign PolicyForeign Policy in Presidential CampaignsKorea in PerspectiveNovember 1952: Imperatives of Foreign PolicyThe Challenge to AmericansThe Foreign Policy of the American Communist PartyThe Promise of Human RightsOur Sovereignty: Shall We Use It?European Legislation for Industrial PeaceLabor Under the NazisThe Permanent Bases of American Foreign PolicyPolitical Factors in American Foreign PolicySome Foreign Problems of the Next AdministrationOur Foreign PolicyOur Foreign PolicyForeign AffairsForeign Relations of the United States, 1921-1924American Foreign Policy: a Democratic ViewAmerican Foreign Policy: a Republican ViewAmerican Foreign Policy: a Progressive ViewAfter the Election1024 x 76832.0.0PortraitSeptember 15, 2015

In the decades since Mikhail Gorbachev and Ronald Reagan began working together to end the Cold War, much has changed. But one grim element of the old order war remains a constant: Mankind still possesses the knowledge and means to destroy itself with nuclear weapons, a capability increasingly outside the firm control of two alliances committed to maintaining their own versions of the status quo. How should today’s thinkers and policymakers deal with contemporary and future nuclear threats? By looking for guidance to one of the giants of the earlier age, Andrei Sakharov, write Sidney D. Drell, Jim Hoagland, and George P. Shultz.

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Oil and the New Reality of Supply and Demand

by Daniel Yergin, James Burkhard, and Bhushan Bahree

Daniel Yergin is Vice Chairman, IHS and author of The Quest: Energy, Security, and the Remaking of the Modern World. James Burkhard is Vice President and Bhushan Bahree is Senior Director at IHS.

Over recent years, the price of oil has stayed near $100 a barrel. That price reflected a balance between a massive surge of new supply from North America and disruptions and geopolitical tensions that curbed supply elsewhere. That balance was a precarious one, and in recent months, it has toppled—and dramatically so. The oil price is now recalibrating to the new reality of supply and demand. But in a break with decades of prior practice, this is occurring without a formal agreement among OPEC members to adjust supply. At the OPEC meeting of last November, the exporting countries decided not to cut production. This historic pivot removed the price support that had been fundamental to the global oil market for several decades. When OPEC handed over “responsibility” to the market, the price decline turned into a rout.

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The low oil price will have a significant impact on the oil and natural gas industry, consumers, the world economy, and the position of individual countries. World economic growth will, on balance, get a sizeable boost. But oil and gas companies, the service companies, and oil exporting nations will all feel the pain. Weakening fundamentals are at the root of falling oil prices. Global supply growth was running ahead of demand growth. Something had to give. We expect that lower prices will lead to only modest increases in demand due to structural changes in the global market and pricing policies in many countries. Growth in world oil demand is unlikely on its own to accelerate sharply enough over the next few years to reduce the supply overhang. Importantly, the growth in Chinese oil consumption has slowed with the slowing of China’s economy. But we project that global GDP will grow steadily, though not spectacularly, and that will lead growth in world oil demand to increase from 0.9 million barrels per day (mdb) in 2014 to 1.3 mbd in 2016.

On the supply side, OPEC has said it will maintain groupwide crude production at 30 mbd, despite low prices. Indeed, we anticipate that OPEC crude production will actually rise next year. Given that, unless there are new supply disruptions—always a possibility—non-OPEC producers will be the ones to bring market fundamentals back into equilibrium. While a good part of the short-term adjustment will fall on North American supply, the effects will be felt around the world.

Lower prices will force many operators to cut their spending on exploration and development, which will lead, over time, to reductions in output. Production of U.S. tight oil—that is, oil produced by hydraulic fracturing—will be affected more by lower prices than conventional production. The United States has emerged—inadvertently—as the world’s new swing producer.

U.S. oil output at the start of 2015 was more than 1 mbd higher than one year ago, which represents sensational growth. And growth will continue, due to commitments already in place. But by late 2015 and early 2016, reduced investment in exploration and development will begin to have an impact on U.S. production. Companies are already scaling back activities to match their reduced cash flow; and highly leveraged firms will face major challenges. According to IHS’s Performance Evaluator, U.S. output will continue to grow until around the middle of this year, at which point output will flatten out. This development will rebalance world oil supply and demand and provide a foundation for a potential oil price recovery. While Canada will add about 450,000 barrels of new oil sands supply in 2015 and 2016, thereafter we expect production growth there to slow as well. And outside North America, cancellations and postponement of projects to maintain or enhance production will reduce non-OPEC supply over time. In all, non-OPEC production, which grew by nearly 2 mbd in 2014, is expected to grow by only 1 mbd in 2015. After being in shock for a few weeks, the global oil industry started to redo its budgets to reflect the new, more uncertain pricing environment. Companies are cutting budgets by 15 to 30 percent—or more. Service companies will be under great pressure to reduce their costs. Companies will reevaluate new projects, and many will be delayed or postponed. The lower prices for oil-indexed liquefied natural gas (LNG) will pose challenges for new LNG projects.

The new pricing environment will be especially difficult for countries seeking investment to develop oil and gas resources. It’s no longer a seller’s market for nations with oil resources. If countries want to attract investment, they will have to revise their fiscal regimes and local content regulations to be more competitive. And that will require recalibration of expectations, not only for governments but for citizens as well.

 

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What is Happening to China’s Demand for Energy?

by Xizhou Zhou

Xizhou Zhou is Senior Director and Head of China Energy at IHS and a lead author of IHS’s China Energy Watch.

With the “new normal” of slower economic expansion, energy consumption in China is entering a period of decelerating growth. This is after a decade of phenomenal increase. “Go to China” was the mantra for many energy companies around the world as China furiously built new supply projects and looked for new resources.

Many players are asking a very different question today: “What happened to China’s insatiable appetite?” With oil demand growing at half the rate of the past decade and electric load increasing at the lowest rate since the turn of the century, many firms that have targeted China as a promised land—and the key market—are feeling anxiety.

A very much justified anxiety.

The long lead time needed to complete many large energy supply projects—oil refineries, coal mines, power plants, and liquefied natural gas (LNG) facilities—means that some launched during the era of exuberance are just being commissioned now. The demand conditions under which these projects had been planned, just a few years ago, have fundamentally changed.

Deceleration and structural adjustment of the Chinese economy

Underpinning the deceleration of growth in energy demand is the economy. China’s previous investment-led model of growth is giving way to domestic consumption drivers. Indeed, investment is no longer the main engine of China’s growth; consumption accounted for more than half of GDP growth in 2014. The “growth at all cost” approach—often driven by government-led investment—is now being replaced by a brand new “economic dashboard” for official assessment that includes 40 variables across eight fields, including economic structure, the environment, and quality of life.

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With two of the three GDP drivers, investment and exports, slowing substantially, overall growth was down to 7.4 percent in 2014, lowest since 1990. But Beijing appears content with this change in direction and has refrained from any large-scale stimulus similar to the one issued in 2009. The prime minister has even modified the official growth rhetoric in public speeches from the decade-long motto of “relatively high growth” to “medium-high growth.” IHS Economics expects China’s growth to slow further to 6.5 percent in 2015 and 6.7 percent in 2016.

Weakening oil demand exacerbating global crude supply glut

Oil demand is responding to macroeconomic trends, with fewer incremental barrels absorbed by China in recent years. By contrast, between 2001 and 2011, China’s oil demand doubled to reach more than 9 million barrels per day (mbd). The growth was so massive that it accounted for over half of the incremental increase in global oil demand during that period. Oil producers around the world counted on growing demand from China, and China delivered—at least for a decade.

Since 2011, however, growth of oil demand has weakened greatly, expanding at only 4 percent annually instead of the average rate of 8 percent during the prior decade. Industrial fuels (diesel, fuel oil, naphtha) were chiefly responsible, due to the deceleration in industrial and investment growth. Slower growth in China’s oil demand is a key reason behind the precipitous fall in global crude prices. IHS Energy expects Chinese oil demand to grow at only 3-4 percent over the next few years.

Record low power demand growth threatening power plant utilization

To meet burgeoning demand that grew on average 12 percent annually between 2002 and 2011, China’s power generation capacity tripled, making the country’s electrical system the largest in the world. Power consumption growth since 2011, however, has averaged only 6 percent per year, as economic growth slowed and industrial demand dramatically decelerated. The investment-to-consumption shift in China’s economy hits power demand especially hard, as industry accounts for 70 percent of the electricity consumed in the country. This relatively slow growth in power demand will continue.

Meanwhile, substantial new capacity additions are still coming online. In particular, so many new hydro projects are under construction today that those slated to enter service in the next four years alone would be sufficient to supply the electricity needs of the entire country of Mexico.

The decisions to invest in these large projects were made more than half a decade ago, when power consumption in China was still growing at double-digit rates. But approval and construction took 5-6 years. These projects’ entrance into service is now expected to lead to lower average utilization hours for China’s power generation fleet, as overcapacity appears. The implications for power producers, equipment manufacturers, and fuel suppliers will be significant.

Great turbulence in the coal market as coastal demand and imports peak

Nearly three-quarters of China’s electricity is generated from coal, so it is no surprise that slowing growth in power demand spilled over into the coal sector. What was a surprise, however, was the extent of the decline; 2014 was the third successive year of oversupply in the Chinese coal market and the most serious to date.

For the first time this century, Chinese coal consumption and raw coal production both dropped in 2014. In light of a concerted policy drive to curb air pollution in coastal cities, it appears that coastal China’s coal demand and the imports that serve it have both peaked and are now in long-term decline.This was unthinkable only a few years ago and has sent shock waves through the coal industry.

Thousands of mines are facing cuts as prices have fallen precipitously from a high of over RMB 840 ($130) per ton in 2011 to less than RMB 500 ($80) today, a drop of more than 40 percent. IHS Energy expects prices to remain at this low level for several years, leading to more mine closures in and outside China.

Natural gas: Can China absorb the upcoming wave of LNG supply?

Back in 2010, China was in desperate need of more natural gas, as demand outpaced domestic supply. China’s national oil companies thus went out and signed many long-term contracts for liquefied natural gas (LNG). Today, these commitments are starting to deliver, with more than 20 million tons per year of contracts scheduled to commence in 2015 and 2016.

There are now questions whether China can indeed take up all this new gas supply as demand weakness starts to emerge for the first time. During the summer of 2014, for example, spot LNG imports into China dried up, in an environment of sinking prices. Spot prices this winter, usually a peak demand season, were reported to be less than $10 per million BTU, from as high as $20 several years ago. The LNG industry is shifting decidedly from a seller’s market to buyer’s market.

Yet even as LNG prices trend downward, coal remains the cheapest fuel in China. Despite rising environmental concerns and some coal-to-gas switching, end-user energy prices continue to be a concern for a government that is very sensitive to social stability. These concerns may act as a ceiling on how much China can take from the global LNG market even with a lower oil price.

What’s life after the super cycle?

A full decade of robust demand growth and high commodity prices made many forget the cycles the energy industry is prone to in its history. The super cycle of the past decade propelled China to become one of the most important drivers in the global energy system. Because of that, China’s demand deceleration and the associated energy oversupply in the country are of particular importance for the world. The outlook in China now is for slower growth in oil demand, decreased coal-fired power plant utilization, overcapacity in coal mines, and reduced appetite and higher price sensitivity for imported gas.

While many of these trends pose investment risks, they also create potential opportunities, such as investment in long-distance power transmission lines that could unlock cheap coal and hydro resources in western China, coal conversion technologies to turn cheap coal into methane or petrochemicals, and the possibility of procuring cheaper gas in the global market by non-national oil companies. Furthermore, after a decade plus of rapid growth, China’s base of energy demand is many times bigger, so even a slower rate of growth nonetheless produces large increases in incremental demand. This means new supply will still very much be needed.

 

CERAWeek 2015: The New Geopolitics of Energy video series

Carlos Pascual and William Burns on Iran, Part 1
Carlos Pascual and William Burns discuss the Iran Nuclear Deal: the prospects for the Middle East and the World (Part 1)

 

Carlos Pascual and William Burns on Iran, Part 2 Carlos Pascual and William Burns discuss the Iran Nuclear Deal: the prospects for the Middle East and the World (Part 2)

 

US Secretary of Energy Ernest Moniz
Moniz discusses the Future of the North American Energy Powerhouse

Angela Stent
Carlos Pascual and Angela Stent discuss Russia and its relations with the West.

 

This section was prepared in conjunction with CERAWeek 2015, the world’s premier conference on the energy future.Monday, April 20, 2015schp_IHSCERAWeek