Power Up: Energy and The Chessboard
June 2, 2020
Andrew Schwartz: Welcome to The Asia Chessboard, the podcast that examines geopolitical dynamics in Asia and takes an inside look at the making of grand strategy. I'm Andrew Schwartz, at the Center for Strategic and International Studies.
Benjamin Rimland: The story of grand strategy on the Asia Chessboard is a story in part about access to energy, both for consumers and producers alike. With COVID-19 delivering a major shock to the system, how are Asian producers and consumers adapting new strategies to the new reality?
Mike Green: Welcome back to the Asia Chessboard. I'm Mike Green, senior vice president for Asia at CSIS and a Professor at Georgetown and head of Asian studies there. We hope that everyone is safe and productive in these difficult times. To put it in a context that we haven't talked about yet, we are joined by Sarah Ladislaw, senior vice president at CSIS and the person in charge of our energy programs. Sarah has been producing quite impactful and influential analysis. You can follow her discussions on energy and geopolitics on her podcast, Energy 360. Sarah welcome.
Sarah Ladislaw: Thanks Mike.
Mike Green: It's great to have you. It's a complicated topic. It doesn't actually make sense in a lot of ways what's happening in energy markets. We'll try to connect that to the geopolitics because historically energy has been considered, especially in the post-cold war environment, a real driver of security tensions and geopolitics in Asia. So now that energy markets are upside down, we'll try to make sense of what that means. But first, on these podcasts people are always really interested in hearing about you. So tell us how you got into the energy business. Connections you have the Asia CSIS and how'd you get here?
Sarah Ladislaw: Well thanks very much for the opportunity to be here. I'm looking forward to the discussion. I do have some connection to Asia. I'm originally from New Hampshire and went to school here in D.C. at the George Washington University. And when I was living in New Hampshire, one of my neighbors was a host family to Japanese exchange students and so I met a lot of them. I thought Japanese culture was really interesting and quite frankly, as the most foreign thing I could imagine to my small town life in New Hampshire. And so I went to GW to study international affairs and actually majored in Japanese. So I was a Japanese language major. So that's not me just trying to suck up to you Mike. I actually-
Mike Green: Naruhodo [foreign language]
Sarah Ladislaw: I studied the language for a while and then went to graduate school for international security. And to be honest with you, I know this can get me exiled in certain parts of CSIS, but I didn't really like the hard defense issues very much. I really liked the economic issues and energy just struck me as perhaps one of the most endlessly interesting things that I could do because it touches on everything. It touches on economics. It touches on geopolitics. It touches on development issues. And it's just a really fascinating lens through which to look at the world. And so when it came time to graduate, I was looking for a job as a presidential management fellow in the U.S. government and found a job at the department of energy in their office of international affairs. The only rub was I couldn't do Asia.
Sarah Ladislaw: I had to do the Americas. And so I had to leave my language and regional training behind and start working in Latin America and North America predominantly. And so I worked there for about five years doing a range of different things, relating to science and technology and energy and geopolitics. It was a really interesting and important time. It was actually like the opposite of today. Prices were extremely high. There was a real resource competition going on and we were seeing a lot of the geopolitical fallout from the rapid growth in Chinese energy demand and things like that. And so it was a very different time, but it certainly convinced me that energy and geopolitics are inextricably linked with one another.
Sarah Ladislaw: And so I got hired from there to come over to CSIS and I've worked at CSIS for the better part of 12 years. I did leave to go to the private sector for a short period of time, but came back because I don't know about you, Mike, but I find think-tanks to be a really addictive place to work. You get to have your own opinions. You get to set your own agenda and you get to have lots of impact without having White House hours. So very much enjoy the work that we get to do at CSIS.
Mike Green: As one of my oldest friends who's not at all in the policy worlds, completely different field of work, tries to understand what the think-tank life is. And one day over beers, he just confessed to me. He said, "You mean they just pay you to be you?" But I like to think that we earn that expertise. And it's interesting how you did it. And I think for people listening who are in grad school right now, the presidential management fellowship is a really good way to get into international affairs. You don't have to join the state department and become a diplomat. There are multiple jobs in the department of energy, justice, and elsewhere, as you've shown where you get a functional expertise, but get to work on international affairs.
Mike Green: So we'll bring you back to Asia and energy markets. So two years ago, most of the analysis about the geopolitical impact of energy markets on Asia, went something like this. Oil prices will stabilize at somewhere around $70 or $80 a barrel. The enormous demand for imported hydrocarbons, especially China, but also Japan and Korea would lead to much greater tension over territorial issues in the East China Sea and in the South China Sea, would lead to this geopolitical alignment of China and Russia, supplier, demander. Because of these high oil prices and high demand.
Mike Green: So here we are in a world post-COVID where oil prices have completely collapsed as has demand, of course, but what do you see? Intensified competition in the South China Sea. More alignment between China and Russia. It's an interesting control experiment about whether or not energy drives geopolitics but before we come back to that question, help us understand. So what did happen? We're in an upside down world now in energy markets. Explain how we got here, what the scenarios are before we think through how they might affect the geopolitics in the region.
Sarah Ladislaw: Yeah. So I think there's two important things to think about. One is the broader strategic shift that we've seen in the context of energy markets. And then there's going to be the COVID-19 world and thereafter, which we're still all analyzing in real time. I think the most profound shift to take place in global energy markets over the last really five years or so is well encapsulated in a cliché in my world, which is the move from scarcity to abundance. So most of us, when we think about energy and geopolitics, we think about a world that doesn't have enough energy. And for a variety of reasons, we in the last 5 to 10 years, have moved away from that world into a world where we have more energy supply than we actually need. And this is pretty much across the board.
Sarah Ladislaw: It's certainly in oil. The United States over the last decade has experienced the largest single increase in oil and gas production in the history of the world. Before the current market conditions, we're the largest hydrocarbon producer in the world. So larger than Russia, larger than Saudi Arabia. The largest oil producing field in the world is in Texas. So we really flipped the narrative in terms of what we tend to think about is that early 2000s to the mid 2015 timeframe, which was high prices, not enough, growing demand in China, how do we keep up with all of that? It's really one now where suppliers, countries around the world that are producing oil and gas, have to think in competitive terms about how they shove those supplies into consumer markets. So it has completely changed the power dynamic from one where we're fundamentally concerned about competition among producers for access to resources, or we're thinking about producer competition for access to markets.
Sarah Ladislaw: And so this is really a very different dynamic for us to think through. It's also complicated by the fact that alternatives to oil and gas and coal, which predominantly coal and gas function in power markets. Oil is largely a transportation fuel in many parts of the world, but all of those fuels have technological competition now through renewable energy, through nuclear energy. The costs for renewable energy technology in many markets around the world, just on a generation basis, is now competitive with things like natural gas and coal. And so moreover, countries are starting to look at the provision of solar technologies or wind technologies or electric vehicles. These new emergent technologies as having some sort of industrial advantage for them. And so you're seeing many countries look at China and say, "Geez, they didn't just sort of satisfy their energy needs. They're trying to create competitive industries in their economy, through the subsidization and the manufacturing of these technologies. How should I do that?".
Sarah Ladislaw: If I'm India, how do I become the maker of these technologies, as well as the consumer of these technologies? Places like Vietnam, other parts of Southeast Asia, really trying to think about, is there something I'm supposed to do here that is smarter and more strategic in my industrial competitiveness strategy that links to these new energy resources. So you've taken an already oversupplied market for conventional fuels. You've added cost competitiveness of these new fuels. And then you've added this industrial competitiveness lens, which leads countries to potentially subsidize different types of energy technology based on what kind-of manufacturing or technological competitiveness they'd like to pursue. So again, it's a real shift to, I call it the three CS of energy geopolitics. It's Consumers, Competition and Crises. And that's really the new framework to think about energy and geopolitics today.
Mike Green: So, you've described the pre-COVID transition that was happening in energy markets and the impact on both producer and consumer competition. What is changing, being accelerated by COVID, and are those changes permanent? Too soon to say? What's happening?
Sarah Ladislaw: So COVID-19 has really left the entire energy industry in a lurch. On the one hand, it's really remarkable that we have this global health crisis that has turned into a global economic crisis. And the energy industry, particularly in the electric power sector, has functioned very, very well. So on one level, the energy industry has proven to be a tremendous asset in a world where we are all social distancing, where we need the provision of electricity, both for the sanctity of our public health systems, for our comfortability and our home life, and all of those types of things. So there's a lot of credit to be given to the folks that work in the energy industry to make sure that's all going. I think what happened is we've seen particularly in the oil markets and natural gas markets, this has been particularly acute.
Sarah Ladislaw: If the world is not flying and people are not driving, then there is a huge decline in the need for things like oil and gas. In oil markets alone, in the second quarter of this year, what we usually consume is on the order of 100 million barrels a day, we're going to be down at least to 80 million barrels. So a 20 million barrel a day cut in terms of demand—and it could get worse than that. And so I think what we're trying to figure out now is how long does that last? So when can we get back to work and when will prices rebound? And what's the difference between, as Larry Summers has been terming this crisis, the world just sort of shutting down for a holiday and opening back up versus the oil industry shutting down in a way that they can't completely open back up.
Sarah Ladislaw: And so a lot of what's happening right now is people trying to think about how much of this crisis is a temporary phenomenon versus something that's going to reshape the industry. I tend to think that there's going to be a lot of opportunity to reshape the industry because I think that the downturn is actually going to be a bit longer than most people are assuming in their forecasts. And that means, particularly here in the United States, a lot of the companies that are producing a lot of the oil and gas that we consume will likely go bankrupt. And so they probably won't come back unless there's enough investor interest and the price signal for them to recover.
Sarah Ladislaw: In OPEC producing countries, there's going to be a lot of economic crises. They simply cannot sustain their livelihoods at $20 a barrel. It's nowhere near the territory of what they need to be able to support. And for consumers, and I hear a lot of this conversation in the Asian context, sure there's a lot of economic stimulus that can come from low oil prices and low energy prices. But that's only if you can use the energy. And so what will be really important is to figure out how long prices will stay low through the recovery period. And I think that countries that are able to figure out how to put low energy prices to use in that recovery is going to be pretty important.
Mike Green: So I can see companies going bankrupt, but if there's oil and gas in the ground in Texas or in the Middle East and there's demand for it, then wouldn't somebody invest in the market work and it would come back? What do you mean when you say some of the energy on the supply side won't come back?
Sarah Ladislaw: So there's a couple of different factors, particularly in the United States. One is that it's not just that demand is cratering and supply isn't shutting down fast enough. When that happens, all of this oil that we're producing goes into storage. And so storage is filling up. If you remember, in 2014 and 2016, there was a price crash in oil then as well. And that resulted from the fact that we had filled up the world's storage capacity. And we're doing that again. And so that filling up of storage capacity can have significant downward pressure on oil prices for quite some time.
Sarah Ladislaw: So how quickly we work off that storage will be part of the equation that determines oil prices, which is part of the equation that determines whether investors are interested in investing in the oil sector. The second part of that is even before this was happening, there was a real question as to whether or not investors, particularly in equity positions within the onshore US tight oil plays in the United States, whether they were thinking that those were good investments. They weren't making returns. Many of those companies were living well beyond their means. The only way they could keep their companies going was by producing more. There's an open question as to whether or not private investors are going to see that as a good opportunity when the economy recovers. So you just might not see the level of interest that you've seen from private investors, particularly in the United States, for oil and gas production.
Mike Green: So the market will work, but it'll be really contorted for a while, potentially, because of this?
Sarah Ladislaw: Absolutely. Absolutely.
Mike Green: So the history of modern Asia of war and peace in geopolitics is the history of national strategy’s driven by energy. So the Japanese, as you know well as a student of Japan, were driven to policies before the war to seek autarchy and control of energy in Southeast Asia, and then embraced the U.S.-Japan Alliance and a global system to protect markets. The Chinese Belt and Road Initiative in large part has been about energy infrastructure. The Japanese have tried to compete with that. The Russian strategy in Asia is very often about building pipelines. I remember being in the White House when we had the second North Korean nuclear crisis, and President Putin wrote President Bush saying, "I have a solution to the crisis in North Korea. If everyone pays for Russia to build a pipeline through North Korea, to supply Japan and South Korea, we can solve it".
Mike Green: So sometimes in ridiculous ways, sometimes in existential ways. All the major powers in Asia, look at Australia natural resource markets and exports, their energy strategy is their national security strategy. So let's go through the region and look at some of these and how this might have upended that. Starting with China. China's drive for infrastructure investment, some would say mercantilist, especially in the energy sector, Made in China 2025 and moving towards electric vehicles in alignment with Russia. What do you think this does to China's overall trajectory? Are they in a good place because of this? Or is this going to confound their strategy?
Sarah Ladislaw: China, like the U.S. used to be considered, is just so centrally important to the global energy sector, particularly because they're just such a big center of demand growth. So everybody I know is looking to China to try and figure out how they're going to recover, and if they recover quickly and consume energy in many of the same ways that they were before the crisis. That's going to be a really big and important signal to global energy markets. So in a way, the importance of China is their centrality as a consumer and consumers have a lot of power in this particular energy market, as I said. So the choices that they make about how they recover and what kinds of energy they consume are probably some of the most important in determining the trajectory of the global economic recovery and how that shapes energy markets.
Sarah Ladislaw: So for example, if they choose a path of sustaining energy intensive stimulus. So they decide we need to grow the economy and it's going to be through manufacturing and just trying to turn on the engines of the economy. That's very energy intensive. It'll probably mean that there'll be a significant uptake in energy demand on that side of the equation. Much of it will be for things like coal and it'll have significant environmental implications. If they say, well we're going to stimulate the economy and we're going to put a huge amount of money into the manufacturing of the things that we have deemed to be the areas we want to be competitive in the China 2025 plan, which a lot of those are nuclear power things like electric vehicles, things like solar and other renewable energy technologies. If they put a huge amount of money into those technologies and to those resources, well that's going to be a very, very, very significant stimulus for the green energy economy.
Sarah Ladislaw: And so the direction that they choose and how they choose to do their economic stimulus is also going to matter just over and above the strength and stability of their economic recovery. So they matter in both of those ways. I think that the thing that's disappointing people is that they're realizing that China may not be able to muscle up the kind of stimulus that we saw after the great financial crisis. And so if that's the case, then I think some of the expectations for China really setting a signal in this post-COVID world will be very different than they were in that last instance that we have.
Mike Green: Yeah. I think that probably is the case when you consider that almost half of China's export markets are now countries like the U.S., countries in Europe that’re being hit by this, Japan, which is being hit again. And they're trying to restart on the supply side for manufacturing, but the demand side is just not there.
Sarah Ladislaw: Yeah.
Mike Green: And it does seem like the stimulus in China is more towards energy intensive manufacturing. Can they realistically push for the electric vehicle technology plan they had Made in China 2025 with oil prices so low. Is the market going to get in the way of that technology ambition?
Sarah Ladislaw: Yeah, it will. And I think the other reality is thinking back to the pre-COVID world, their new energy vehicles program, their subsidies for electric vehicles were being rationalized as well. So we're going into that phase, the post-thousand flowers blooming phase of their stimulus program into the, let the market work a little bit, let's kill off some of these companies let's try and let the most competitive ones win. And now we've got this environment where low oil prices will be a challenge. So if they want to have a competitive future for some of those technologies in companies that they've created, it'll probably require additional government support in some way, shape or form to steer consumers towards that and away from cheaper oil supplies.
Mike Green: So what's the impact of the low oil and gas prices on Belt and Road? On the one hand, you could look at this and say, there's an awful lot of developing countries that have taken out loans and debt that's not sustainable. Based on assumptions about oil and gas prices that are way off, and China's going to lose a lot of money and have a lot of people on them. On the other hand, you could look at it and say, no, there's going to be a lot of developing countries that have taken on energy infrastructure and now cannot repay their loans which is going to let China nationalize and control so that when we do recover, they have even more control of energy infrastructure. You could see the argument going either way and it's early days, but what do you think?
Sarah Ladislaw: I end up in a very similar spot to how you frame the question, which is even in terms of whether or not you think the Chinese would find it to be in their interest to own a lot of this infrastructure. I think the lesson that we had learned from a lot of Belt and Road Initiative, energy oriented infrastructure was twofold.
Sarah Ladislaw: One that a lot of what China was doing was reflecting some of the interests of the energy priorities in those given countries. So for example, in Vietnam, like a buildout in coal fired power generation was largely happening anyway. And the Chinese just came in and helped facilitate that. It was a win- win, whereas like in Ethiopia where they are looking for more high speed rail and clean energy technology type things, the Chinese were very willing to accommodate that as well. So I think that that's the framework that we go into thinking about how China was thinking about Belt and Road Initiative energy oriented projects. Now, whether or not they think taking on indebted projects is going to be in their long-term interest, I'm not so sure. I might not want to be saddled with all of those projects. And so I think that that will be similarly a very stinky wicket.
Sarah Ladislaw: And I don't know, you probably know better than I do Mike, but I think it increases the likelihood that they'll be very concerned about going out and doing a lot more of this Belt and Road Initiative investing the way that they were at the heyday of this phenomenon in this particular context. Because I think that there's a lot of liability to holding that debt. There's a lot of liability to owning those assets. It may be a level of involvement that they just don't want to have. And so it may make them a little bit more reluctant to get involved in those.
Mike Green: I think they'll probably be more reluctant. I think that the way I framed the question is also how I think about it. I'm still on the fence that temptation in Beijing will be to colonize. To put a not too fine point on it, to take advantage of this, but I'm sure that the China Development Bank and others are feeling great empathy with other lenders and are discovering the moral hazard that OECD countries like the U.S. and Japan already know very, very well. And I wouldn't close the door on the possibility that with a less competitive nasty U.S.-China relationship, you could woo the Chinese towards more alignment with the Paris group, with the DAC countries in the OECD.
Mike Green: And Japan is trying to do that because Japan's a free and open Indo-Pacific energy infrastructure investment is competing with China, but they are opening up the possibility of working with China, trying to get China to sign on to better debt sustainability. Because our friends at JBIC, Japan Bank for International Cooperation, are talking to their friends at the China Development Bank and can feel their pain. So a lot will depend on how the U.S. leads, frankly, on this one. What about Japan? You would think that Japan would be a country that's delighted at low energy prices right now, but is that right?
Sarah Ladislaw: Again, everybody who is knee jerk happiness about low energy prices gets muted because there's nobody to use it. It doesn't benefit anybody if nobody could use it. Just think about how many times you've gone up and filled your car in the last several weeks. It's probably not nearly as much as... I haven't been in a car in four weeks. So it doesn't benefit the economy if you can't use it. And so I think that there's a lot of real difficulty, particularly for Japan in thinking about how they manage their domestic reliance on oil markets, on natural gas markets. All of this is very complicated for them because they have to import everything that they use. And so I think that the volatility in oil markets, the positions they've taken on certain trades, how they think about playing in natural gas markets, it was all really complex before this.
Sarah Ladislaw: And now it's become virtually impossible to understand where your company is, which there's a lot of Japanese companies that are deeply engaged in many parts of the global energy industry. Not just what's happening in Japan, but they've taken forward positions in terms of assets they own in the United States, in natural gas and oil. It's just really complex and so to the extent that the Japanese government or Japanese companies have been involved in some of these projects in sectors of the economy that are taking a hit, everybody's taking a hit. When you can't take advantage of the low price and you get harmed by the high prices, it can have a negative impact. I think for me, Japan's issues are a little bit broader than this. Japan has got to decide what its long-term trajectory for its energy sector is and whether or not nuclear is going to play a significant or an insignificant part of that.
Sarah Ladislaw: And based on those decisions, it has huge implications for how much they have to ramp up in terms of natural gas purchasing or renewable energy subsidizing. And this makes things complicated for them. They really have to think hard about what they think the world is going to look like on the other end of this. They had certain theories about where they should be buying natural gas from, in this sort of early 2020 period of time. I think there are going to have to be rethinking some of that and thinking quite hard about what the potential implications of this are for them.
Mike Green: As you know, since the March 2011 tsunami, earthquake and Fukushima nuclear disaster, Japan's government has held out the possibility of 20, 25%, something like that, nuclear in their energy mix and it's not really happening. Could this change the debate, do you think? Or is it net neutral in terms of the impact on the energy mix?
Sarah Ladislaw: I think right now it's net neutral. And I think that's because what's happening right now is people are experiencing the shock and they're not experiencing the recovery. And a lot of what's going to happen in shaping their views about energy policy is going to be about shaping the recovery. So for example, right before all of this happened, Japan had put out their next climate pledge thinking about what they were going to put on the table for the UN conference of parties meeting that was going to take place at the end of the year. And people were generally pretty underwhelmed. It really wasn't a very big decisive shift in any direction. It basically signaled that Japan is going to keep muddling along, which for an economy the size of Japan's, for the importance that it plays in the global economy. It was really an indecisive signal about whether they were sort of launching a clean energy revolution or just trying to figure out how to satisfy some other economic and security priorities within their energy frame.
Sarah Ladislaw: I think that for Japan, they're going to need to really think hard about... They probably don't have the wherewithal to launch some massive green stimulus program that's going to reshape their economy. So I don't really see them as being able to make a very profound shift. I don't think that this changes the political dynamics around nuclear that have frozen that decisionmaking process for a long time. So I don't see it as being a hugely decisive moment or shift for Japan and their energy strategy.
Mike Green: So we talked about China and Japan, the two biggest consumers of energy in the region. There are of course important producers. Russia is an uneven and inconsistent Asian power, but an East Asian power. And then you have Malaysia and Indonesia. One in increasingly net export and the other. One that should be a net exporter. On the producer side, what does this do? Particularly Russia? Russia is always a wild card in Asia and this must significantly complicate Putin's assessments about how much budget and power he's going to have to play with.
Sarah Ladislaw: Yeah. I think that that's right. And I think it's important to remember that not all oil producers are the same. So Russia is a very large oil producer, 11 million barrels a day and they have a lot of latitude. So they have a lot that they can do in terms of thinking about how they position relative to how they price their currency, how they deal with their state owned enterprises. They're just a big player and big players have some more options in terms of thinking about how they position in this market. Nobody called Indonesia and Malaysia out to the White House to put together an OPEC deal. So I think they play on a different level of certainly within oil market dynamics. I think you're right. I think right now they're having to deal with trying to figure out how they're going to shut in production, how they're going to cut back on production, both because of the OPEC deal.
Sarah Ladislaw: But more importantly, because I think that they've realized in a way that they certainly didn't several months ago, the real magnitude of the collapse in demand, and the fact that they're going to have to think about how they pull back on production. And so they're thinking about how do they do that in ways that don't damage producing fields. How do they do that in ways that don't put them in a bad position for the investment that they need to do for oil production going forward. So I think that there's a lot of that kind of decision making going on within the Russian energy sector. I would say on the geopolitical side, there's just huge amounts of speculation that Russia was certainly at least thinking strategically about this downturn. Even though, as I said, they did not understand how deep the downturn in the economy was going to be and how hard oil markets were going to get hit.
Sarah Ladislaw: But they certainly did not want to be the only ones feeling pain. They wanted the United States oil market to feel pain. And so that was part of how they were positioning going in. They think very geopolitically about the oil market. And so I see a lot of potential for much more Russian opportunistic maneuvering throughout the duration of this crisis and then afterwards. On Indonesia and Malaysia, they're in a different camp. The investments that go into upstream oil and gas development in those countries is hampered from the start. It's higher price, it's not as competitive. And in a world that is going to be completely overwrought with oil supply and natural gas supply for several years to come. I think they're going to have a really hard time attracting additional investment in sustaining some projects that are going to get cut in the massive capital expenditure cuts that we've seen coming from oil and gas companies. And they may squeeze their state owned energy companies to support the domestic economy as well. So I think that they're going to experience some real downsides to this.
Mike Green: As I was saying at the outset, two years ago the predictions on future geopolitics in Asia focused on energy predicted correctly, that there would be more intense competition, confrontation in the East China Sea and the South China Sea. Between Japan and China, between claimants in the South China Sea and China. More alignment between Moscow and Beijing because of the obvious supply-demand connection. And with the collapse of oil and gas prices, things are really messed up. And there are big questions about the markets and big questions about the assumptions these countries have about their sources of growth, and yet all those trends are happening anyway. And they're more intense.
Mike Green: China and Russia are aligning more particularly on propaganda around COVID-19 in the U.S., and militarily. South China Sea, the PLA Navy and Coast Guard is more active, not less. So it makes you look back on those predictions and think they were kind of right about the geopolitics, but the drivers may not have just been energy. It may have been nationalism and narrower military goals and energy is not a direct driver so much as one of those sources of uncertainty that causes other the things. What do you think?
Sarah Ladislaw: I agree with you, I'm predisposed to agree with you because I think that that's the frame that I've had for those particular regions anyway, at least for the last five or six years. It's hard to look at the resource base across the world and conclude that the South China Sea or the East China Sea are hugely consequential for energy markets. They're just not. They can be thought of as strategic plays much in the way that the Arctic is. So you could have a territorial interest in being there. You could really want to gain the learning about operating in those environments or learn about how much it costs to produce those resources, but they're not market critical places.
Sarah Ladislaw: And so the geopolitical attention that's given to those regions doesn't match their value in the energy space. And so I've always sort of thought about those as being very geopolitically important places, but maybe not necessarily as much for energy purposes. And I think particularly right now, they're even less important. And so I think that what you're seeing is probably a lot of opportunistic maneuvering when governments are distracted by crisis. That's something we're seeing across the board and in a lot of different ways. And so I think that that's probably what's happening and the reason why those places are heating up.
Mike Green: And to the extent there have been diplomatic efforts to resolve those problems, they’ve center around energy. Discussions on joint development, which have gone nowhere, and may ultimately not be the sources of the problem anyway. Shifting quickly to the Russia-China relationship. I would think that the collapsing oil and gas prices make Russia an even more junior partner to China, China's problems notwithstanding. Still aligning for ideological reasons, opposition to NATO and American alliances, but this really puts Russian in an even more junior position to China, I would think.
Sarah Ladislaw: Yeah, I think that's true. It's really funny because oftentimes in my world, again, people think about producers of energy resources as being influential and not consumers. But as we're seeing particularly right now, consumers matter a lot. Demand always matters more than supply almost universally. And so China has a lot of levers. It has a lot of levers because so many economies around the world really depend on it. The only thing I'll say about Russia, is Russia consistently does a very good job being opportunistic about playing its hand. And so I think that the thing that speaks to Russia's advantage right now is how chaotic the world is, and that is going to continue to play to their strengths.
Sarah Ladislaw: They have been very good at finding opportunities to punch outside their weight class in a lot of markets where energy provides a way for them to get into particular crises. So for example, in Libya or Venezuela, or even in OPEC dynamics in the Middle East, they've just really found a way to make themselves a central player. And they play very differently than China. With China, they seem to be very aligned with their own interests. Oftentimes leading with economic interests, there can be other geopolitical interests in there as well, but Russia plays a much more opportunistic game. And so while I generally agree with your thesis statement, I do think the Russians have a tendency to surprise in environments like this.
Mike Green: Let's finish with climate change. It's really fascinating that you can now see the Himalayan Mountains from Indian cities. They're beautiful. And in China, including in big major cities, you can see blue skies. And yet when you go through the media in those countries, or you look at social media in particular or government policy, you don't see a lot of people saying what a great lesson let's get serious about climate change. It's all about economic growth. And a lot of that is because the U.S. isn't leading of course on this issue, but what's the future of the climate change debate? Which is one of the very few areas where over the last decade, there has been some measurable level of cooperation between the U.S. and China and Japan and China.
Sarah Ladislaw: Yeah, I think it's an open question. It is startling that on the one hand, you see local air pollution issues, which drives a lot of the kind of policies that are good for climate change, even though local air pollution and climate change are different. It does drive a lot of the impetus around doing things that are positive for reducing greenhouse gas emissions in places like China, in places like India. The co-benefits that you get through air pollution and things like that are very important to driving those policies. So I agree with you. I think it's just, people find it very hard to talk about the positive changes in the environment relative to the really terrible economic conditions that people find themselves in. And so the climate community has been very cognizant of, even though we may see U.S. emissions drop by seven and a half percentage points this year, which is unheard of. And really quite frankly, the only kind of movement we've seen in emissions reduction that is like what we need to see in terms of where we want to go for climate change.
Sarah Ladislaw: People are very reluctant to say, "Aha, see, we should keep going like this" because that's not the message they want to send. You do not want to say that the only way to deal with climate change is to shut down the global economy. So I think what you're seeing is a movement that's being started by lots of different policymakers and investors and companies in different parts of the world saying, "When we can start talking about it, let's talk about building back green." So people really trying to influence the conversation about the Chinese stimulus program or the Korean stimulus program, the European stimulus program, the U.S. stimulus program. The question is when do we get to stimulate?
Sarah Ladislaw: When is the economy going to be healthy enough that we're not just putting it on life support, but we're trying to drive a recovery. And this is where the climate community is spending all of their attention, because if you're going to spend trillions of dollars in infrastructure, you better hope that that infrastructure is going to be the low emissions kind or the kind that helps the economy transition to deal with climate change, or is more resilient to dealing with climate change or else you're probably not going to get the opportunity to see that kind of money spent for a very long time. And so I think that most of the focus is really being put on trying to put the emphasis on building back green.
Mike Green: There is real irony in the probability that come November, the statistic that will be most positive for the Trump campaign will be reduction of CO2 emissions.
Sarah Ladislaw: Yes, right.
Mike Green: I'm not sure he'll embrace climate change as a policy, but it is a long-term challenge. This doesn't fundamentally alter the trajectory that was so dangerous for the earth or the need for cooperation. So Sarah Ladislaw, thank you very much. Everyone can follow Sarah's analysis and her team's analysis on energy markets and geopolitics on csis.org and on the podcast Energy 360. Thank you very much. You didn't do 360 degrees with us today. We did about 90 degrees, just Asia. It was terrific. Thank you.
Sarah Ladislaw: Wonderful. Well, thank you very much. It was great to be on with you.
Andrew Schwartz: Thanks for listening. For more on strategy and the Asia program’s work, visit the CSIS website at csis.org and click on the Asia program page.