Monday, February 15, 2010

China's Preparing for Oil Scarcity, But Is America?

The economic recession is now out of its most acute phase, but the systemic damage and slow recovery will be felt for years in many Western countries, particularly the U.S. Conversely, China grew at about 8% last year and a top Chinese think tank has predicted10% growth in 2010. As China roars into its year of the Tiger, America will be dealing with high unemployment and low single-digit growth for half a decade or more.

If we were to deem 2010 as a starting point for evaluating future economic prospects, China obviously has a leg up over the U.S. from the get-go, in terms of growth potential.

But which country is better positioning itself for long-term growth? Two decades from now, the gears of national economies will be churning without the last century's most popular lubricant: oil. In a future of oil scarcity, will the U.S. or China be more prepared?

If you travel around China, palpable is the massive infrastructure investments being injected into every major city. Guangzhou, Xi'an, Shanghai, Hangzhou, and Fuzhou, along with many other first- and second-tier Chinese cities, have plans to begin or expand subway and high-speed rail systems as quickly as possible. This is part of the government's $350 billion investment to build 20,000 kilometers of new rail in the next three years.

While the Chinese have now clearly passed Americans in auto sales, the PRC government is constructing a modern mass transit network because it knows that the future -- 20 years on -- includes severe oil scarcity. So it is providing the links for citizens and businesspeople to easily traverse China's vastness in the future, when most people won't be able to afford the expense of autos. (And the oil cost associated with a car is not only in the gas needed for daily driving; it also includes road materials, building the car, and road tolls. For much more on this, see $20 Per Gallon.) Moreover, the Chinese government is structuring incentives in its economy so that businesses and people choose more efficient and less petroleum-reliant modes of transport. For example, a vehicle emission tax is being formulated that will make all autos -- but especially the most energy intensive -- more expensive to own.

Across the Pacific, the U.S. is a different story. Its economy is now, like the Chinese, still dependent on oil, but the government is doing little right to prepare for the slow decline into crude oil scarcity. The people of California, if they can get beyond their budget crisis, have called for a high-speed railway that would link its most important commercial hubs, yet in the rest of the nation, the collective mindset and, thus, Congress's focus is far from the future of national transportation. Despite the warning signs of rapidly increasing gas prices, Americans haven't realized the salience of world-class public transport in a not-too-far-off future where cars and plane tickets are luxuries.

This evaluation of economic prospects is complicated, however, by the costs of international transport. Currently, global supply chains are dependent on cost-effective transport to every corner of the world -- made possible by cheap oil. Trading over long distances by air, sea, and land will all become less-sensible for businesses in the future; trade will necessarily become more local unless international transportation can find a viable non-oil alternative. So while the Chinese are building their infrastructure, the trade and export growth that fund these projects will be threatened. So the potential for China to capitalize on its current infrastructure investments will depend on a larger chunk of its annual growth being domestic rather than foreign consumption.

For the U.S., expensive oil and reduced international trade could be a huge boon to its low growth numbers. The necessity to produce goods closer to the point of consumption will both bring millions of jobs back to America and help reduce America's trade deficit and debt. But this benefit is contingent on the U.S. finding the resources and will to build a massive railway system on which to transport these goods. When automobile and air transportation becomes ridiculously expensive, at $10 or $14 per gallon, rail will be critical to keep products moving at low costs across America. Without an effective rail system, goods will simply be more expensive, thereby raising prices and damaging consumption.

And then there's the "why." Why does the U.S. have such a hard time investing in critical long-term infrastructure projects while the Chinese can quickly construct a massive national transportation network backed by piles of money? Surely, the political systems play no small part. A centralized one-party state has few barriers to ramping up national plans, for better or for worse, than a staunchly partisan democracy.

Ultimately, the "why" is less important than the "how" for America. Despite the apparent righteousness of scapegoating on a democratic system, without greater preparation, the U.S. economy could be left uncompetitive or worse in the approaching oil-starved world.

This was originally published on RearClearWorld.


  1. You may soon have all of China's oil, don't worry, when China collapses after it's statistical frauds are all exposed.

  2. yeah china has been growing up very quick in the last years, madding diplomatic relationships with some other countries, something that china didn't do since ever I guess, because they are very xenofobic, I guess there's a hidden motive that china starts to made bussnies with other countries.