This week we expand our global power market analysis with a focus on how various regions compare and contrast with China, which is by far the largest power market in both size and volume growth. China’s power market dominance has allowed it to become “manufacturer to the world” and positions it well in the current race to build artificial intelligence (AI) capabilities that are critical to future growth areas like robotics, autonomous transport, space, and military applications.
In the category of better late than never, both of the major political parties in the United States and wide swaths of the American public have recognized the need to reverse course on circa 30 years of unfettered manufacturing outsourcing and to start (re-)building more things domestically again. The seeds of a manufacturing renaissance is coming coincident with “winning the AI race,” which is also a shared objective across parties and the broader population. We see power market growth as being one and the same with these dual trends of reshoring manufacturing and AI dominance.
As a reminder, we are energy specialists, not macro economists or geopolitical strategists, and we will do our best to stick with our knitting and rely on others to help with views beyond our core expertise. Seven questions we pose in this post:
(1) How much larger is China’s power market versus other countries and regions?
(2) What energy sources have driven China’s power dominance?
(3) Will our “US+Allies” grouping need to rethink its anti-coal views?
(4) Should China’s adversaries limit growth in renewables since China dominates the renewables manufacturing value chain?
(5) Can the EU Big-4 reverse what looks like a terminal decline rate?
(6) Will key countries in the Middle East supplant the EU Big-4 as the US’s most relevant allies going forward?
(7) What can be learned from the unexpected rapid rise in U.S. oil production and LNG (liquefied natural gas) exports over the last decade?
Question 1 (Q1): How much larger is China’s power market versus other countries and regions?
Answer (A): China is double in size versus the next largest market (USA) and is growing 6X-9X faster on a volume basis than other key regions.
China’s power market is more than 2X larger than the next largest country (USA) and is growing 6X-9X faster on a volume basis over the last 5-years versus other key regions like the USA, India, and the Middle East (Exhibits 1 and 2). Given that China’s power market growth shows no signs of slowing, it is on-track to widen its advantage in the coming decade.
At a time when other regions, most notably the United States, are looking to revive domestic manufacturing and compete in new technology areas like AI, there may be no more important metric than a country’s ability to provide reliable and affordable power to its citizens, businesses, and military. Everything in life starts with energy access or lack thereof. Right now China is leading and is on-track to dominate for the foreseeable future.
As the world’ first billion-person-scale economy to ramp up economic and hence energy s-curves, China is unlikely to relinquish its competitive advantage any time soon. Exhibits 1 and 2 include a line we have labeled “US+Allies,” which shows a combined power market capacity and population that is in excess of China. Included in our list of US allies are the European Union (in total, not just the Big-4 that we often refer to in this and other posts), Canada, Mexico, Japan, South Korea, Philippines, Australia, New Zealand, Israel, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates (UAE). While US+Allies exceeds China in absolute size, it is growing at a considerably slower rate, which needs to change if this group hopes to not be overwhelmed by China in the coming decades.
Exhibit 1: China’s power market is more than 2X the size of the USA
Source: Energy Institute, Veriten.
Exhibit 2: China’s power market is growing at 6X-9X the rate of other markets in absolute terms
Source: Energy Institute, Veriten.
Q2: What energy sources have driven China’s power dominance?
A: Coal, baby, coal.
Coal has overwhelmingly been the core driver of China’s massive power market (Exhibit 3). This too is not a close call. China now accounts for over 50% of global coal consumption (Exhibit 4). It is true that China is massively ramping domestic renewables and growing nuclear and natural gas. But make no mistake, coal is its backbone: reliable, dispatchable, affordable, baseload coal. Going forward, we expect China’s coal consumption to, at a minimum, grind higher on an absolute basis though lose share on a percentage basis to primarily renewables but also nuclear and other sources of power generation. Arguably, the death of no energy source has been more exaggerated than coal.
Exhibit 3: Coal is the dominant energy source in China’s power sector
Source: Energy Institute, Veriten.
Exhibit 4: China’s manufacturing rise has been fueled by domestic coal and the country is now over 50% of global coal production
Source: Energy Institute, Veriten.
Q3: Will our US+Allies grouping need to rethink its anti-coal views?
A: Yes.
To be more specific, the over-arching metric that we think US+Allies will need to prioritize in order to compete with China is how to maximize reliable and affordable power generation. The “climate first” orientation of much of the EU and a portion of the United States we see as contributing (though hardly the only factor) to the west’s diminished competitiveness with China. Our point isn’t that coal is “the answer”—no single energy source is. Rather it is to highlight the absurdity of historically rich, western countries being anti-coal while they export their manufacturing capacity to a coal-dominant China. One doesn’t need to be an activist to recognize such a trade has been bad for the environment and climate never mind the gutting of our manufacturing base and loss of jobs and community in impacted regions.
In our view, it will be a mix of coal, natural gas, nuclear, solar, wind, and batteries that accomplishes the goal of meeting our growth needs with reliable and affordable power. If the left-of-center in the United States is incomprehensibly “climate first” in its orientation, our right-of-center foolishly downplays the benefits of many newer technologies from an economic competitiveness standpoint. We see the prospect for significant growth potential for newer technologies including but not limited to enhanced geothermal, fuel cells, long-duration storage, virtual power plants (VPPs), distributed energy resources (DERs), small modular nuclear reactors (SMRs), and perhaps even space solar. The recent re-branding of “climate tech” to “electro tech” we view as an encouraging rhetorical step that should be embraced by the right-of-center, just as the left-of-center has increasingly recognized the importance of natural gas in the United States.
We note that both the United States and Canada enjoy massive, domestic, low cost-of-supply natural gas resource bases that provide an alternative to coal specifically. However, this is not true for many of the other countries in our “US+Allies” grouping, where coal ought to remain part of the conversation, especially if China and the developing world continues to ramp its usage. We expect a fresh look at coal will come with all the technologies that ensure traditional air pollutants are scrubbed away. Carbon capture could also be a requirement if also employed by China and developing nations.
Q4: Should China’s adversaries limit growth in renewables since China dominates the renewables manufacturing value chain?
A: No, we don’t think so.
The idea that the U.S. should not or would not trade with China going forward is absurd. We will be buying many things from them and vice versa. We subscribe to the stock versus flow argument about renewables versus coal, natural gas, and oil. That is the idea that the risk of trade flow disruption is more relevant to a given country that requires daily feedstock inputs of crude oil or natural gas (coal tends to be a domestic resource where used, so this point is less relevant for it) than it is for a solar or wind farm, where once the capacity is installed the sun or wind “feedstock” is not imported from another country. This latter point is arguably the number one reason we will see growth in renewables. It is not about “saving the planet.” It is about saving your country.
Q5: Can the EU Big-4 reverse what looks like a terminal decline rate?
A: Umm, not sure they can.
It has been a challenging run for the Big-4 European economies of France, Germany, Italy, and the United Kingdom. Our recent trip to the Middle East highlighted how far Europe and its leading economies had fallen in terms of relevance to the broader world. Key phrases we heard in our meetings included “vacation spot,” “museum,” “not as relevant,” “depleting asset,” and similar sentiments. Ouch.
Europe’s declining relevance shows up in its power consumption, which remarkably peaked for its Big- 4 in 2005 and has been in steady decline ever since (Exhibit 5). A deep value investor might ponder whether the European bearishness is a bit overdone (even it feels super correct right now). To use Wall Street phraseology: Is Europe a value or value trap? Is Europe beyond turnaround? The steps the EU Big-4 would need to take to reverse its devastating energy consumption trends are beyond the scope of this post.
Exhibit 5: EU Big-4 power consumption peaked in 2005 and has been in a steady decline since
Source: Energy Institute, Veriten.
Q6: Will key countries in the Middle East supplant the EU Big-4 as the US’s most relevant allies going forward?
A: Saudi Arabia, Qatar, United Arab Emirates, and Kuwait all benefit from being long inexpensive energy and with stable governments that are favoring economic growth.
Our recent visit to Saudi Arabia and UAE revealed a region that is on the rise, at least for countries with stable and healthy governments. Saudi, UAE, Qatar, and Kuwait are each blessed with stable governments, massive energy resources in excess of the needs of its citizens, and are pursuing pro-growth economic and social liberalization policies. We were in the Kingdom when Crown Prince Mohammed bin Salman was in the United States to visit President Trump. We would describe local reaction to his visit as ecstatic that the U.S. and Saudi had re-cemented their close working relationship.
The Middle East’s Big-4 pro-growth economic policies stand in contrast to Europe and its Big-4. We believe the region, or at least this quartet of countries (Saudi, Qatar, UAE, Kuwait) have the potential to graduate from a historic “OPEC-oil exports-geopolitical turmoil” framing that has characterized US/Western views since the 1970s to important allies that can help counter the rise of China. We look forward to more frequent visits to the region in coming years.
Q7: What can be learned from the unexpected rapid rise in oil production and LNG exports in the USA over the last decade?
A: Authoritarian capitalism is not the only model that works.
All the talk of Chinese dominance reminds us of the late 1980s when Japan was viewed as a rising, dominant economic power and we heard about the advantages of the keiretsu business model and what the west called “Japan Inc.” to describe the post-World War II close working relationship between big government, big banks, and big industrials. The US shale revolution is but one example where US-styled capitalism with limited (but not non-existent) government directives transformed energy markets.
Private land and minerals rights ownership, a favorable fiscal and legal backdrop, and intense oil & gas company competition were all major factors in the shale revolution. We also appreciate that tax-payer funded R&D contributed as well.
The story is well known with the U.S. now #1 in terms of size and growth for both oil (liquids) and LNG markets (Exhibits 6 and 7). It is a potent mix of innovation, entrepreneurialism, private wealth creation, competition, markets, legal, upward mobility, and organic and inorganic population growth that has made the United States the greatest country in the history of the world. We are optimistic that we will solve our power and manufacturing challenges and win the AI race. That said, it won’t happen simply because our track record is good. We can and must do better going forward.
Exhibit 6: The U.S. went from being in decline to blowing past Saudi Arabia and Russia as the world’s largest oil producer within a decade
Source: Energy Institute, Veriten.
Exhibit 7: The U.S. moved to #1 in LNG exports from essentially zero a decade ago
Source: Energy Institute, Veriten.
⚡️On A Personal Note: 8 Days In the Middle East
Just prior to the Thanksgiving holiday, I spent an amazing 8 days in the Middle East on a trip hosted by Jason Bordoff (founder) and Dr. Karen Young (Middle East scholar) of the Center on Global Energy Policy, where I am an advisory board member. We visited Abu Dhabi, Dubai, Riyadh, AlUla, and Dhahran. Since 2006, I have been to the region many times, though I hadn’t been since a November 2019 ADIPEC conference just prior to COVID. And I had never previously been to the Kingdom of Saudi Arabia—an embarrassing hole in my resume for someone that has covered the oil sector for 33 years. Key highlights and observations:
Abu Dhabi, Dubai, and Riyadh are all booming. New, clean, fresh, vibrant, a palpable sense of optimism, and the center of the world is how I’d characterize the feeling of being there.
Those 3 cities are visually spectacular. Why can’t we have more unique architecture in our cities? How do they keep things so much cleaner than we do?
It felt great to be in Saudi, something I will admit to not being sure about. It was awesome and I can’t wait to go back. Apparently, every Saudi person has learned how to say “welcome” in English. Well done.
Saudi’s social transformation in the short decade following MBS’s ascension is impressive. Perhaps what was most eye opening was seeing the “regular” people of Saudi Arabia as well as its elite business leaders versus my career-to-date focus only on its sizable oil production and impact on oil markets.
Saudi’s “no drinking” policy had its positives! To be sure, I am not advocating for Prohibition 2 in the U.S. But from the vantage point of Saudi culture, I get the appeal.
I really enjoyed and appreciated Saudi hospitality. We had a dinner at the family compound of a large Saudi business family and another at the home of one of Jason’s close contacts. Two memorable and fun dinners.
As the father of two college-aged girls, I see the appeal of the burqa! 😃 (relax everyone, that is a joke).
And as someone who would wear a baseball or winter hat 100% of the time if our culture allowed it, I appreciated the male head gear. Can the US melting pot incorporate Middle Eastern dress please.
For those of you that haven’t been, Aramco’s headquarters city is something to see.
A trip highlight was visiting the Columbia SIPA alumni in Riyadh, perhaps a dozen or so in total including HH Princess Noura bint Turki. Their excitement to stay in Saudi and build a career and life there is a sure sign of progress. I especially appreciated how the princess and her colleague (and cousin) Mishaal thought about Saudi’s role in marrying needed energy growth with sustainability objectives—very much in-line with Super-Spiked viewpoints.
If you are looking for a unique vacation spot not overrun with American tourists, I highly recommend AlUla. We stayed at Habitas which I would recommend, though we had a great lunch at Banyan Tree which also looked real nice.
It was a unique and very positive experience to travel with CGEP given its energy policy orientation. Essentially all of my historic global work travel has been on “Wall Street” trips. To be sure, besides Jason and Karen, the two other members of our travel team had Wall Street backgrounds (former Goldman Sachs investment banking partner and Bridgewater). The entire group was a joy to travel with.
I have been on CGEP’s advisory board since 2017. I have especially valued its impressive global network of energy officials, policy makers, and executives as well as the opportunity to engage in vigorous energy policy debates/discussions with Jason and the scholars at the Center.
Speaking at an IEF Energy Forum event in Riyadh
At a historic fort in a new commercial district of Riyadh
At Elephant Rock in AlUla
⚖️ Disclaimer
I certify that these are my personal, strongly held views at the time of this post. My views are my own and not attributable to any affiliation, past or present. This is not an investment newsletter and there is no financial advice explicitly or implicitly provided here. My views can and will change in the future as warranted by updated analyses and developments. Some of my comments are made in jest for entertainment purposes; I sincerely mean no offense to anyone that takes issue.
This article comes at the perfect time, offering such insightful analysis. What if the energy needs for advanced AI compute become the ultimate bottleneck, even for nations prioritizing a manufacturing renesaissance?
Arjun, you seem to have forgotten Israel. It is a superpower in technology and water irrigation, among other technologies. Qatar, on the other hand, is a sponsor of the Muslim Brotherhood, Hamas and Tucker Carlson. I generally agree with your assessment of energy (all of the above) and the huge demand for electricity. Even more frightening for European energy demand, countries like France and the UK will need a/c as well, none of which is in their energy plans. But it is impossible to look at the Middle East's future without taking into account the politics. To put the UAE (A true ally) and Qatar together, is a disservice to the analysis.