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This Week in Climate: China and the End of Petrocracy

This week in climate we look at how China is taking advantage of America’s oil addiction to advance climate diplomacy around the world
Julian Moore
Sep 28, 2022 9 min read
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The war in Ukraine is only the latest fossil fuel war, but it may have birthed the world’s first act of state climate terrorism. Russia is suspected of having detonated three explosions along the Nord Stream Pipeline in the Baltic Sea, releasing tons of methane into the ocean and atmosphere.

Blowing up the pipeline doesn’t present any obvious political gains, since it had been shut off since the beginning of September as part of sanctions against Russia.

Climate goals, however, will certainly be the loser. In order to maintain minimum pressure, the pipeline was holding 300 million cubic meters of methane gas at the time of the explosion. Much of that methane will now end up in the atmosphere, massively spiking emissions of a greenhouse gas the world is struggling to contain already.

It’s yet another example of pernicious fossil fuel geopolitics interfering with climate goals.

But halfway across the world, Russia’s ally China has been busy using climate action to achieve the same strategic goal of undermining the United States and Europe.

Green Belt and Road

In recent years, China has embarked on a climate diplomacy campaign across the world that covers everything from the energy transition to farming adaptation strategies.

In Benin, Chinese consultants are helping maize farmers adapt to harsh droughts by employing planting techniques honed in China that increase output in dry conditions.

Chinese companies are building a modern highway through the remote mountains of Tajikistan while accounting for ecological impacts in its “green development guidelines”.

Then there’s Bangladesh. A report this week found that China is supporting as much as 90% of the country’s energy transition toward a 2050 goal to produce 41% of its growing power demand from renewables. Those plans still include three new coal power plants, in an apparent violation of China’s pledge to stop funding coal abroad.

But those will come online along with 450 MW of solar power built by a joint Chinese-Bangladeshi utility venture consummated in 2020.

Each of these moves is meant to increase Chinese influence in countries where the United States and Europe have faltered on promises to help fund a just transition to renewables, and to deal with loss and damage from climate change.

End of the Petrodollar

It is impossible to understand China’s climate moves abroad without first understanding the global economic system China wants to replace: the American petrodollar.

The United States dollar has dominated the international financial system since 1944, when the Bretton Woods conference led to the creation of the International Monetary Fund and the World Bank. Those agreements built the international governance framework we know today, but they also set in motion geopolitical dynamics leading to the climate crisis.

After World War 2, the United States held most of the world’s gold reserves. That allowed the U.S. to offer a war-torn world a deal: any dollar could be redeemed for the value of gold if foreign governments would attach the value of their currency (or peg) in a fixed ratio to the dollar.

Most of the world’s major economies (and their colonies) agreed, signing the Bretton Woods in July 1944 and officially making the U.S. dollar the global reserve currency. With the stroke of a few diplomats’ pens, the U.S. cemented itself as the premier superpower.

The U.S. promptly flexed that power to create alliances securing its access to fossil fuels. A 1945 agreement with Saudi Arabia guaranteed that oil contracts would be paid in dollars, setting a standard that oil producing countries around the world would follow for years to come.

That system worked until 1971, when the U.S. economy found itself mired in stagflation: a confluence of slow economic growth, high unemployment and increasing rates of inflation. As the economic downturn dragged on, international investors got nervous and soon they started knocking on the U.S. Federal Reserve’s door to redeem their dollars for gold as Bretton Woods had promised.

Faced with a declining gold reserve, U.S. President Richard Nixon blew up the status quo: he announced the U.S. treasury would no longer convert dollars to gold, causing the value of the dollar to plummet practically overnight.

Back in Saudi Arabia, this was a huge problem. As the dollar crashed, the value of Saudi Arabia’s oil-for-dollars contracts went with it. And since its economy was so highly concentrated in oil production, Saudi Arabia was overwhelmingly dependent on imports from other countries. Those transactions took place with foreign currencies which were suddenly much more expensive, and the cost of living in Saudi Arabia went through the roof for circumstances far beyond their control.

The Saudis were, to put it crudely, pissed, but they didn’t have many options. They had tried oil embargoes twice before, and both had failed. Then in 1973, Nixon asked Congress to help Saudi Arabia’s arch-enemy Israel in its war against Arab nations.

Enough was enough. OPEC countries declared an oil embargo that quadrupled the price of oil in six months, forcing an energy crisis in the U.S. and Europe that pushed some governors to restrict Christmas lights.

Oil-producing countries had made their point: they had the power to cancel Christmas in Oregon if they didn’t get a good deal in dollars. Western countries paid the price, and the petrodollar was born as OPEC countries suddenly became flush with more cash than they could spend on their own economies.

Those petrodollars have since extended the reign of U.S. currency, much to the dissatisfaction of China, which in 2009 called for an end to the U.S. dollar’s dominance.

And this is where climate change comes in. Since U.S dollars spent to purchase oil dominate the global economy, then a world less reliant on fossil fuels is also a world that is less beholden to the United States dollar hegemony.

Seen in this light, every solar panel installed by Chinese utilities abroad replaces American oil money in that country’s coffers. That means less U.S. influence and greater returns for Chinese investors leading the world in renewable energy production.

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The Author

Julian Moore