[Choi Ji-woong's Oil Hegemony War] The True Intentions Behind Japan's Loyalty to the US and China's Challenge to the US

The Crucial Puzzle Piece of the Complex International Order: 'Seokyu'

Asia Economy Newspaper serializes 'Choi Ji-woong's Oil Hegemony War' every other Friday, diagnosing changes in the international oil order and the future of the energy industry. The author joined Korea National Oil Corporation in 2008, working in the Europe & Africa Business Division and the Stockpiling Business Division before attending the Oil & Gas MBA program at Coventry University in London in 2015. Last year, he published the bestseller 'How Oil Rules the World,' which chronicles the modern history of oil.

If we were to name the person who has had the greatest influence on economics today, it would be Adam Smith, the author of The Wealth of Nations and the founder of classical economics. In 1776, he sought to identify the 'cause of wealth' in The Wealth of Nations. While many associate the book with the invisible hand and market principles, the invisible hand actually appears only once in the entire work.

What he pondered more deeply than market functions was the 'source and nature of wealth.' The original title of The Wealth of Nations clearly reveals his intention: An Inquiry into the Nature and Causes of the Wealth of Nations. In it, he argued that the source of wealth is 'labor,' and wealth increases through 'improvements in labor productivity' via division of labor and other means. He defined wealth as all essential and convenience goods supplied annually by the labor of the people. This aligns with today's most fundamental economic indicator, Gross Domestic Product (GDP).

Specific ideologies and cultures are products of their social environments. Adam Smith’s view that the source of wealth is labor and that wealth is the sum of essential and convenience goods reflected the changes in British society at the time. In the late 18th century, cities and commerce rapidly developed in Britain, giving rise to diverse goods and forms of labor.

If Adam Smith rewrote The Wealth of Nations... the source of wealth would be 'energy'

If Adam Smith had written The Wealth of Nations before the development of commerce and industry, he would have regarded land as the source of wealth. During the period when many were tenant farmers under landlords and most labor was devoted to agriculture, land was the most important source of wealth, and food was the most important product. Indeed, just before The Wealth of Nations was published, physiocracy, advocated by Fran?ois Quesnay and others, dominated economic thought in 18th-century France.

If Adam Smith were to contemplate the source and nature of wealth today, what would he write? Around the time Adam Smith was writing The Wealth of Nations in the late 18th century, James Watt improved the steam engine, heralding the dawn of the Industrial Revolution. After the publication of The Wealth of Nations, Britain underwent revolutionary changes. Human labor began to be largely replaced by machines. The power source driving machines was coal until the 19th century, then shifted to oil in the 20th century.

If Adam Smith were to write The Wealth of Nations today, he would say the source of wealth is energy, such as coal or oil, and wealth increases through securing energy sources and developing new ones. Indeed, energy today is the root of the wealth we create and the foundation of economic activity. All goods are produced and transported through energy. All human activities?transportation, communication, healthcare, leisure?depend on energy.

▲ Choi Ji-woong, author of How Oil Rules the World, working at the Korea National Oil Corporation Oil Information Center

There is something called the 'Li Keqiang Index.' Li Keqiang, China's premier and the second most powerful figure after President Xi Jinping, reportedly does not trust China's official GDP statistics and instead refers to three alternative indicators. He stated that he gauges economic conditions and growth rates by electricity consumption, railway freight volume, and bank loan growth. This was before he became premier.

Errors can occur in the process of generating and compiling diverse data in China, the world's largest manufacturing hub. Therefore, the simplest measure?energy (electricity) consumption?is used as an important indicator of economic growth. This reflects the close relationship between wealth and energy. Railway freight volume also correlates with energy usage, and bank loan growth increases production activities by boosting energy consumption.

U.S. Maintains Influence in the Middle East and Returns as '21st Century's Largest Oil Producer'

Today, the source of wealth is energy, and the most important energy source is undoubtedly oil. Oil was the primary energy source throughout the 20th century. Before oil, it was coal. The First Industrial Revolution was a transformation that began after the steam engine enabled the full utilization of coal as an energy source. The Industrial Revolution was, in essence, an innovation in energy sources. By converting coal’s heat energy into mechanical energy through the steam engine, it achieved productivity advances that surpassed the past.

With the Industrial Revolution occurring in 18th-century coal-rich Britain, the country rose to become the empire on which the sun never set, the British Empire. Later, Britain declined, and the United States rose as a great power in the early 20th century, also due to innovations in energy sources. By the 20th century, the U.S. achieved industrialization through overwhelming oil production and pioneering use.

In the first half of the 20th century, the U.S. was the dominant oil producer, accounting for 60% of global crude oil production. This contributed to unprecedented productivity improvements and supply increases. The surge in production, which outpaced effective demand, was a major cause of the Great Depression in the 1920s. Later in the 20th century, the U.S. ceded the top oil producer position to Middle Eastern countries like Saudi Arabia but maintained influence in the Middle East, striving to keep oil resources under its sphere of influence. In the 21st century, the shale revolution restored the U.S. as the largest oil producer.

Controlling the 'Strait of Hormuz' and 'South China Sea' is Global Dominance

Adam Smith’s reflection on the source of wealth remains important today. Understanding the true source of wealth and contemplating its nature are necessary to grasp today’s wealth and politics. American scholar Noam Chomsky argues that the reason the U.S. can form an alliance with Japan and secure Japan’s loyalty is because the U.S. controls Middle Eastern oil-producing countries and guarantees passage through the Strait of Hormuz.

In the same context, the U.S.-China dispute over the South China Sea can be understood. One reason the South China Sea is important is that it is a gateway for energy flows. Major oil-importing countries like Korea and Japan depend on this route. If China controls the South China Sea, Asian importers may have to heed China rather than the U.S.

Oil, as a resource, acts as a complex and crucial puzzle piece in international relations, more than we might think. However, becoming a truly advanced nation is possible only when a country can independently secure necessary resources and maintain its own security without external influence.

Korea relies almost entirely on overseas sources for oil and gas, the sources of wealth, and thus cannot escape the influence of international affairs and oil-exporting countries. To offset this situation even slightly, Korea must take an interest in securing independent energy resource development capabilities. Moreover, Korea is the world’s fifth-largest crude oil importer. Given that energy supply uncertainties pose greater risks than for any other country, systematic attention and planning for energy resources are essential.