Securing China’s energy supplies

Author: Peter Drysdale, Editor, East Asia Forum

China’s spectacular industrial growth has been associated with equally spectacular growth in Chinese energy and resource consumption.

While Chinese energy efficiency (the amount of GDP produced per unit of energy consumed) has risen steadily, except for a few years early this decade, aggregate energy consumption has been lifted by a hugely energy-intensive phase of industrialisation and the spread of motorised transportation on a scale and at a speed that is unprecedented anywhere. China’s economic growth and the demographics will continue to underpin massive growth in energy demand.

China now consumes 47 per cent of the world’s coal, 19 per cent of its hydroelectric power, and 10 per cent of its oil. According to the International Energy Agency (IEA), China surpassed the US as the world’s largest energy consumer in 2009.

China’s dramatic change in status in global energy markets has not only surprised the rest of the world but has caught Chinese policy makers and analysts off-guard as well.

Thirty years ago, China was energy and resource self-sufficient. Indeed, on opening up to international engagement at the end of the 1970s, China was an exporter of coal and other resources, not an importer. But China’s soaring appetite for energy has driven Chinese energy users to international markets to satisfy a growth in demand that has outstripped the capacity to procure increased supplies domestically. In the meantime, some in the policy community have become nervous about growing import-dependence and ‘energy security’.

To some, who are not used to dealing in reliable international markets, any measure of import dependence appears to risk energy security. But many large resource-deficient economies, like Japan, have become used to depending on international markets for the overwhelming proportion of energy supplies to serve their industrial base. Japan relies on imports for 99.6 per cent of its oil imports at last count.

‘Energy security’ can be seen as the ability of a country to procure sufficient, affordable and reliable energy supplies. International supplies are a critical component of affordable and reliable energy for import-dependent economies, and no country is insulated from developments in international energy markets in an open global economy. But the sudden rise in energy imports and reliance on the international energy market has landed China in unfamiliar territory. ‘Energy security’ (nengyuan anquan) was a term that appeared only once in the People’s Daily in the year 2000; in the two years following 2008 the paper published 476 different articles using the term. For many Chinese observers, mounting reliance on energy imports implies external vulnerability and is a worry on both political and economic grounds. For others, the challenge is to lift national energy efficiency and ease back from over-reliance on coal with its associated environmental problems. China produces most of the coal it consumes but now draws over half of its oil supplies from overseas. The IEA projects that, by 2035, China will import nearly 12.8 million barrels per day, or 84 per cent of its total supply.

As Andy Kennedy points out in this week’s lead essay, China has adopted a variety of supply-side policies to ensure its access to oil supplies over the next several decades. Most, he concludes, have been ineffective, wrongly directed, or are under-developed.

The Chinese government ‘has encouraged its national oil companies (NOCs) and other state-owned enterprises to ‘go out’ — to invest overseas and gain greater access to resources abroad’. At the beginning of last year, the NOCs had equity in overseas production of 1.36 million barrels per day — nearly one-third of China’s net imports in the previous year. But has this has enhanced China’s energy security?

The NOCs don’t necessarily send the oil they produce overseas back to China. Nor is it reasonable to assume that oil produced by the NOCs would somehow be cheaper or more readily available to China in a supply crisis. Physical disruptions that impede the flow of oil to China will affect foreign and Chinese firms alike, and the NOCs, seeking profits in the international market as they are, have shown little inclination to give Chinese customers a discount when prices are high.

‘China is also diversifying the sources of its oil imports away from Middle Eastern suppliers’, says Kennedy, ‘its ‘loans for oil’ deals in recent years have facilitated long-term contracts with a range of oil-producing countries in other parts of the world — including Russia, Brazil and Venezuela’. Yet this has had a marginal effect on reliance on supplies from the Persian Gulf.

China is also building its naval capabilities to secure its sea lanes, although it is doubtful that anything other than an anti-piracy capability is a sound investment in the relevant timeframe.

And China is building its Strategic Petroleum Reserve to cover 63 days worth of net imports in an emergency at levels projected in 2020. To be effective, Chinese reserve strategies will have to be coordinated with those of other major importers.

China’s growing position in the international market makes reliance on unilateral and bilateral measures to reduce its vulnerability to oil-supply shocks a doubtful strategy. China will need to pursue greater coordination with other major oil importers through the IEA and develop the multilateral side of its approach to energy security. China is not yet a member of the IEA: it needs to be. Multilateral engagement would provide Beijing with more information and greater influence in the event of future supply shocks — a danger that faces other oil importers as much as it faces China, around uncertainties in the Middle East. ‘Greater multilateral engagement would also demonstrate that Beijing is looking for ways to cooperate with the international community as the story of China’s rise continues to unfold’, as Kennedy argues.

Yet there is no global regime that protects importer interests in reliable energy supply as there is for reliable market access under the WTO. That was one dream in the Atlantic Charter never realised in the Bretton Woods architecture after the Second World War. What there is by way of substitute is a complex surrogate of understandings and agreements, bilateral and global, that work to project the same effect. This is why for big (non-oil) energy exporters, like Australia, assurances of reliable energy and resource supply to major importers such as Japan, China and Korea are important to confidence in international resource markets. It is also why China, the United States, Japan and other major oil importers understandably expend as much diplomatic effort and good will as they do in the Middle East.

Peter Drysdale is the Editor of the East Asia Forum.

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