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China's True Economic Achilles' Heel? Oil Dependency

Concerns grow in Beijing, especially as the American boom in shale-gas production is helping the U.S. move toward energy independence.

A PetroChina gas station in Huaihua, Hunan
A PetroChina gas station in Huaihua, Hunan
Zhang Huanyu

BEIJING — The United States is expected to bypass Russia next year to become the world’s largest non-OPEC crude oil producing country, according to a recent report by the U.S. Energy Information Administration. Another report pointed out that the difference between daily oil consumption and production in the U.S. has shrunk to 624 barrels in September. That same figure is 630 for China, making it now the world’s biggest net crude oil importer.

China’s oil import dependency has risen from 32% at the beginning of this century to 57% last year. In the past few years, Chinese car ownership has exploded while China’s oil production has grown only slightly.

A few days ago, China’s National Energy Administration incorporated shale gas for the first time as a strategic and emerging industry. The Chinese government is expected to increase financial support to this industry by reducing fees and royalties and adding new tax breaks to shale gas mining firms.

“There’s no doubt China’s oil import dependency is increasing,” a Chinese energy expert says. “It’s only a matter of time that this will reach 60% or even higher.”

China’s per capita oil and gas reserves are inherently low, so as its economy grows, along with its per capita oil and gas consumption, a looming shortage in the resource won’t come as a surprise, the expert explains.

In contrast, America’s oil and gas production continues to grow while its per capita car ownership and car mileage have started to show a downward trend.

Worry about the self-sufficiency rate

China’s overall energy self-sufficiency rate has always hovered around 90%. But its energy structure is not balanced. In considering its huge demographic base, its per capita energy resources are far lower than the world average. As the 2012 China Energy Policy white paper showed, China’s per capita resources of coal, oil and gas are respectively 67%, 5.4% and 7.5% of the world average. At the same time, China’s current per capita energy consumption level is only one-third of that of advanced countries.

It took only 15 years for China to double its crude oil consumption, from the 200 million tons at the end of 1990s to 480 million tons last year. Meanwhile, China’s oil production has grown only modestly from 1.6 million tons to 2.1 million tons.

“As for the exploitation of shale gas, rapid development in China won’t be seen in the short term,” says Lin Boqiang, director of the China Center for Energy Economics at Xiamen University. “America’s shale gas production has grown rapidly in recent years, but it took them 10 years or even longer to first acquire the technology. It would be very hard for China to catch up in the short term.”

Increasing car ownership

According to China’s Association of Automobile Manufacturers, China sold 19.31 million cars in 2012, up from 9 million cars just four years earlier. And though China now has some 120 million vehicles, there is still huge room for growth.

Xu Qinhua, director of the Center for International Energy Strategic Research Studies of Renmin University, points out that many developed countries went through the consumption phase China is currently experiencing, such as Japan in the 1970s when people favored larger, less energy-efficient vehicles.

“The automobile manufacturing is a pillar of industry in China’s national economy,” an international energy consulting agency researcher says. “The Chinese government cannot and will not introduce overly strict regulations. And anyway, as per capita income grows and living standards improve, it’s very difficult to suppress car consumption.”

No alternative so far

Over the past few years, a variety of new energy-saving projects have appeared one after another with dizzying speed, from the Tesla electric car to photovoltaic and wind energy. Inevitably, all of these new innovations spark a frenzy of speculation in China. Most of them are short-lived. After all, it will take a long time for new energy sources to become a real alternative to conventional ones. “It will probably take 20 years or even longer for the new energy to arrive at an industrial scale,” says Xi Qinhua. As she points out, the Chinese government must still build major infrastructures to allow for fossil fuels to be replaced with new more sustainable energy solutions.

“China’s shale gas won’t be gushing out in the short term. It’s still a long way from full-scale development,” says Zhang Yuejun, director of the Energy Market & Coal Market Research Office of the Beijing Institute of Technology.

According to recent data, the U.S. accounted for 39% of the world’s shale gas production in 2012, Canada 15%, and China barely 1%.

What’s the solution?

What does China’s continuous crude oil demand mean for the country and for energy prices?

Zhang Yuejun says that China’s increasing oil imports may have long-term effects on the volatility of oil prices. But in the short term, factors such as the growing U.S. inventory, the political and economic changes in the Middle East and other factors are more influential on short-term oil price fluctuations.

For China, the task of reforming its energy market is urgent. If the Chinese government artificially restrains rising oil prices for social stability considerations it will most likely jeopardize industrial expansion and technological initiatives.

“The key is to allow market efficiency so that more private capital can enter this market and break the monopoly over property rights and prices," says Lin Boqiang.

Lin also believes that in the context of today’s energy shortage it’s difficult for China to gain advantages as a latecomer, although it can obtain new oil and gas resources through overseas mergers and acquisitions. “So the key is to diversify the origins of the crude oil. Apart from the Middle East, China should actively develop new oil and gas sources in countries such as Russia,” Lin urges.

In contrast with the endless ethnic and national conflicts in the Middle East, from which energy transport requires warship escorts, Russia is relatively stable and is China’s neighbor. Besides, Russia’s traditional export destination, Europe’s economy, is still shrinking and lacks sufficient demand. All this implies that there’s more opportunity for cooperation in energy between China and Russia.

Indeed, during his visit to China last month, Russian Prime Minister Dmitry Medvedev announced that the two countries have signed a document in which Russia agrees to export 10 million tons of crude oil to China annually.

Another possibility, as Xu Qinhua points out, is if China and the countries of Southeast Asia work together to exploit offshore oil and gas resources. That, no doubt, will require the best diplomatic skills from all.

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