China’s energy demand: the view from Europe

Two sets of issues of China’s energy strategy are of particular significance to Europe: those relating to oil and those relating to the environment.


China became a net importer of oil in the mid 1990s and is now the world’s third largest importer of oil after the USA and Japan. Its dependency on oil imports is set to grow indefinitely, driven by strong demand in the transportation and petrochemical sectors. The government of China has developed a number of strategies, both domestic and international, to address this rising import requirement. The domestic strategies include maximising the domestic production of oil, developing substitutes for oil, enhancing vehicle efficiency and constructing strategic oil stocks. These are thoroughly laudable activities and the Chinese should receive every encouragement to continue, not least because they will reduce the pressure on international oil markets.


Although the Chinese government’s stated strategy for oil supply draws on both market mechanisms and direct government action, both the government and the national oil companies (NOCs) lack experience and understanding of international oil markets. As a consequence, the government has provided support for its NOCs to invest in oil resources around the world. At the same time, the government itself has been building political and economic relationships with the governments of oil-producing countries.


In the context of global oil markets, it matters not a bit that a Chinese NOC is producing oil in a certain country rather than some other companies. As long as oil is being produced, sold and then used, it is a good thing. Indeed, in the case of Sudan, it might be argued that if the Chinese (and Indian and Malaysia) NOCs were not producing oil, nobody else would. So, at the margins, China is adding to the world supply of oil.


The two real concerns for Europe relate to what is perceived by western oil companies as ‘unfair competition’ and to the undermining of Western diplomatic priorities. It is unarguable that NOCs from China and from other countries may often have a competitive advantage over many international or independent oil companies when bidding for investment opportunities around the world. Lower or more flexible commercial criteria for investment, a lower cost of capital and strong political support have allowed the Chinese NOCs to win opportunities which they might not otherwise have won. A lack of experience and a willingness to pay more for the opportunity to learn may also make Chinese NOCs overbid for available blocks. It remains to be seen how rapidly China’s NOCs evolve to behave in a more commercial manner, but moves to block their efforts, such as that displayed in the attempted take-over of Unocal by CNOOC, could drive China to rely more on direct government action and to abandon the market approach.  


Of greater concern to Europe is the way in which China’s search for overseas energy supplies appears to be undermining Western diplomatic initiatives; for example in Sudan, Iran, Angola and Myanmar. In 1996 China began to rebuild its relations with Sudan and to invest large amounts of money in its embryonic oil industry. Almost single-handedly China and its NOCs have driven economic growth and development in Sudan. But at the same time, they stand accused of working too closely with a government which is considered by many as being guilty of human rights abuses within its own borders. In Angola, a development loan from China came with no strings attached and thus obviated the need for the Angolan government to accept a loan of a similar size from the IMF. In the case of Iran, it is China’s desire for involvement in the country’s oil and gas sector which is seen as preventing the government from aligning itself with Western interests concerning nuclear proliferation in this country. In the UN Security Council, China vetoed proposed sanctions against Myanmar. These and other events show that a major gap in perceptions and values appears to exist between “The West” and China with respect to relations with third states. In part this arises from China’s foreign policy axiom of ‘non-interference’ in the domestic affairs of other countries.


China’s environmental challenge derives from the rapid growth of its economy, the abundance of coal reserves, and the very low per capita GDP. Coal provides almost 80% of China’s electric power and about 70% of total primary energy supply. The burning of coal produces a range of pollutants locally and across the region, as well as adding significantly to greenhouse gas emissions. In 2004 China was the world’s second largest emitter of carbon dioxide, behind the USA and ahead of Russia, accounting for one-sixth of global carbon dioxide emissions. China’s per capita emissions were relatively high at one half of those in Europe despite the fact that China’s per capita GDP is less than 25% of that in Europe, in purchasing power parity terms. Thus, although China’s emissions will inevitably continue to grow, there should be plenty of scope to constrain the rate of increase.


The last three years have seen China’s government formulate a concerted response to the twin challenges of constraining energy demand and protecting the environment. It has introduced a wide range of new measures to enhance energy efficiency in both energy production and energy consumption. A new law has been drafted to promote investment in renewable energy, and pollution standards are being raised and more rigorously enforced. These steps may indeed have some effect on the rate of growth of both energy consumption and of greenhouse gas emissions, but China’s ability to make a large impact in the short term is highly constrained, not least by the difficulty in managing the trade-off between economic growth and environmental protection.


Two key approaches to raising energy efficiency are economic and command-and-control. With respect to the first, China’s social and macro-economic policies prevent it from allowing end-user energy prices to rise too fast. Concerning the second, the country’s systems and institutions for regulating energy efficiency and emissions lack the requisite authority and capacity to be effective. Further, the most modern clean technologies can be very expensive for a developing country. This is particularly the case for carbon capture and storage which has yet to be operated commercially anywhere in the world. Given the current importance placed on global warming by the European Union, diplomatic engagement with China on this issue should be a high priority.


China’s energy challenges are of global significance because of their nature and their scale of impact on the world. Europe has a major role to play in drawing China into international discussions and organisations, not just as a spectator but as an active participant. Such moves should have two objectives.


The first objective is to build mutual understanding and to draw China more deeply into active engagement and membership into key international organisations and systems. Many key players in Europe do not understand the scale and nature of the challenges facing China, and China’s leaders and senior officials also  need encouragement to deepen their understanding of international economic and political norms and systems. But understanding is not enough. China’s government and its state companies should be progressively drawn into regional and international organisations and institutions relating to energy and the environment as a key player, yet without threatening the nation’s vital interests.


The second objective is to secure agreement from OECD member governments to commit to making a major and sustained financial and technical contribution to tackle the emissions arising from China’s energy use. If the world is to make a major change to the trajectory of total carbon emissions over the next fifty years, we have to take action now, and much of this action should be directed at China’s energy sector. Europe has a central role to play in building an international consensus  to commit billions of dollars per year for several years not only to China but also to India – and it is in Europe’s own interests to do this.

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