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China’s Energy Challenge

Posted in China Business

By: Steve Dickinson

In October of this year, the Information Office of the PRC State Council published its White Paper on China Energy Policy 2012. The White Paper outlines the current state of energy production and consumption in China and China’s future energy plans. Since energy is critical to economic growth in any country, it is worth taking some time to consider China’s energy challenge. The White Paper is particularly significant because it was released immediately before the 18th Party Congress. The White Paper sets out China’s current energy situation and then maps out its energy plans for the ten-year term of the new leadership to be installed at the party congress.

In this Part One, I set out China’s energy scenario.  In Part Two, I will analyze the White Paper itself.  In Part Three, I will discuss how China’s energy challenge is likely to impact foreign companies doing business with China or in China.

Before turning to the White Paper, let’s consider China’s basic energy situation using data from the BP Statistical Review of World Energy June 2012 and the CIA’s World Fact Book. The most important fact is that in 2011 China became the largest consumer of energy in the world. In 2011, China consumed 21.3% of world primary energy. In that same year, the United States was the second largest consumer, taking 18.5% of world primary energy.

Note however that in 2011, the Chinese GDP was less than half of that of the United States. According to the CIA, U.S. GDP was about $US 15.0 trillion. In nominal terms, the Chinese GDP was $US7.2 trillion. That is, the U.S. economy was slightly more than twice as large as the Chinese economy. On the other hand, U.S. energy usage was only 86% as large as that of China. Stated simply, China used substantially more energy than the U.S. to produce less than half the economic output.

Consider this issue from the standpoint of economic growth. During the year 2011, China’s GDP grew at a rate of 9.2%. During that same year, China’s consumption of primary energy grew at a rate of 8.8%. Using rough numbers, we can say that for every 1% of economic growth, China’s economy required a 1% increase in energy consumption in 2011. This ratio of energy to GDP growth has been fairly consistent for the past decade in China. We can therefore say that under China’s current pattern of production and growth, this ratio will probably remain the same for the next decade of growth.

Now consider the issue facing Chinese economic planners. It has been a commonplace to claim that China’s GDP will reach the level of the U.S. GDP sometime in the next decade. If we use the CIA numbers, this prediction means China’s GDP will grow to about 2.5 times its current size within the next decade. Applying the one to one ratio of 2011, that means China’s consumption of energy will also need to grow to about 2.5 times its current size to fuel that increase in GDP.

Consider now what that increase in energy consumption would mean. In 2011, China consumed 2,623 million tonnes oil equivalent (MTOE). The world consumed 12,274 MTOE. If China’s economy grows 2.5 times larger, its energy consumption would increase to 6,533 MTOE. That is, China alone would consume over 50% of the current total energy consumption of the entire world. In order for this to happen, one of two things would have to occur. Either all the other countries in the world would be required to substantially decrease their energy consumption, or the entire world production of primary energy would need to increase by over 50% in a ten-year period. If other developing countries grow at a rate even close to that projected for China, even this 50% number would need to increase by a substantial rate.

This then leads to the energy dilemma. No one believes that the countries of the world will reduce their own consumption of energy simply to make room for increased Chinese consumption. And no one believes that it is possible to increase world primary energy production by over 50% in a ten-year period. This then means that under current conditions, the projected growth of the Chinese economy is simply impossible. There is not enough energy available to fuel that growth.

This is China’s energy challenge and the White Paper was written with this stark challenge as a background. For many reasons, China must continue to grow its GDP. However, if China does not make major changes to its current system, energy constraint will make that growth impossible. These are not constraints that will have an impact in the distant future; they are constraints that will have an immediate impact. Thus, the new leadership of China must address these issues immediately.

The purpose of the White Paper is to address these issues. Like most government based energy policy statements from around the world, the White Paper avoids providing any clear statistics outlining the real issues. It instead portrays the issues and the proposed solutions in purely qualitative terms. This suggests either that 1) the issues are not fully understood or 2) the problems are so intractable that a factual discussion would lead nowhere. This is typical of world governments and should come as no surprise.

Stay tuned….

  • Blue Apple

    you say “we can say that for every 1% of economic growth, China’s economy
    required a 1% increase in energy consumption in 2011. This ratio of
    energy to GDP growth has been fairly consistent for the past decade in
    China. We can therefore say that under China’s current pattern of
    production and growth, this ratio will probably remain the same for the
    next decade of growth.”

    However the “White Paper” gives a very different figure: during the last decade there was a 0.5% increase in energy consumption for each 1% increase in GDP.

    This big difference in the basic assumption will result in very different conclusions, both for the Chinese economy as a whole as well as for foreign invested companies.