Beijing’s “New Thinking” on Energy Security

China’s growing appetite for energy has caused widespread concern around the world. The Middle Kingdom is blamed for the sharp increase in global oil prices in the past few years, and the United States grows uneasy about Beijing’s evolving cozy relations with major oil producers such as Iran, Saudi Arabia, Sudan and Venezuela—some of which are hostile toward Washington. Moreover, there is a growing call to contain China as an energy threat in a world of diminishing resources. Yet Beijing is resentful of such attitudes and has taken new measures to counter its critics.

China as Victim?

In the past year, top Chinese policymakers have emphasized the fact that China, as a developing economy, is paying a huge price for mounting oil prices, a point not always recognized in the West. In 2004 alone, Beijing had to spend an extra US$7 billion of its foreign exchange due to climbing oil prices, with payment totaling over US$43 billion, making crude oil and product oil the country’s largest single import item. As reported by Sinopecnews, this had a negative impact on consumption, investment, export and import, and China’s GDP suffered a 0.8 percent downturn.

The dominant Western view holds that the worldwide increase in demand, especially from China and India, and decreasing spare production capacity conspire to keep oil prices high. Beijing sees the issue far differently. The PRC suspects the real culprit is what China’s State Council Information Service calls Western government-backed, profit-seeking “international petroleum crocodiles” that manipulate oil prices. Reports in recent weeks of windfall earnings by Exxon Mobil, BP, and Royal Dutch Shell only enhance such perceptions.

In addition, take last summer’s political firestorm in the U.S. over China National Offshore Oil Corporation (CNOOC)’s $18.5 billion bid for Unocal. CNOOC dropped its bid last August after the U.S. House of Representatives effectively blocked the deal on ostensible national security grounds. California-based Chevron ended up acquiring Unocal, and plenty in Beijing came away convinced the U.S.—despite rhetoric to the contrary—does not always live up to the free-market rhetoric it broadcasts to the rest of the world.

Some even suspect the U.S. is committed to slowing down the pace of China’s development by keeping energy prices high and limiting the role of Chinese companies in the global energy market. After the uproar over the Unocal bid, the Chinese have looked elsewhere, making a series of high-risk energy investments in Africa, the Middle East and Latin America. Thus when the Chinese read Western media accounts of Beijing dealing with dictators or “rogue states” as defined by the U.S., they feel especially bitter.

Given the perception gap, the recent Chinese debates on energy security have resulted in some people strongly advocating for a speedy buildup of China’s own blue water navy in order to protect vital energy shipping routes. Currently, a popular Chinese online book, The Battle in Protecting Key Oil Routes, imagines a decisive sea engagement near the Strait of Malacca linking the Indian Ocean and the South China Sea, in which the Chinese navy destroys an entire U.S. Pacific carrier group.

Chinese government officials object to the working assumption among many Western analysts that Chinese demand is driving up oil prices. They stress that China is not just the second largest energy consumer in the world but also the second largest energy producer. They quote statistics that China accounts for only three percent of overall global oil trade, and contend that such a number will not drive up energy prices. They have pointed out repeatedly that the United States, with only five percent of the world’s population, consumes 25 percent of the daily global oil supply, whereas China accounts for six percent of consumption for 22 percent of global population.

Beijing also rejects the idea that China’s booming economic growth means it will quickly catch up with U.S. demand in absolute terms. In 2005, with increased domestic energy production, China’s oil imports grew by just 3.3 percent even as the economy surged by nearly 10 percent. This year oil imports will fall, says Lu Jianhua, director of the Foreign Trade Department of China’s Ministry of Commerce. “It is unfair to blame China for rising international oil prices,” Lu says.

New Policy Directions

Meanwhile, China has identified a number of challenges in the energy sector. As reported by Vice Premier Zeng Peiyan to the People’s Congress in March, China faces the following problems in the energy sector:

• Sustained strong energy demand that places pressure on the supply;

• Shortage in resources that limits the growth of the energy industry;

• Coal-centered supply structure that is detrimental to the environment;

• Backward technologies that inhibit the efficient supply of energy;

• International market fluctuations that negatively impact domestic energy supply.

To counter such challenges, the Chinese leadership has set the following new priorities:

• Coal mining with high efficiency and clean burning technology;

• Adjusting electricity supply structure for higher efficiency;

• Increasing the supply of natural gas;

• Speeding up the development of new energy and renewable energy sources;

• Building up petroleum reserves;

• Enhancing energy resources survey capabilities (Xinhua, December 27, 2005).

Beijing has begun to implement a range of policies to boost domestic energy exploration and production, together with energy diversification and conservation measures. China also announced that it is not in a hurry to fill its strategic oil reserve under current conditions, and that the newly added electricity supply will meet China’s demands this year.

Moreover, the latest action plans for the Chinese economy as passed by the People’s Congress last month reflects at least four new policy priorities of the Chinese leadership on energy security.

First, Beijing has called for a nationwide paradigm shift in development strategies. The new model is labeled as a “scientific development concept” that will endorse an environmentally friendly approach to industrialization, and regards resource and energy conservation as top priorities. For the first time, Beijing set some compulsory targets on the efficient use of energy: energy consumption per unit of GDP is to decrease by 20 percent, water consumption per unit of industrial added value is to decline by 30 percent, and industrial solid waste recycling and conservation rate is to grow 60 percent—all by 2010.

Second, Beijing has stepped up the overall supervision, regulation and coordination of the country’s energy industry. As Xu Dingming, Director-General of the Energy Bureau of China’s National Development and Reform Commission put it, it is difficult to coordinate the vast production lines in the coal, petroleum and electricity sectors. Additionally, there are obvious contradictions between China’s medium to long-term energy plan and the reality of resources, construction, safety, environmental protection and energy efficiency. So the central government is speeding up the process of legislation in the energy area, such as passing the Renewable Energy Law this year, and drafting a national energy legislation that will serve as the constitution of the entire energy industry. Price adjustment and state-owned energy enterprise reforms are also underway.

Third, China is re-focusing on the self-reliance strategy that depends primarily on domestic energy sources to meet economic development needs. Beijing’s drive to increase energy and power production to satisfy the explosive demands for energy in the past two years has had some initial success. In 2003-04 alone, according to Xu Dingming, China put in new electricity generating capacity of 85 million kilowatts, equivalent to the entire electrical supply of Great Britain. New policy briefs from the government have put major emphasis on more exploration of domestic energy reserves.

Fourth, China does not want to be tarred as a rapacious energy user willing to enter into deals with any regime—no matter how internationally isolated—to lock up oil and natural gas assets. If Beijing succeeds in keeping demand for oil from growing at explosive rates, it will be less vulnerable on that point. China is learning to play the psychological game at the global marketplace by lowering expectations of China’s demands for oil, thus taking away what Beijing believes to be an unjustifiable excuse for big Western oil companies to hike up oil prices.

It may well be the case that China’s energy demand will slow down substantially this year. Yet China remains the second largest carbon dioxide emitter after the United States, most of its cities and rivers are severely polluted, and it burns three times as much energy as the global average and many times more than industrialized countries in producing every unit of GDP. Consequently, China is now looking to make its GDP greener and is willing to spend US$150 billion on renewable and alternative energy in the next 15 years.

Instead of blaming Beijing for its energy demands or containing China as an energy threat, the industrialized countries may be wise to seize China’s vast energy market potential in technologies of energy conservation and efficiency, environmental protection techniques and know-how, renewable and alternative energy production, and joint-efforts in managing global warming. A cooperative approach to solving common energy security concerns between China and the West will moderate Beijing’s foreign policy behavior, thus making easier the task of solving tough issues such as the on-going Iranian nuclear crisis. Yet all this depends on some clear thinking in the West about the true drivers of Chinese behavior in the energy sector.