Part 3: It is about oil

Part 1: Hydropower, wave of the future?
Part 2: The human price

HONG KONG – China’s energy crisis caused by shortages of coal and hydroelectric power is compounded by a worsening oil shortfall. Though the world’s fifth-largest oil producer, China has fallen from being a net oil importer in 1993 to becoming the world’s fastest-growing importer. Its estimated exploitable oil reserves would last about a week.

The energy crisis has sounded a national alarm, requiring China’s leadership to confront the power famine head-on, review its energy policies and develop a long-term, sustainable energy policy.

An abundant energy reserve – or a sound energy security policy – is a precondition for big-power status. With its oil reserves virtually non-existent, its energy security precarious and no coherent energy policy, China’s national security cannot be guaranteed – let alone its sought-after rising-power status, according to analysts.

During the extremely cold weather last October, coal-burning power plants began to have trouble meeting the growing consumption and demand. After the central government ordered the suspension or closure of thousands of small, unsafe mines, seven provinces have ordered power cuts and blackouts to guarantee a minimum power supply.

Worse still, oil is now in short supply and the problem is very likely to last until the weather warms in the spring, reducing the need for heating oil, according to Sinopec Corp, a domestic company engaged in exploration, production and distribution of oil, gas and related chemical products.

Although the official media give few details about the oil shortage, knowledgeable sources estimate China’s maximum exploitable oil reserves at only 13 billion to 16 billion tons – at best comparable only to one medium-sized oilfield in Iran. Most worrisome is that China’s current oil reserve is rated to last the whole country only one week.

Japan isn’t much better off – its reserve might last six months – but Tokyo’s strategic energy planners are far ahead of their Chinese counterparts in making plans to fill the gap, and the oil gap can have devastating consequences. When Iran’s 1979 Islamic Revolution triggered the second worldwide oil crisis, the United States lost about 3.5 percent of its gross domestic product, while Japan survived, thanks to its then-sufficient oil reserve.

It is estimated that China will need 5.8 million barrels of oil a day in 2004, in effect replacing Japan as the world’s second-biggest oil-consuming country, according to China’s official Xinhua news agency. China consumed 250 million tons last year and this year is expected to consume 300 million tons. The United States consumes 1 billion tons of oil a year.

Oil shortage could undermine economic growth
China’s inconsequential oil reserve, if not bolstered by imports, could undermine national economic expansion – the nation’s priority and obsession.

The nation will need a petroleum reserve of 11 million to 21 million tons in 2010 based on a forecast annual oil consumption of 270 million to 300 million tons and an import volume of 100 million to 130 million tons, according to Chen Huai, vice director of the Research Institute of Market Economy under the State Council’s Development Research Center. The safety reserve for 90 days should exceed 25 million to 32 million tons, he said.

Premier Wen Jiabao has urged the sustainable development and supply of petroleum and natural gas. At a major Beijing meeting last May 26, he called for better-developing domestic resources, building up a strategic reserve and maintaining petroleum security. A study was launched.

An oil-focused energy strategy was proposed to the State Council in late November by its Development Research Center. It called for establishment of a domestic petroleum futures market and a related legal and supervision framework. This would allow China to bridge its gap with the international energy market, have a greater say in petroleum pricing, better resist price fluctuations and secure an oil supply.

The proposals are under consideration.

The proposed energy strategy also calls for:

  • Systematic conservation across various industries and sectors. Conservation is seldom practiced today.
  • A flexible strategic petroleum reserve system.
  • A shortage-warning system with a five-scale contingency plans for handling shortages that account for 3, 5, 7, 10 or 15 percent of import volume.
  • More effective development of domestic energy resources.
  • Intensive research into alternative fuels and resources and more efficient technologies to reduce reliance on petroleum and coal. These would include solar, wind, and hydrogen power, among other fuels.

    As early as the 1980s, experts warned that China’s inadequate petroleum reserves could not keep up with demand. Since 1984, the annual growth in petroleum consumption has averaged 4.9 percent, far outpacing the yearly growth of 1.7 percent in crude-oil production. Though the world’s No 5 oil producer, China has transformed from a net oil exporter in 1993 to the world’s fastest-growing importer.

    In 2002, the country’s oil output reached 168.9 million tons, while consumption reached 245.7 million tons, leaving a gap of 76.8 million tons that had to be filled by imports from the international market.

    Slow to embrace oil market mechanism
    Li Peng, premier from 1988-98, directed the development of the petroleum industry, but he was slow to embrace the market mechanism, since at the time Beijing considered petroleum a strategic raw material. Some critics of China’s energy policy – or lack thereof – hold Li partly responsible for the current energy crisis.

    China has a long way to go in developing an energy market with a cost-efficient management system.

    During the tenure of Jiang Zemin, the previous president, China was developing energy cooperation with Russia and Kazakhstan. Jiang’s big-power diplomacy, however, undermined the plan. Concerning the proposed Sino-Russian petroleum pipeline project, Beijing moved slowly and mainly paid lip service to the project with Moscow, while Japan moved smoothly and energetically with Russia on its own, separate pipeline project.

    The pipeline and other setbacks prompted President Hu Jintao to adopt more pragmatic diplomacy, and his efforts to diversify energy supply were evident at the Asia-Pacific Economic Cooperation conference last October in Bangkok. Hu conferred with Mexican President Vicente Fox on energy cooperation and later, on his visit to Australia, he signed a memorandum of understanding for the management and implementation of the Australia-China Natural Gas Technology Partnership Fund.

    On December 18, Hu met Israeli President Moshe Katsav in Beijing and they discussed cooperation in petroleum technology, a field in which Israel is strong. Hu called cooperation “reciprocal to both peoples and in accordance with the interests of both countries”.

    This is the final article of this series.

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