I want to stitch together some pieces of information, a set of events unfolding, that that I describe as a double Achilles Heel in ethanol production here in China. It’s a case study in progress of rising food prices and natural disasters influencing bio-fuel production, especially ethanol, and new regulations for gasoline exports.

Last week, flipping through China Daily, an English-language daily here in China I noticed a story “Autumn Grain Harvest Under Severe Threat”. In northern China, a drought has hit about 11.5 million hectares (27 million acres) of arable land, according to the Office of the State Flood Control and Drought Relief Headquarters. In the past, the country has satisfied nearly 100 per cent of its own grain demand. The autumn harvest accounts for 70% of the total annual production. In January this year Chinese corn consumption for 2006-2007 was forecast to reach 144.5 million tonnes, with country wide output reaching 144 tonnes.

Drying out after the deluge.

In southern China flood waters have submerged about 9.7 million hectares (21.5 million acres) putting the total submerged and parched dry land at one-sixth of the country’s 120 million-hectares (288 million acres) of arable land. Add to this, the damage to half-a-million hectares (1.2 million acres) that have been devoured by rice-plant hoppers in Sichuan Province, and at this time it is not clear whether the drought, flood and insect pests would force Beijing to turn to imports. Drought-stricken areas are the country’s key bases of grain production; flood-hit areas are the key to rice production. The 2006-2007 grain forecast is razor-thin, consumption versus production, and remember that China leads the world in consumption of rice and wheat. If China indeed turns to imports, how much additional grain will be required, and how much will it drive up grain prices on the world market?

The consumer Price Index (CPI) grew 5.6% in July 2007, the highest in ten years, with meat (especially pork rising 43% in one year), poultry, eggs and grains leading the index. The following month, in August, China declared a moratorium on the construction of most ethanol plants. Chinese officials recognized that producing corn-based ethanol was linked to rapidly rising food prices. Xu Dingming, an official of the National Energy Leading Group, told a recent seminar: “Food-based ethanol fuel will not be the direction for China. Unless ethanol can be produced using “non-staple crops,” it won’t be produced in China at all”.

During the last week of August, the National Development and Reform Commission (NDRC) stated that China’s major oil refiners should strictly control oil product exports. The NDRC is the government body in China that normally decides economic and pricing policies. Immediately following the order, the Petroleum & Chemical Corporation (Sinopec), Asia’s largest refiner, now plans to export no more than what is called for from its fixed long-term contracts, and PetroChina, the other major oil refiner in the country, cut August gasoline exports to 160,000 tonnes – a decrease of 33% – the year’s lowest figure so far, according to state-run China News Service. The report added that, apart from contracted supplies such as those to Hong Kong and Macau, Sinopec will reduce oil product exports in all regions to the lowest level of the year as well.

On September first the head of China’s Energy Ministry, Ma Kai, in a live television speech stated “For the long-term development of our Chinese nation, saving energy and reducing pollution are so important, so urgent. If we don’t change this situation… the economy will go badly and won’t go far”. It was the first televised large-scale appeal to consumers to change their lifestyles and conserve energy.

There is still ethanol production in China coming from China’s largest ethanol producer China Agri Industries, which is the grain-processing unit of Cofco Ltd., China’s largest grain trader is planning to open two more refineries this year, a 100,000 ton project in Hubei and a 300,000 ton project in Liaoning. These projects will use sweet potatoes as the feed stock. An additional 1 million tons of capacity also using sweet potatoes, awaiting permission, will be added by the end of 2008. China Agri has started using a different feedstock grain, sorghum, to produce ethanol. Sinopec and PetroChina have teamed up with China Agri in the downstream ethanol blending business. Other feedstock plants for China Agri ethanol plants include sugar cane and cassava. The shift of feedstock has caused a bump up in price of sorghum and sweet potatoes.

Obviously ethanol production is a very important part of China’s energy strategy, but rising food costs and a billion and a half people watching their food prices double in the last two years, a lot of unhappy words have been spoken to the point that energy consumption has collided with food production in a time of natural disasters. It seems the Chinese course of action is to curb exports of gasoline, keep it in the country to offset lost ethanol production. China in general has bountiful natural gas, hydroelectric power and coal supplies. With Tajikistan connected by pipeline filling in the gaps, there is no lack of energy for factories and power plants.

This set of events only shows the true irreplaceable value of crude oil. Even in countries and regions rich in two out of three fossil fuels, there is no substitute for crude oil as the lifeblood of an economy. Chinese road transportation networks use a combination of compressed natural gas (CNG), electric vehicles, as well as ethanol-blended gasoline – far more diverse methods and on a much larger scale than North America – and this country still can’t survive with outlarge amounts of crude oil. If what we see unraveling here as a litmus test for future reliance on substances other than crude oil to power our transportation networks, the effects of peak oil and depleting oil supplies worldwide will be far more damaging than most people expect. It seems there is no “magic bullet” for our world’s energy problems; even a combination of “magic bullets” isn’t enough. Right here, right now staring you in the face, the vulnerability of ethanol production is all too obvious.

David DuByne currently teaches Business English in Chongqing, China.