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The peak oil crisis: thinking about China

Earlier this week, the International Energy Agency announced that China was now the world's largest consumer of energy (oil, coal, natural gas, nuclear power and renewables), surpassing the U.S. for the first time.

With 1.3 billion people, China is unlikely to reach current U.S. energy consumption per capita for some time, if ever, but to double energy consumption in the last ten years is still an impressive achievement. But keep in mind that the average American is still consuming five times as much energy each year as the average Chinese. China had not been expected to overtake the US for another five years, but the global recession reduced U.S. consumption and China's strong economic rebound in the last sent Beijing's consumption soaring.

Interestingly, Chinese officials immediately denied that the IEA's announcement was correct. This is not because the Chinese do not want to be the world's number one energy consumer, but because they do not want to be known as the number one polluter and contributor to global warming emissions. As global temperatures set new records, Beijing would rather be thought of as the leader in efficient use of energy and developer of renewable technologies, rather than as a giant pollutant-belching smokestack, which may be closer to the truth for much of China's energy comes from coal.

The key issue for the next few years is whether China can keep up its frenetic growth. Earlier this year, after a heavy dose of financial stimulus and much loose lending, China's GDP was growing at an annual rate close to 12 percent. Keep in mind that China's definition of GDP growth does not exactly square with what is used in other countries. So while China's economic growth may be spectacular by OECD standards, it may not be quite that spectacular. When inflationary pressures appeared last spring, Beijing tightened up on lending which seems to have cut inflation, taken a point or two off of GDP growth, and cut back on industrial production.

Beijing is about to fall victim to rapidly increasing oil prices, and eventually, shortages.

Whether Beijing's formula of mixed capitalism and state control of key enterprises will prove to be durable over the long run has yet to be seen. What we do know, however, is that a few more years of surging energy consumption will soon be playing havoc with energy prices around the world. Even with GDP growth down to 8 or 10 percent each year, China seems to be on course to import at least an additional 500,000 barrels a day (b/d) on top of the 5.4 million b/d imported in June. Beijing's oil imports have doubled in the last five years. Given that other Asian states are increasing imports and the Gulf oil exporters are consuming increasing amounts of oil, something has got to give. That of course will be prices.

There are a few dark clouds on Beijing's horizon, however. Labor unrest is growing and the realities of China's decades of neglect for the environment are closing in. Natural and man-made disasters -- droughts, floods, hurricanes, melting glaciers, polluted air and water, falling aquifers - are accumulating at an alarming pace. Someday these problems, especially when they cause persistent food shortages, are going to reach the point where they impact the nation's ability to sustain any kind of economic growth. However, the consequences of these problems do not seem imminent.

Like everyone else, Beijing is about to fall victim to rapidly increasing oil prices, and eventually, shortages brought about by peaking world oil production. The government clearly recognizes this and has embarked on multiple programs to increase the efficiency of its energy use, increase production of renewable energy, and to buy up at top dollar as much foreign coal, oil and natural gas production as anybody is willing to sell them. This will in turn prove to be a major problem for the oil importing OECD countries that will see their sources of foreign oil disappear more quickly than anticipated.

For now the Chinese economic juggernaut appears ready to keep moving along right into the age of oil depletion. While the country has social and environmental issues none appear to be a hindrance to continued rapid economic development for the immediate future. With massive reserves of foreign exchange, Beijing should be in best position of any major oil importers to weather at least the initial stages of much higher oil prices.

The next few years are likely to be critical for should China keep increasing its imports of oil and even coal at anywhere close to their current rates of increase, major price spikes in the world's oil markets seem inevitable. The U.S. and OECD may not do too well economically in the next few years, but their oil and coal consumption are unlikely to take more than minor dips. These dips in consumption are unlikely to be enough to offset increasing oil consumption in Asia and the oil exporting nations.

China's new status as the world's number one energy consumer may or may not last long, but it serves as a reminder that there are serious troubles ahead.

Tom Whipple is a retired government analyst and has been following the peak oil issue for several years.

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