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The Peak Oil Crisis: Prospects for China

Headlines were made recently when it was announced that in July China's GDP surpassed that of Japan to become the world's second largest economy. This was immediately followed by a passel of stories speculating on how long it would take China's domestic output to surpass that of the U.S. and thus become the world's largest and by inference most influential economy. The mean estimate of the prognosticators seems to be about 20 years so that by 2030 China could be #1. This estimate is derived, of course, by assuming that China's economy will continue to grow at circa 10 percent each year and that the U.S. in turn will suffer from decades of stagnation.

If only it were so simple.

There is no question that China has had 40 good years. Once the Chinese got over celebrating their revolution, the cult of the personality (Mao worship), and the more onerous features of Marxism-Maoism (such as shooting capitalists), they came up with a political-economic system, which while not democratic, served well to harness the country's strengths and set it on the way to rapid economic growth. Blessed with a good endowment of natural resources, a long tradition of selecting and educating the best and the brightest for leadership, a reasonably homogeneous population, and the developed world as an example of where they would like to go, China has assembled a mixture of capitalism and socialism that undeniably yielded decades of impressive economic growth.

By moving tens of millions of peasant farmers into industrial enterprises where they worked long hours, under harsh discipline, for poor wages, China soon became the world's preeminent factory producing an inordinate share of the globe's manufactured goods. The question of the day is "How much longer can this last?" Rapid economic growth requires every increasing quantities of fossil fuels and other minerals. After forty years of hyper-exploitation of its domestic mineral deposits, China is now in a position where it must import half of its daily oil demand and is starting to import coal and other minerals as domestic sources become thinner and more difficult to produce.

Recent events suggest that China may suffer disproportionally from the effects of global warming.

The key question in all this is how much longer China's economic miracle can continue before the realities of finite mineral resources force a slowdown? Another five years of 10 percent annual economic growth will result in Beijing increasing its oil consumption by another 2.5-3 million barrels per day. This alone would likely mop up much of the world's spare capacity to produce oil and result in very large price increases. When China's ever growing demand is added to that of India, Brazil and the oil exporting states, the likelihood that we will see a substantial increase in oil prices within the next five years becomes very high.

Although China still has large reserves of coal, they have now begun importing which suggests they are having trouble producing it fast enough from deeper, aging mines to keep up with demand. Some believe that Beijing will only be able to keep increasing production for another 15 or 20 years before peak coal production is reached.

Recent events suggest that China may suffer disproportionally from the effects of global warming. This year the country was ravished by droughts, dust storms, and floods as increasing global temperatures worked their way on the weather patterns affecting China. If these changed patterns prove to be permanent feature of China's weather, droughts, floods, tropical storms, falling water tables and the melting of the Himalayan glaciers may force China into a survival mode where the struggle for food and water will trump industrial growth.

Although climate change, decreasing exports, and depleting mineral resources will all eventually impact China's ability to grow economically, the availability and affordability of oil is still likely to impact first. Despite the current oil glut, all indicators suggest that global oil supplies are likely to start running short in the next three to five years. Although China Incorporated may be in better shape to weather the initial stages of a price spike than the average American consumer, it is doubtful if China can grow its economy at 10 percent annually without increasing supplies of oil.

Beijing clearly recognizes all this and is moving to build a more efficient, less energy-intensive economy that can grow with less fossil fuel. Moreover, China's leaders are catching onto the notion that the costs of ignoring air and water pollution may eventually be prohibitive. The precept that China can keep growing its emissions until they reach the per capita level of the industrial nations may eventually fall as climate aberrations start to take an unacceptable toll on economic growth.

There are many unknowns and variables in all this, but it is a good bet that China's miracle of 10 percent annual economic growth has a half-life far shorter than many suspect.

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

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