But that double tracking theory fell by the wayside after 1994 when China became a net importer for the first time.
It took until 1997 for then Premier Li Peng to concede as much, stating that, as the economy developed and living standards rose, "demand for oil and gas is certain to increase by large margins [and that] while striving to develop our own crude oil and natural gas resources, we have to use some foreign resources." Oil imports have grown at a very fast clip since. In 2000, six years after China became a net importer, they were growing at an annual 15%. Just-released customs data for 2004 show they increased 35% year-on-year, to 120m tons annually, accounting for 41% of China's oil consumption. The State Information Center projected total consumption in 2004 to hit 300m tons, up from 250m tons in 2003.
Bloomberg recently told of one analyst who predicted 2005 import growth would moderate to 18%, bringing incomings to 142m tons – and China's import ratio to 43% of consumption. Only in China could an 18% increase in something be considered moderate. Yet the gap keeps widening and to fill it, Beijing keeps signing deals, both long-term supply agreements and outright acquisitions, from the oil-tar sands of Northern Canada to the North Shelf of Australia.
China has accelerated prospecting at home, too, on land and offshore – and straying, some would say, into the waters of other countries. The Philippines, Japan, Vietnam and other countries have each been discomfited by the vibes of China's drilling rigs. By some industry estimates, only 10% of China's current oil harvest comes from under the land.
China displaces Japan
China is now the second biggest energy consumer after the United States – having displaced No. 2 consumer Japan in 2003 – and appears to be consuming oil like it's going out of style, though its per capita energy consumption is modest – less than a tenth that of the US. American per capita consumption has hovered close to 350m British Thermal Units for the last several years, while China's has remained far below 50m BTUs, according to the US Department of Energy.
In its quest to ensure stable supplies, China has also been dealing with regimes the US does not like very much – in the Middle East, Iran and Sudan come to mind; in the Western hemisphere, Venezuela, with its pro-Cuban president, Hugo Chavez, probably tops the list. There is a palpable tension in the air.
The more tensions rise, the more important an oil reserve becomes for China. The larger the import ratio, the greater the urgency to build a reserve to cushion against shortages and the price spikes that go with them. China needs insurance against disruptions as political tensions heave this way and that – principally in the Middle East, from where China has been sourcing more and more of its imports, but also in other regions in Africa and elsewhere.
According to state media reports, Beijing wants initially to secure a 30-day reserve by 2008. Oil company stocks range from 10 to 30 days now. But China cannot feel really comfortable until its reserves match those of other big importers, like Japan (120 days) and the US (90 days), although there's nothing comparable to owning all you need to begin with – which explains China's enthusiasm for acquiring rather than leasing foreign supplies.
As China enhances energy security, corporate America, corporate Europe and corporate Japan should feel more comfortable, too, for it was their decision to outsource manufacturing to China that helped transform it into a global factory – and into an energy importer. It is ironic, as consumers everywhere clamor for made-in-China products and Chinese consumers clamor for cars made in China by US, European and Japanese multinationals, that China has singlehandedly forced the world's rich countries to put the issue of secure oil supplies at the top of their strategic agendas.
Coal, extracted from the world's deadliest mines, remains China's biggest source of energy. And research moves at speed to develop clean-coal technologies and new applications for the fuel. But it is oil that picks up most of the slack as China's economy grows by leaps and bounds. And that will continue at least until newly-ordered nuclear and hydro plants for generating electricity are commissioned to help fill gaps.
Rising Chinese demand is driven by expanding manufacturing, but also by the demands of modernization that sophisticated manufacturing requires – and by the rise of China's middle class, already estimated to number around 200m. Oil is needed to fuel more private cars, selling till last year at 70%-plus year-on-year growth rates, and more oil is needed to feed electricity generating plants to power middle-class comforts like central heating and home appliances.
In Shanghai's older, drafty flats, circuit breakers pop when demand is raised by so much as a tea kettle beyond two inadequate heaters. Those low-rise blocks are coming down, all to be replaced by high-rises filled with flats drawing off many times the power. Demand is soaring city block by city block.
But it is summer that really drives demand. MIT's Building Technology Group said in 1997 that China's air-conditioner market grew thirteen-fold in the preceding 12 years. Electricity consumed by air conditioners in the Yangtze basin by 1997 accounted for more than one third of total peak summer demand. Updating the story, Japanese air conditioner maker Daikin Industries says China is now the fourth largest air conditioner market – after North America, Japan and Europe – with a 14% global share projected to top US$6.75bn this year. Only 10 years ago, air conditioner penetration in Chinese households was 1% overall.
Add in modern hospitals, schools, the soaring profiles of city centers, vast new ports to expedite cargo to the world, mass transit systems being built by the score, brightly lit expressways and so on.
Economic imperatives
Economic imperatives at home set foreign affairs imperatives, of course, and, as a Brookings Institution energy paper observed several years ago, "China's interest in preserving its energy security will remain the serious dividing line between the Chinese and the US strategies in the region." The authors further argued that, "Growing solidarity between Moscow and Beijing in their apprehension of growing U.S. 'hegemony' after the 1999 war in Yugoslavia will make these divisions even more difficult to surpass. For Beijing, the importance of interaction with the United States over the Middle East will certainly grow, considering that China's reliance on imported oil will also grow."
Reducing energy waste and development of new and alternate energy sources might help relieve some pressure on rising import demand. More efficient pricing in the domestic market will certainly help. Developing a talent for futures trading (fuel oil futures began trading in Shanghai only in the second half of last year) will also help China hedge against price surges – provided its hedging skills rise above those of China Aviation Oil, which recently managed to lose US$500m on Singapore's futures trading market.
But China crucially needs to move at speed to build a safety reserve to turn to in the event supplies are disrupted by trade embargoes or by political upheavals – and to gain time for thinking through solutions. The alternative is brinkmanship. Building an oil reserve is made doubly urgent considering China's increasing dependence on Middle East oil, and the vulnerability of shipping lanes and pipeline projects in place and in the planning stage.
China Daily recently quoted Li Gansheng, a Sinopec engineer, asserting that it is possible for China to keep growth of its oil reserves stable for as long as 20 years, "with its total amount of explorable crude oil reaching 15bn tons."
But Beijing should not scuttle its stockpiling plans on this account because there is a catch: "The prospecting work is difficult due to the country's complicated geological structure," the newspaper noted.
Earlier, Zhang Xiaoqiang, vice chairman of China's National Development and Reform Commission (NDRC), had announced the country's first 10m-barrel storage facility, ahead of its opening in Ningbo, below Shanghai, in August – phase 1 of China's strategic petroleum reserve (SPR) scheme that calls for establishing a 150m barrel reserve in three to five years.
That was welcome news, but it took an age coming. SPR has been a strategic priority since 2001.
