• Young Diplomats Society

China: An Energy Goliath

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Jason Szeftel

As the summer of 2021 set in, cities all along the Chinese coast struggled to keep the lights on. Hot weather, limited rain, and surging consumer exports overwhelmed the power system, forcing the state to ration electricity in some of its most productive regions. Outages during the winter had caused similar problems. These recent events show that China’s seasonal energy challenges are growing larger and more frequent. They are also a harbinger of what the country faces as it strives to transform its energy infrastructure over the next decade.

China has an energy dilemma. It uses a lot of energy but does not produce enough to meet its own needs. As a result it confronts the classic problem of 20th century industrial states: it must feed its economy on foreign fuel. The difference is that China’s needs are much larger than those of earlier industrial states. In 2020 China consumed more energy than the United States, Japan, Germany, France, Britain, and Italy consumed together in 1990.

Total Chinese energy use is over 50% larger than American energy use. However, while American energy use has barely changed over the last 30 years, Chinese energy consumption is still growing and is not expected to peak until the mid-2030s. Scale matters and here scale does not work in China’s favor. China uses more energy than any other country ever has, and over the coming years it will become more dependent on foreign supplies. China’s energy future is out of its hands.

The next decade will be a trying time. China may be able to overcome its challenges through innovation and dedication. It may exit the 2020s with a greater supply of domestic renewable energy sources, a large and expanding nuclear sector, and a competitive natural gas industry. However, it is far more likely that the country will struggle to balance the many changes and demands pressing in upon it.

Energy Dependence

Chinese energy dependence is already worse than American energy dependence was at its height in the mid-2000s. Back in 2005 the United States imported 60% of its oil. In 2019 China imported 43% of its natural gas and 67% of its oil. Energy dependence on this scale is unprecedented: China imports more energy than Japan consumes in total. While shale oil has since made the United States functionally energy independent, China’s situation is about to get dramatically worse. By 2030 the International Energy Agency predicts China will import 60% of its natural gas and by 2040 may import 80% of its oil.

Chinese energy dependence keeps growing because Chinese energy production is unable to keep up with demand. Domestic Chinese oil and gas production is shrinking. China's largest oil field at Daxing peaked in 2008 and its output is now down by 20%. Overall Chinese oil production peaked in 2015 and has been declining ever since. China initially sought to fix this by replicating the American success in extracting shale oil. However, by 2020 it was forced to radically cut its goals for new shale oil and natural gas extraction due to the unexpected cost and complexity of the project. No shale revolution is coming to rescue Chinese oil and gas production.

Since China can’t expand domestic production, its only option has been to expand and diversify its imports. For years China has been scrambling to open up new pipelines, build more refining capacity, construct new liquified natural gas facilities, and cut new deals for ever more hydrocarbons. None of this gives China increased control over its energy future, or even the price of fuel, but it does prevent any single foreign country from gaining too much leverage over it.

The Emissions Problem

China is working to secure its energy future at a very difficult time. Climate change and environmental sensitivities are pushing the largest transformation of global energy use since the industrial revolution. Energy use is increasingly viewed through the lens of carbon emissions and all companies and economies are working to limit their environmental footprint. Even the oil supermajors are facing pressure to move to a clean energy future. Here China is in serious trouble: it emits more carbon than the rest of the developed world combined.

To make up for its emissions China has made very large and public investments in renewable energy. Heavy state support for green energy was supposed to put China in the vanguard of new technologies as well as in a better public relations position to fend off environmental critiques of its economy. At the very least it was intended to offset foreign criticism of China’s expanding investments in fossil fuel energy. After all, China’s flagship overseas initiatives, such as the Belt and Road Initiative, are mostly financing conventional industrial and fossil fuel projects rather than renewables.

China continues to invest in conventional energy because it knows it cannot rely on current renewable energy technologies to make up for its declining domestic fossil fuel output and growing energy consumption. Together coal, oil, and natural gas meet 86% of Chinese energy needs. Wind and solar meet only 5%. Closing this gap will require decades. Even though renewable technologies are making remarkable progress, a Chinese energy revolution based upon them is not around the corner.

Indeed, most of China is very poorly suited to wind or solar energy. The best regions are in the far western and northern reaches of the country away from major population centers. They require long, expensive transmission lines and create intricate new problems for energy reliability. Due to these issues more renewable energy goes unused in China than in any other country.

China’s most promising energy source is nuclear energy. It is the one source that, if properly scaled, could actually solve many of China's energy problems. France successfully took this route after the oil shocks of the 1970s. However, nuclear power currently meets only 2% of China’s needs and each new nuclear power plant is a major capital project in an industry with few economies of scale. Expanding nuclear energy to met China’s needs will require hundreds of billions of dollars in capital investment. Expanding too quickly could also lead to a Fukushima-style mishap that would set any hope of Chinese energy independence back decades. As a result China is being cautious and, while still betting heavily on nuclear energy, has set only modest targets for nuclear power generation through 2030.

Coal in the Crosshairs

Despite all the media attention directed at renewable energy, China's primary response to its mounting energy needs has been to import more hydrocarbons and expand its use of coal. China is the largest energy producer on the planet and the major reason for this is coal. Coal accounts for close to 60% of total Chinese energy use. China creates more energy out of coal than the United States creates out of oil, natural gas, and coal combined. In fact, for the last 10 years China has used more coal annually than the rest of the world combined.

China uses this much coal because it is the country’s only local, cheap, and abundant supply of energy. Energy is often the single greatest constraint on industrial production in developing countries, making the cost and reliability of electricity major factors in the location of industrial facilities. China overcame these issues by taking advantage of its large coal reserves. By burning tens of billions of tons of coal China kept energy prices low and predictable, and successfully scaled up its energy sector to power the world’s greatest industrial expansion. Domestic Chinese coal made China’s rise possible.

Coal powered the development of China’s large, energy-intensive economy. Cheap electricity paired with cheap labor and lax regulations let China outcompete many other countries on cost and flood global markets with goods and commodities. It helped China build out dominant positions in some of the most energetically demanding industries on earth from steel to chemicals to refining. Over time it turned China into the world's factory and still lubricates an economy built on construction, housing, and manufacturing.

With coal in the crosshairs this economy is now under threat. Switching to more expensive energy sources would handicap Chinese industry just as pandemic supply shocks are forcing multinational firms to reconsider their traditional global supply chains and production locations. It adds new and dangerous uncertainties to one of the key pillars of the Chinese economy. It is no surprise that the Chinese government is far more concerned with meeting its energy needs and preserving its economy than with meeting global emissions targets. China only plans to start cutting back on coal use in 2026 because it knows cheap, reliable energy will be as essential in the coming decade as it was in the last three.

Paying for Power

Nonetheless, these intertwined problems of energy scarcity, growing energy needs, and a changing energy profile will come to a head this decade. For China emission reductions, energy security, and economic growth do not synergize at the scale its economy requires. Green energy is presented as a transformation that can provide for all three in one fell swoop, but, in truth, it cannot. Due to its sheer size China will be using and importing more hydrocarbons than any other country for a long time to come.

Securing these resources will be a challenge. Even under the most optimistic scenarios for renewable energy, oil demand is likely to increase for at least the next 15 years. At the same time, major oil fields are drying up and oil exploration is trending down. As the investment in oil and gas goes down, the cost of energy increases, and these costs will ripple through the Chinese economy, forcing the state to either increase subsidies or pass on the costs to producers and consumers. Regardless of what it chooses, China will have to pay to power its country.

Without cheap, reliable energy the Chinese economy cannot function let alone evolve. As a result, many observers fear China will fight to secure the resources it needs. However, trying to acquire energy supplies through war is a dangerous gambit. China would only ever do this if its back was truly against the wall. Open conflict over energy is a sign of desperation, not strength.

Not only this, but China’s vulnerable maritime supply lines stretch for thousands of miles, and war would be an open invitation to attack them. 80% of its oil imports also pass through the narrow Malacca Strait, which makes targeting Chinese energy supplies easy. China would have to bully almost a dozen states just to secure this chokepoint, while breaking through to the Middle East would require even more conflict. This is not a promising scenario.

Any Chinese attempt to secure its energy future through military means would likely have the opposite effect. It would destroy diplomatic relationships, disturb markets, and upend the Chinese economy. Nothing requires more fuel than war and nothing would make Chinese energy more costly and unreliable.

Final Remarks

Dazzled by the scale of a nation’s ambition, we often forget that even countries with grand strategies can struggle to keep the lights on.

Jason Szeftel is a writer, consultant, and former development lawyer. He is writing a book on China scheduled to be published in early 2022. He is also the host of the China Unraveled podcast. Over the years he has worked and studied in Europe, South America, and Asia.