China's energy consumption is projected to double by 2040, but who will win and who will lose?
China has the most impressing record of sustained economic growth in the history, averaging more than 10 percent growth every year over the last three decades, showing an impressive resilience. Trend growth was unaffected by the 1997 Asian financial crisis or the 2008 great financial crisis. Since 1980, roughly the period in which market reforms started, its economy has grown twenty-seven fold from $300 billion to more than $8 trillion. The rapid industrialization process has multiplied the energy needs. Since 2000, total consumption more than tripled from 36 quadrillion Btu (British thermal units, the energy indicator used to compare across different energy sources) to 115 quadrillion in 2012. In 2011 China overtook the United States as the world’s leading energy consumer. BP expects current consumption to double by 2040.
This growth is taking place across all energy sources. In the 30 years running to 2012, oil consumption grew from 1.7 million bpd to 10.2 million, natural gas from 380 billion cubic feet per year to 5.2 trillion, and coal from 727 million short tons per year to 4 trillion, Kuwait-based Asiya Investments, an Asia-focused investment company, said Sunday in its analysis on China energy needs.
Production also expanded very rapidly to sustain this growth. Domestic oil output more than doubled from 2 million bpd to 4.4 million bpd in the last three decades. For almost fifteen years after the reforms started, China exported oil. In 1993 the country turned into a net importer and in 2013 it became the top net oil importer in the world, overtaking the United States. More than 6 million bpd are imported every day in China, around 60 percent of its total consumption. Imports will continue to rise rapidly because yields in most Chinese deposits are falling and no new discoveries are being made. To expand production, over the last ten years offshore blocks have been offered to foreign companies via tender for exploration and development, but interest is very limited due to the lack of information about the geological conditions and the high cost of drilling in deep water. Similarly, natural gas started to be imported in 2004. In 2011 imports reached a trillion cubic feet, about 20 percent of consumption. Coal production increased fivefold during the same period, allowing self-sufficiency at this stage.
Expectations about the future of China are also high. According to Oxford Economics, China is expected to grow on average 7 percent during the next decade and then 6.5 percent in the following 10 years. This would make China, again, the fastest growing country among the largest economies, expanding twice as fast as the world average of 3.6 percent. Future growth will probably be lower than that due to the structural transformation that the country is going through. However, even a level of growth 20 percent or 30 percent below the current consensus call involves a large positive differential with the rest of the world and massive additional energy needs. The US Energy Information Administration estimates that, assuming a world average growth of 3.6 percent per annum, world energy use will grow by 56 percent between 2010 and 2040 and half of the increase is attributed to China and India.
In China, growth in oil demand will have to be served by imports, due to domestic production constraints. Similarly, coal imports are likely to be needed soon, as the sector is facing some tensions. For example, the coal industry uses 17 percent of the national water consumption but it is mostly located in one of the driest regions of the country, Inner Mongolia, creating significant logistics bottlenecks. Shale gas will not play a substantial role in the Chinese energy mix. China has the largest reserve of shale gas in the world (19 percent of the total, ahead of the United States with 13 percent) and a regulatory framework that supports the development of shale gas technology. However, technical issues like lack of water, depth of the gas deposits, proximity to urban areas and lack of technological skills make exploitation extremely expensive. Energy authorities in China expect to reach a production of 100 billion cubic meters by 2020, around 40 percent of the current United States production.
The energy mix is not expected to change substantially in China. The EIA expects the country to rely massively on coal and oil to cover around 80 percent of its energy needs in the next two decades. Renewable and nuclear will slightly increase their share, but oil is expected to lose only a small fraction of its weight in the energy mix. In absolute terms, Chinese demand is expected to grow faster than that of all other large economies. China will therefore have to rely mostly on imported oil to fuel growth, and most of that growth will have to be served by Middle East oil.