Economic growth feeds China's insatiable appetite for foreign oil

Economic growth, urban migration, small reserves: the gap between oil production and consumption in China is set to increase for decades to come.

Work on an electricity pylon is carried out in Anqing, China. With about 350 million people anticipated to move into its cities in the next decade, China will face new challenges ranging from availability of social services to adequate energy supply. China Daily / ReutersShow less

China's national oil companies are increasingly visible in the Middle East. Here's why:

China is the world’s most populous country and largest energy consumer. It is the second largest economy in the world. From 2001 to 2011, it experienced annual GDP growth of about 10 per cent.

The recent slowdown in the Chinese economy is planned and calculated, as indicated in the government’s 12th Five Year Plan, in the hopes of restructuring the economy, boosting private consumption and relying less on exports. Those are the main Chinese lessons of the recent financial crisis.

Since 2000, China's needs for energy have grown rapidly. Continuous economic growth coupled with structural change in energy consumption before and after the country joined the World Trade Organization in 2001 have been behind this dramatic increase in energy demand.

Also, the change in energy consumption trends has had a huge effect on the country’s environmental records. According to the US energy information administration, from 1980 to 2002 China was responsible for about 28 per cent of the net growth in the world’s carbon emission. However, the country accounted for more than 50 per cent of the growth in emission from 2002 to 2005.

The recent shift in the country’s energy consumption has been a result of two main changes in the economic structure. The two changes were in the way the Chinese government kept up the country’s GDP growth. According to some economists, investment went up exponentially after 2002 and surpassed private consumption to become the largest slice of China’s GDP pie in 2004.

Investment, especially in energy-intensive fixed assets, reached about 44 per cent of real GDP by 2008.

The second change was in the share of net exports, which leapt from about 2 per cent of GDP in 2002 to around 8 per cent in 2008.

Essentially, Chinese economic growth since 2002 has been sustained by this growth in investment and net exports.

Looking forward, McKinsey Global Institute expects that some 350 million people will be added to the urban population in the next decade. That will present a new set of challenges ranging from availability of social services to availability of energy supply.

In terms of energy consumption, there is a huge difference between urban lifestyle and that of the suburbs; urban living is more energy-intensive. Those living in cities are more likely to use cars, trains, washing machines, fridges, TV, lights, heaters/air conditioners and many other devices that consume energy. This trend makes it imperative for the government to invest heavily in the energy industry.  The widening gap between energy consumption and production makes this investment an even more urgent matter.

According to BP, China's gap between gas production and consumption was about 2 per cent in 2007, but had jumped to around 22 per cent by 2011. Gas consumption represents 4 per cent of the total primary energy consumption, but its share is expected to increase to 8 per cent by 2015, as predicted by the International Energy Agency (IEA). This is normal when considering the country's aim to reduce its carbon emission intensity rate by 17 per cent by 2015 – gas emits half the carbon dioxide of coal.

Similarly, the gap between crude oil production and consumption was 4 million barrels per day (bpd) in 2007, but grew to 5.7 million bpd in 2011. The country’s oil reserves-to-production ratio is 10, indicating that at the current production rate and with no major future reserves expansion, the country has only 10 years before it runs out of oil.

Many factors influence China’s energy strategy, but the one that keeps the decision-makers awake at night is the country’s insatiable thirst for oil, about 60 per cent of which is imported. More critically, according to the IEA, the country is expected to import 77 per cent of its oil requirements by 2020.

With expected GDP growth of at least 7.5 per cent a year, little expansion opportunity in domestic oil production (a great deal of which comes from ageing fields) and challenges in reducing energy intensity, the gap between oil production and consumption is expected to increase for years, if not decades, to come.

The statement of Zhang Guobao, former head of the country’s National Energy Administration, succinctly and clearly describes China’s situation: “Oil security is the most important part of achieving energy security ... preparations for alternative energies should be made as soon as possible.”

Ebrahim Hashem is a senior adviser in business strategy and corporate governance at an Abu Dhabi-based company.