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Study by Joe Barnes, James D. Coan, Jareer Elass, Mahmoud A. El-Gamal, Peter R. Hartley, Amy Myers Jaffe, Steven W. Lewis, David R. Mares, Kenneth B. Medlock III, Ronald Soligo, Richard J. Stoll and Alan Troner

Introduction

China will play a major role in shaping long-term global energy trends. Already, China's growing economy has been a driver of global commodity markets in recent years. Since the economic reforms begun in 1978, China’s government has succeeded in lifting hundreds of millions of Chinese citizens out of poverty, and provided employment opportunities that have moved much of the population away from subsistence activities. China has made significant investments in the basic infrastructure needed to elevate the country to an advanced industrial economy, including a strong educational system, a diverse energy system, broad liberalization of trade barriers across economic sectors, and institutions of competition among localities for private and public investment.

As a result of these policies, China’s economy has grown at incredibly fast rates over the past three decades. This growth has been heavily biased in favor of investment-driven, capital-and resource-intensive, and export-oriented industrialization. China is now the world’s second-largest economy and second-largest consumer of hydrocarbons. In fact, soaring Chinese oil and natural gas demand has become a major feature influencing global energy market trends.

Although China has made great strides in improving energy efficiency and reducing the environmental impact of its economic expansion, continued fast growth is certain to increase demand pressure on fuels and other resources, and to test the limits of environmental sustainability—much as high U.S. hydrocarbon use has had similar global ramifications. Utilizing economic modeling simulations and policy analysis, this study, The Rise of China and Its Energy Implications, finds that regardless of aggressive demand management policies announced in recent years by Beijing, China’s oil use by 2040 could easily reach levels comparable to today’s U.S. levels. This is despite world-class automotive efficiency standards and an ambitious program to propel the use of electric vehicles. Even with emerging praise of the Chinese growth model as a new “Beijing consensus” economic paradigm that challenges the U.S. democratic, free market privatization model, China’s efforts at centralizing a clear and effective energy policy do not appear to be significantly more successful than the makeshift patchwork of energy initiatives devised by the United States. If anything, U.S. private sector efforts are achieving innovation in the energy sector, especially in the area of unconventional oil and gas, that is attracting Chinese state investment on U.S. shores and prompting Beijing to consider further opening its oil and gas exploration to American firms.

The study also finds that not only is China’s centralized planning apparatus likely to fail to constrain Chinese oil demand from rising to levels comparable to the United States, the state’s “going abroad” program for acquiring foreign oil—where China’s national oil companies have pursued equity oil through foreign oil exploration deals and corporate mergers and acquisitions—is also encountering significant difficulties. As the global recession hit in 2007-2008, China’s national oil companies (NOC) took advantage of depressed asset prices and tight credit in global financial markets to secure more than $40 billion in oil and gas acquisitions in the hopes of diversifying their portfolios and profiting from an appreciation in assets in the coming decade. However, China has encountered geopolitical complications that are creating uncertainty about the fate of some of its foreign oil holdings and loan packages, especially in countries such as Iran, Sudan, Libya, and Venezuela—all of which have recently experienced political turmoil, including partition (Sudan) and regime change (Libya). Since 2010, under increasing pressure from the United States, China’s NOCs have slowed their operations in Iran’s oil and gas industry. The resulting project delays have prompted contract cancellation threats from Tehran. Even in more stable investment climates such as Brazil and Argentina, China has experienced backlash in the form of antidumping tariffs and public criticism for undervaluing its currency (Mares 2011). In short, China is learning that owning equity oil in risky regions may not be as clear a path to energy security as it had previously imagined. Indeed, China has tried to offset some of this risk by increasing investments in the United States and Canada and by pursuing unconventional oil and gas investments within its own borders.

The good news is that China, now finding itself mired in more energy-related foreign diplomacy than it bargained for, is more inclined to act in concert with other members of the international community. But China’s far-flung involvement in unstable regions also means that it may need troops to guard foreign oil and gas installations and naval craft to effect evacuations in emergencies. Even this modest increase in China’s foreign military profile will require greater consultation with the United States, first, to avoid potentially dangerous misunderstandings and, second, to create the groundwork for cooperation during possible crises.

As China becomes a more engaged stakeholder in the international arena, the United States must prepare itself for increased global power sharing—a process that will be difficult given the deeply entrenched American self-concept of “exceptionalism” and the corresponding Chinese sense of national destiny (Barnes, Coan, and Elass 2011). How to reconcile these national visions will almost certainly influence energy geopolitics in the coming decades as turmoil and political change sweep across the Middle East.

This material may be quoted or reproduced without prior permission, provided appropriate credit is given to the author and Rice University’s Baker Institute for Public Policy. The views expressed herein are those of the individual author(s), and do not necessarily represent the views of Rice University’s Baker Institute for Public Policy.