Chapter 5: China’s Energy Security
5.1 China’s Energy Security Concept
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Chapter 5: China’s Energy Security
This chapter will argue that China views its energy security primarily through the lens of security of supply and that its primary concern in the Belt and Road period is ensuring that it can reliably transport energy purchased abroad back to China, as opposed to emphasizing diversity or affordability. It will also show how the energy-related Belt and Road projects identified in the last chapter contribute to China being able to reliably transport energy.
5.1 China’s Energy Security Concept
China’s perception of its energy security seems to best fall under what was described in Chapter 2 as the “traditional energy security” concept, focused primarily on ensuring the supply of and access to energy. A survey of 312 Chinese respondents found that along 16 dimensions of energy security, almost half considered having “a secure supply of coal, gas, oil, and/or uranium” as either the first or second most important dimension.227
It is only natural for China to be most concerned about having an adequate supply of energy resources. As the previous chapter suggested, China has traditionally been most concerned about oil in particular, although natural gas is of growing importance as well.
According to data provided by the China Statistical Yearbook, China’s fuel mix in 2014 was 64% coal, 18.1% crude oil, 5.9% natural gas, and 12% other energy.228 According to these same statistics, China produced roughly 3.9 billion tons of coal and consumed roughly 4.1 billion tons, meaning that China produced roughly 94% of the coal that it burned in 2014. 229 On the other hand, China used 518 million tons of crude oil, but produced less than half that
227 Results reproduced in Appendix B. Benjamin K Sovacool and Vlado Vivoda, "A Comparison of Chinese, Indian, and Japanese Perceptions of Energy Security," Asian Survey 52, no. 5 (2012): 960.
228 See Appendix C. China Statistical Yearbook 2016, China Statistical Yearbook (China Statistics Press, 2016), 9-2.
229 Ibid., 9-5.
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amount at 211 million tons.230 In 2016, China’s crude oil imports hit record highs,231 while crude oil output dropped to the lowest levels since May 2009.232 China is slightly more self-sufficient with regard to natural gas, only importing 30% of its consumed natural gas in 2015, but this is expected to climb to 40% by 2035.233 In order for China to feel secure with regard to its energy, it must address its inability to be self-sufficient in oil and gas.
Bo Kong identifies three components of China’s energy insecurity: cyclical, structural, and institutional security.234 Of these, the first two are components that the Belt and Road is able to address. Cyclical insecurity refers to the recurring power shortages that continue to plague China. From 1978-1996, power shortages were caused by insufficient production as China built up its electrical infrastructure. The Asian financial crisis of 1997 led to a decline in energy usage, and the central government banned the construction of new power plants in response.235 When the economy recovered more quickly than expected, there was again a shortage of production capacity, which created another period of electricity shortages.236 Kong believes that China’s structural insecurity comes as a result of excessive coal consumption. In order to reduce coal consumption, China has increased its share of oil, gas, and renewable sources of energy.237 In 2005, 72.4% of China’s energy consumption came from coal, which dropped to 64% in 2015, while oil grew from 17.8% to 18.1% and natural
230 Oil is generally measured in barrels, but the China Statistical Yearbook uses tens of thousands of tons. Ibid., 9-4.
231 Adam Rose and Aizhu Chen, "Amid Global Price Rout, China Crude Oil Imports Hit Record," Reuters, http://www.reuters.com/article/us-china-economy-trade-crude-idUSKCN0UR0DU20160113.
232 Meng Meng, "China October Crude Oil Output Drops to Lowest since May 2009," Reuters, http://www.reuters.com/article/us-china-economy-crude-output-idUSKBN1390GD.
233 "Bp Energy Outlook 2017 Edition," news release, 2017.
234 Bo Kong, "An Anatomy of China's Energy Insecurity and Its Strategies," (Springfield, VA: Pacific Northwest Center for Global Security, 2005), 2.
235 Shunkun Yu, Lisha Zhou, and Chen Li, "China Wrestles with Power Shortages," Power Magazine, http://www.powermag.com/china-wrestles-with-power-shortages/?pagenum=1.
236 Ibid.
237 Kong, "An Anatomy of China's Energy Insecurity and Its Strategies," 7.
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gas grew from 2.4% to 5.9%.238 Kong considers oil to be the “principal element of China’s structural energy insecurity” because it “bears the brunt of substitutes for coal” and is uniquely important for economic development for as a military commodity.239
China’s desire to reduce its coal consumption is only one of the reasons that China’s thirst for foreign oil will continue to grow. In order for China to maintain the high economic growth rates that it has become accustomed to, its oil supply must grow as well. One study conducted in 2004 estimated that for China’s economy to maintain a growth rate of greater than 7%, its oil supply would need to grow by at least 4%, but between 1990 and 2003, domestic oil production grew by an average rate of 1.57% per year.240 The GDP growth target has since dropped slightly to 6.7%, but between 2014 and 2015 oil production increased by an even lower 1.5%.241
Digging deeper into China’s concerns about its energy supply, three pressing issues are affordability, diversity, and transport reliability.242
5.1.1 Affordability
Affordability refers to the degree to which China can purchase energy without placing an undue burden on its economic development. Given that China needs to import so much energy already, higher energy costs mean that there is less money available for development and thus represents a security challenge because it can “undermine the country’s sustained
238 China Statistical Yearbook 2016, 9-2.
239 "An Anatomy of China's Energy Insecurity and Its Strategies," 7.
240 Ibid., 8.
241 "Bp Statistical Review 2016," 10.
242 Adapted from "An Anatomy of China's Energy Insecurity and Its Strategies."
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rapid growth, which is vital for stability of the Chinese system – stability in economic, social, and even political terms.”243
Chinese officials have estimated that “for every increase of 10 dollars per barrel of oil,” China’s GDP growth rate will decrease by 1%.244 It has also been estimated that a similar increase in the price of oil increases the consumer price index by 0.4%, which leads to higher inflation.245 Some scholars suggest that affordability of energy is important because it can affect social and political stability. Kong argues that high inflation “can induce students to take to the street, thus threatening political stability.”246 Erica Downs goes even further and cites a number of Chinese economists who have drawn a link between inflation resulting from high energy prices and the 1989 Tiananmen Square demonstrations, and argues that the Chinese government is particularly sensitive to the heightened possibility of future domestic unrest brought on by higher oil prices.247
Two ways that China can ensure affordability of energy are through equity oil and the creation of a strategic petroleum reserve. As explained in Section 3.2.2, the term “equity oil”
refers to oil that is acquired overseas and shipped directly back to China, typically as repayment for Chinese concessional loans. Equity oil’s efficacy in ensuring affordability is situational; the price of equity oil it is not necessarily always more affordable than market oil, but it will be less volatile, so it is guaranteed to provide some degree of economic stability.
The impact of a strategic petroleum reserve on affordability will be explained in Section 5.2.
243 Ibid., 19.
244 Liao Hong and Chen Yun, (Tebie cehua: duiyi zhanzheng, zhongguo jingji sunshi you duoda?) (“Special Report: What is the magnitude of Chinese Economic Losses Resulting from the Iraq War?”), People Daily Online , available at http://past.people.com.cn/GB/jinji/31/179/20030225/930064.html in ibid.
245 Fu Yongming, “Guoji Shiyou Jiage Dui Woguo Jingji De Yingxiang [Impacts of International Petroleum Prices on the Chinese Economy],” Jiage Yuekan [Prices Monthly], no. 4 (2005): 11 in China's International Petroleum Policy, 46.
246 "An Anatomy of China's Energy Insecurity and Its Strategies," 19.
247 Downs, "The Chinese Energy Security Debate," 31.
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5.1.2 Diversity
Issues of diversity and transport reliability can negatively impact affordability.
Diversity refers to the number of sources that China can import oil from. Diversity could refer to both diversity of sources and diversity of transport methods, but I will limit its definition here to simply diversity of sources, as diversity of transport methods is more meaningful when folded into transport reliability.
China has thus far been able to import enough oil to meet its domestic needs, but is heavily reliant on a small handful of countries; half of its oil imports in 2014 came from four countries.248
248 U.S. Energy Information Administration, "China," U.S. Energy Information Administration, https://www.eia.gov/beta/international/analysis.cfm?iso=CHN.
Figure 5.1: China’s crude oil imports by source (EIA 2015)
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The totality of China’s oil imports come from about 30 countries whereas the United States imports its oil from over 60 countries.249
China is even more limited in its source diversity when importing natural gas. The figure below shows the sources of China’s liquefied natural gas imports; more than half of its LNG comes from two countries (Qatar and Australia).
With regards to natural gas imported via pipelines, China is almost totally dependent on Turkmenistan, which provided 82% of its pipeline gas in 2015.250
China’s lack of source diversity is problematic because it is heavily reliant on a handful of countries for the majority of its energy needs; lack of diversity means that disruptions to exports from those countries will have a disproportionate effect on China.
China imports most of its oil from the conflict-prone Middle East and West Africa, which
249 Energy Economics: Modeling and Empirical Analysis in China, 221.
250 "Bp Statistical Review 2016," 28.
Figure 5.2: China’s LNG imports by source (EIA 2015)
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adds an additional layer of risk.251 Addressing the problem of limited diversity is relatively straightforward: China needs to seek out other suppliers of energy.
5.1.3 Transport Reliability
Transport reliability refers to whether energy resources can be reliably transported to China once purchased. The problem of China’s dependence on African and Middle Eastern oil is further compounded by the paucity of routes that this oil can travel through; nearly 77%
of its oil imports flow through the narrow Strait of Malacca.252 The Strait of Malacca links the Indian and Pacific Oceans and may very well be the most important shipping lane in the world. In 2013, approximately 15.2 million barrels of oil (bbl) – roughly 27% of the world’s oil maritime trade – passed through the Strait of Malacca each day.253
The United States, as a global naval power, has long used its navy to maintain open access to sea lines of communication (SLOC) such as the Strait of Malacca. While this has been hugely beneficial to free trade and the global economy, it is also concerning to Chinese leaders, who fear that the United States could someday use its control of the Strait of Malacca to contain China by cutting off its oil supply. Downs notes that while some scholars argue that “the Chinese goal of secure oil supply lines can be more easily and cheaply satisfied by
‘free riding’ on American protection of the communication lines,” Chinese energy scholars tend view China’s dependence on American security as a vulnerability.254 Top Chinese
251 In 2014, 52% of China’s oil imports came from the Middle East and 22% came from West Africa. "China".
252 ZhongXiang Zhang, "Why Are the Stakes So High?: Misconceptions and Misunderstandings in China's Global Quest for Energy Security," in Rebalancing and Sustaining Growth in China, ed. Huw Mckay and Song Ligang (ANU Press, 2012), 335.
253 U.S. Energy Information Administration, "World Oil Transit Chokepoints," U.S. Energy Information Administration, https://www.eia.gov/beta/international/regions-topics.cfm?RegionTopicID=WOTC.
254 Downs, "The Chinese Energy Security Debate," 32.
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leaders have agreed with this latter view; then-President Hu Jintao declared in 2003 that new strategies would be needed in order for China to overcome the “Malacca Dilemma.”255
Nor are threats to Chinese transport necessarily state-directed. The Strait of Malacca is only 1.5 miles wide at its narrowest point, making it a natural bottleneck.256 The sheer volume of ships that transit through the Strait increases the possibility of accidents that could lead to closure and force ships to take longer routes to their destinations; such a rerouting would force ships to travel an additional 994 miles, straining already-tight shipping
capacity.257 There are also concerns that terrorism or piracy could either close the Strait, or simply raise shipping costs, both of which would lead to increased oil prices.258
Pipelines are one method by which China hopes to bypass the Strait of Malacca.
Chinese energy analysts have argued that pipeline oil is “less vulnerable to disruption by the United States than oil arriving by tanker.”259 During the Twelfth Five-Year Plan (2011-2015), China planned to nearly double the total length of its oil and gas pipelines from fifty thousand kilometers to ninety thousand kilometers.260 While the actual effectiveness of oil pipelines is a contentious topic261, China views pipelines as preferable to maritime shipping.262