Crisis Looms Over China
By Eva Cheng
30 May, 2004
Green Left Weekly
a quick fix for China's worsening energy problems, in the first nine
months of 2003 the country imported US$50 billion worth of energy resources
and raw materials, mainly oil 49% more than the same period in
2002 according to the December 8 People's Daily.
With the price of
oil hitting almost US$42 per barrel on May 18, China's energy import
bill is set to blow a major hole in the country's fiscal account. China's
oil imports have soared 35.7% during the first quarter of 2004, to 30.14
million tonnes. Oil imports grew 31.2% in 2003.
But the financial
burden is only part of Beijing's worries. An unreliable energy supply
could seriously jeopardise China's ability to maintain its recent role
as the factory of the world, based on low-cost manufacturing.
A campaign started
in 1999 to close down China's numerous small, highly polluting and dangerously
operated coal mines (small- and medium-scale mines produce much of China's
coal, which accounts for 66% of the country's energy consumption) was
sure to spell trouble.
Towards the end
of last year, when winter fell, coal for heating in China's freezing
north ran short. A regional drought had already undermined the power
supply in many provinces that rely on hydro-electric power. Twenty-one
of China's 28 provinces and autonomous regions were forced to ration
electricity supplies, even hitting the crucial coastal export belt,
including Guangdong, Fujian, Zhejiang and Jiangsu provinces, as well
as major cities like Shanghai. In 2002, electricity rationing was applied
in 12 provinces.
In December, most
factories in Hangzhou, in Zhejiang province, only had access to power
for four days a week. Blackouts became the norm. Many factories resorted
to in-house generators for power, which mostly run on diesel. Soon diesel
supplies also ran out.
However, this has
not deterred rampant speculative investment, which has worsened energy
shortages further. For example, new investments in iron and steel plants
skyrocketed by 107%, and cement works by 101% during the first quarter,
compared to the same period for 2003.
In its first quarter
monetary report for 2004, China's central bank warned that the 35.5%
increase in fixed assets for the quarter was already greater than the
rise in 1992-93, the last overheating wave. The bank added that there
were too many excessively large new projects, which were creating irrational
With the northern
summer fast approaching, China's precarious power supply capability
will be further strained. The deputy chairperson of China's State Electricity
Regulatory Commission, Song Mi, expects China's electricity shortage
in 2004 to be 20 million kilowatts, double the 2003 figure, according
to a Xinhua News Agency article on April 6.
The sharp rise in
oil prices makes things worse. China increasingly depends on oil, especially
imported oil, to meet its energy and industrial needs. Some 21% of its
primary energy consumption come from oil, and 36.1% of its oil needs
were imported in 2001.
China's energy problems didn't emerge overnight. The country is rich
in coal, so after the 1949 revolution China overwhelmingly relied on
coal for power generation 94% in 1953.
The discovery of
a major oil reserve in Daqing, in north-eastern China, in the late 1950s
brought much needed diversity, helped by smaller offshore oil finds
in the 1970s. Coal's share of China's primary energy consumption had
dropped to 71.8% in 1975. However, following aggressive oil exports
that followed the Chinese Communist Party's open door economic
policy launched in 1978, the country's coal dependence had risen to
75% in 1990.
by coal extraction and consumption was so serious, and acid rain so
rampant, that in 1998 China accounted for seven of the world's 10 most
polluted cities. The need to reduce coal dependence was not in doubt,
but the problem was the lack of an affordable and clean alternative.
Hydro power has
been a major focus of alternative energy development due to China's
abundance of rivers. The US$22 billion, 18.2-gigawatt Three Gorges Hydro
project began construction a decade ago but is not due to be completed
until 2009. Another hydro project, twice the size of the Three Gorges
project is on the drawing board, but will probably take even longer
accounted for 21.2% of China's electricity generation in 1990, but that
ratio slipped to 18.5% in 2001. Overall, hydro power accounted for 2%
of China's primary energy consumption in 1995 and that ratio will not
change dramatically shortly.
Natural gas is another
alternative. Its production grew in the 1960s and '70s after the discovery
a major gas field in Sichuan province in China's remote west. But the
sector's growth has lagged due to the cost of delivering it to the population
centres in the east. Still, construction of a $18 billion, 4200-kilometre
pipeline began in 2002 to bring gas from Xinjiang in the west to Shanghai.
Another 4000 km
pipeline is being built to bring offshore gas from Hainan Island to
the southern and eastern coasts. Construction could take 15 years, so
natural gas' contribution to China's overall energy consumption (2%
at present) will not significantly increase for some time.
In 2001, China embarked
on two infrastructure projects necessary to start importing liquefied
natural gas. Beijing has contracts to obtain LNG from Australia and
Indonesia, but its facilities won't be ready until 2009 and 2011, respectively.
Scramble for oil
In the absence of immediate alternatives to coal, oil is of critical
importance for China. China's dependence on oil imports is on the rise.
Between 1990 and 2000, oil's share of China's primary energy mix increased
from 17% to 21%. Production in Daqing, which supplies half of China's
oil needs, is declining, while other fields, including those offshore
and in the remote west, where extraction is difficult, are not coming
China became a net
oil importer in 1993. Recently, it overtook Japan to become the second-biggest
oil importer in the world, just after the US. Its dependence on oil
imports is expected to rise to 50% by 2010.
60% of China's oil imports come from the Middle East and have to be
shipped through the Malacca Strait, a strategically vulnerable bottleneck
that China, unlike the US, does not have the military capability to
explains why Beijing has been working overtime to diversify its sources
of oil imports, with priority given to Russian and Central Asian sources.
Beijing knows that
Washington's bid to control the Middle East is also aimed at controlling
the critical oil supplies of its economic competitors, such as China
and Western Europe.
Oil monopolies from
the imperialist countries are also more than willing to make things
worse for China. BG, a British group, agreed to sell its 16.67% stake
in a Kazakhstan oil joint venture to two Chinese state oil companies
for US$1.2 billion. But in May 2003, ENI of Italy, Exxon of the US,
Total of France and Anglo-Dutch Shell collectively exercised their rights
as existing shareholders to buy that stake in order to block out China.
China has been obtaining
oil from Russia via train but this is expensive and only allows limited
supply. China's bid to build a pipeline to access east Siberian oil
has been frustrated. Beijing has been competing with Japan to obtain
Moscow's blessing for two alternative pipeline proposals. China's proposed
route is 2400km and will cost $2.5 billion. Ending at Daqing, it will
serve the Chinese market only.
is 3900-km long and will cost two to three times the cost of the Chinese
route, but it is backed by $7.5 billion worth of Japanese finance. The
pipeline is to end in the port city of Nakhodka, on Russia's far-east
coast and theoretically can serve markets other than Japan.
it had virtually sealed the deal when Russian President Vladimir Putin
signed a communique on China's proposal in May 2003 in Moscow. China's
President Hu Jintao travelled there for the signing.
Though yet to be
officially confirmed, Reuters quoted a Japanese official on March 23
as saying that Japan has won the deal. Japan proposes to build an even
longer pipeline to accommodate a branch to Daqing.
From Green Left
Weekly, May 26, 2004.
Visit the Green Left Weekly home page.