Tuning the Midnight Oil China's quest for energy conservation

India Infoline News Service | Mumbai |

Did you know China is the fifth-largest crude oil producer in the world? With domestic production supplying half of its crude oil demand, it commands a higher self sufficiency rate than most major economies of the West. Do read this update to get an insight about China’s Oil market…

Appearances are deceptive, they say and rightly so. Talk of China and oil never hogs the limelight. A little known fact about China is its status as the fifth-largest crude oil producer in the world. With domestic production supplying half of its crude oil demand, the country commands a far higher self sufficiency rate than most major economies of the West. Enhanced recovery technologies and development of new zones have helped China sustain stable production. Having said that, China’s oil demand is moderated by its quest for energy security and efficiency improvement.    

 

Greasy facts


China has woken up to few facts of negative energy. Despite significant improvements over the years, China’s energy efficiency leaves much to be desired. In 2008, China generated USD 4.4 trillion of GDP by way of 2 billion tonnes of oil-equivalent primary energy. In sharp contrast, Japan consumed only 25% as much energy as China did – despite the fact that oil playing a smaller role in China’s economy compared to Japan. Even India is 21% less wasteful than China for every USD of GDP generated.


China’s recent energy improvements have been stalled since 2001, thanks to the rapid expansion in energy-intensive sectors such as steel and aluminium.    


Energy Composition


China is a coal-based economy. Its heavy reliance on coal contrasts with major developed economies, where oil is the major source of energy. The coal dominance in China is on account of three factors:

  • Abundant domestic supplies of coal

  • A large manufacturing sector

  • Strategic desire for self-sufficiency in energy

This necessity cum choice is likely to see coal remain the primary source of China’s energy in the foreseeable future. It’s only a snowstorm that can cause a shift in favor of oil consumption. In 2003-04, China’s oil consumption soared by 17.37 YoY following widespread electricity blackouts that forced manufacturers to employ diesel and fuel-oil generators to run their factories. A 2008 blizzard caused a similar shift and since then, China has greatly expanded its power generation capacities.


A matter of policy

 

Looking ahead, China is expected to make energy efficiency gains of 4% per annum in the next three years. Although this rate would fall way short of meeting the 2010 target of 20%, the growth would be led by factors governed by regulation and reality check including:

  • Contraction of export manufacturing in the wake of the global economic crisis

  • Consolidation and/or shut down of smaller less-efficient players in energy-intensive sectors

  • Economic rebalance in favor of domestic consumption – comprising a larger portion of value-added less energy-intensive manufacturing

  • Growing financial impetus and government will to implement nation-wide conservation initiatives (The ban on manufacture of ultra-thin, unusable plastic bags has reportedly cut China’s use of plastic bags by 66% - equivalent to 3 million tonnes oil per year 


Demand drivers


China’s petroleum consumption tilts heavily in favor of productive usage – manufacturing, transportation and logistics sectors in particular. The oil utilization by electricity and heat generation sectors has been on a declining spree. The future consumption growth is likely to be led by transportation, household usage, agricultural and service sectors. Though transportation is a major consumer, it’s far from turning into a key demand driver, primarily because the government has initiated measures to contain fuel usage of household cars like:

  • A 5-8% hike in petroleum consumption taxes thereby keeping fuel prices high

  • Encouraging sales of compact cars by way of reduced purchase tax for 1.6 lit or less cars and hiked consumption tax for 3.- lit (or above) cars
  • Rotational traffic restrictions in Beijing that keep one-fifth of the cars off-road on week days  

An interesting fact of the consumption story is the diesel paradox. Although diesel forms the largest part of the refined petroleum consumption, the demand for clean-diesel cars has taken a back seat in the country. Tight supply, poor refining quality and popular myths over the adoption of clean-diesel cars have seen the thrust in favor of electric and hybrid cars.


The import scene


The Middle East is China’s most important source of oil supply but we expect growing net imports from Latin America and Russia in the coming time. The popular misconception surrounding the oil price boom is its attribution to a non-existent China’s voracious demand. Nothing can be further from truth. The oil price moves purely in line with the trade diktats. China’s oil imports are significantly lower than those of US and European countries. Even in 2008 – the year of OECD demand crash, China’s imports accounted for only 8 per cent of the total trade, compared to US (23.6%) and Europe (25%). The real reason for the meteoric price rise since 2004 lies in speculation, Wall street manipulations and largely, plunging crude oil production in the US and Europe. 


The Players

 

China has three powerful national oil companies:

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