China's Energy Security Policy and Sino-US Relations

EAI China Panel Report No. 1

Author

Park Byung-kwang (朴炳光)_Senior Research Fellow, Institute of National Security Strategy (INSS). Graduated from Dankook University with a degree in Political Science and International Relations, and obtained a Ph.D. in Chinese Politics from Fudan University. He has served as a Visiting Research Fellow at the University of Tokyo's Institute for Oriental Culture and a Visiting Scholar at Seoul National University's Institute for Global Studies. His main research areas include China's foreign relations and East Asian security. Recent publications include "China's Military Rise and Northeast Asian Security" (2011), "China-North Korea Economic Relations during the Hu Jintao Era" (2010), "The Trend of China's North Korea Policy and Perception of the North Korean Nuclear Issue during the Hu Jintao Era" (2010), and "A Study on the Development of China's Space Military Power" (2009), among others.

I. Introduction

China and the United States have emerged as the world's largest energy consumers. The U.S. is the world's largest crude oil importer, and China is the second largest, following the U.S. Both the U.S. and China consume significantly more crude oil than they produce, and their demand continues to grow. In particular, China's rapid industrialization since its reform and opening-up has generated immense energy demand. For China, securing overseas crude oil import routes is a matter of survival. This situation applies not only to crude oil but also to other forms of energy and natural resources. Consequently, China's leadership has already designated energy issues as a core national security concern and is actively pursuing energy policies.

The problem is that the reserves of energy resources, particularly crude oil, which both China and the U.S. consider core security issues and seek stable supply for, are rapidly dwindling. As a result, oil-producing countries are weaponizing oil production and supply to achieve political objectives, while energy-importing countries are focusing their diplomatic efforts on securing stable energy supplies. In this process, the competition between China and the U.S., the world's largest energy consumers, over energy acquisition and supply is intensifying. The U.S. seeks to maintain global hegemony through exclusive control over energy, while China is striving to guarantee its own independent and stable energy supply.

In this context, energy issues have emerged as a core concern for the national survival and hegemonic competition of China and the U.S. in the 21st century. While some argue that China and the U.S. share significant interests in energy and possess considerable potential for cooperation as the world's largest energy consumers (Pollack 2008, 440; 劉堔 2010, 21-27), most policy dialogue mechanisms between China and the U.S. currently include energy issues as a major agenda item. Furthermore, since the advent of the Obama administration, China and the U.S. signed a Memorandum of Understanding on Cooperation in Areas such as Climate Change, Energy, and the Environment in 2009.

Nevertheless, many experts predict that as China's energy consumption increases, the potential for competition and friction between China and the U.S. over energy issues will grow. Moreover, concerns are raised that China's increasingly assertive energy policy (and diplomacy) may lead to confrontation with the U.S., which currently dominates the international energy order, thereby causing geopolitical instability (Leverett and Bader 2005; Zweig and Jianhai 2005). Indeed, in its pursuit of energy security, China has recently extended its reach into traditional U.S. spheres of influence, including Latin America, Canada, and Australia, thereby provoking U.S. concern and vigilance. Some in the U.S. also express concern over China's efforts to secure maritime transport routes through military buildup. If China's economic growth and increasing energy demand lead to military expansion, and if this in turn challenges U.S. military hegemony, Sino-U.S. relations could face serious challenges.

This paper aims to examine the relationship between China and the U.S. with a focus on energy issues, which may emerge as a critical factor in the future competition for global leadership between the two countries, and to offer a future outlook. However, the focus of this paper is on China, not the U.S. Therefore, it will first examine China's energy supply and demand situation, and then evaluate the content, objectives, and characteristics of its energy security policy. Subsequently, it will explore the potential for cooperation and the areas of competition and friction regarding energy issues between China and the U.S. The conclusion will reflect on the significance of energy issues in the future Sino-U.S. hegemonic competition and discuss their impact and prospects.

II. China's Energy Supply and Demand Situation and Characteristics

Strictly speaking, China is not only a major global energy producer but also a country with a very high energy self-sufficiency rate. Based on its abundant coal reserves, China currently procures approximately 90% of its total energy consumption domestically. As of 2006, China possessed 1,034.5 billion tons of coal reserves and, as the world's third-largest coal producer, coal accounted for about 70% of its primary energy consumption.

Furthermore, according to the Energy White Paper (<China's Energy Situation and Policy>) released by the Chinese government in 2007, China possesses abundant renewable energy resources. In particular, its water resource storage, when converted to power generation capacity, amounts to 6.19 trillion kWh annually, ranking first in the world, and its actual electricity production also ranks second globally. China has large oil fields such as Daqing, Shengli, Liaohe, and Tarim. In 2006, its crude oil production was 185 million tons, ranking fifth in the world (State Council Information Office of the People's Republic of China 2007). Consequently, until the early 1990s, China's domestic energy supply and demand structure was self-sufficient. It had not experienced the 'first and second oil shocks' and did not feel the need to maintain strategic petroleum reserves.

However, despite being a major energy producer, what compels China to be so concerned about energy issues is the fact that it is the world's largest energy consumer. China surpassed the U.S. in 2009 to become the world's largest energy consumer, and its energy consumption is currently growing rapidly, at more than twice the global average annual growth rate. For instance, according to the International Energy Agency (IEA), global energy demand is projected to increase by an average of 1.5% annually from 2007 to 2030, while China's is expected to grow by 3.2% annually (IEA 2010, 76).

Notably, China's oil consumption is increasing at a very rapid pace. For example, in 2006, China's daily oil consumption was 7.4 million barrels, double the daily consumption of 3.7 million barrels in 1996, ten years prior. Moreover, in 2006, China's oil consumption was approximately 30% of that of the U.S., the world's largest oil consumer, a doubling from 17% in 1996 (Shim Ki-eun 2007, 1). Consequently, the external dependence ratio of China's crude oil imports is rapidly increasing each year (see Table 1).

[Table 1] China's Oil Import Dependence Ratio (Unit: %)

Compared to China's rapid increase in energy consumption, the domestic supply of crude oil is acutely insufficient to meet demand. The gap between China's oil consumption and production has widened rapidly in the 2000s, primarily due to the following three reasons.

First, most of China's domestic oil fields were discovered in the 1960s-1970s and are now in their mature stage. This means that large oil fields discovered and developed 40-50 years ago are largely depleted. Consequently, China's crude oil production is expected to peak at an average of 3.9 million barrels per day around 2012 and decline to an average of 2.7 million barrels per day by around 2030, with larger oil fields expected to be depleted first (Lee Woo-ik 2008, 82-85).

Second, factors include increased capital investment due to rapid economic growth and industrial development leading to increased energy consumption. In China's industrialization process, the proportion of the primary industry has declined, while the proportion of the secondary industry, including heavy and chemical industries, has rapidly increased. Heavy industry, in particular, consumes vast amounts of energy; for instance, the steel industry accounts for 16% of China's total energy consumption. This industrial structure necessitates large-scale energy consumption (Berrah 2007, 15).

Third, the improvement in the living standards of the general population due to rapid economic development is a contributing factor. The development of the service industry and the widespread adoption of private vehicles in China, driven by economic growth, are spurring oil consumption. For example, the number of private cars owned in China in 2006 was more than ten times higher than in 1994, and China emerged as the world's fourth-largest car producer and third-largest car consumer (Yang Gu 2009, 327). The Chinese automotive industry has continued to grow since then, becoming the world's largest car producer in 2010, with over 10 million units produced.

Meanwhile, despite China's absolute energy reserves and the surge in energy consumption, its per capita reserves of oil and natural gas are only 8% and 6% of the world's per capita average, respectively. Even for coal, which is relatively abundant among China's energy resources, per capita reserves are only 55% of the global average. Due to its vast population, per capita resource availability is extremely limited. Furthermore, the irrational energy consumption structure, heavily reliant on coal, is a major cause of worsening environmental pollution, including the generation of large amounts of greenhouse gases (see Table 2). Moreover, China's energy efficiency is very low, with energy consumption per unit of product being six times higher than in developed countries (State Council Information Office of the People's Republic of China 2007; He 2006, 93-95). Consequently, the Chinese government aims to optimize its energy consumption structure by reducing the proportion of oil and coal and increasing the share of renewable energy and nuclear power.

[Table 2] China's Total Energy Consumption and Composition

Source: http://www.stats.gov.cn/tjsj/ndsj/2009/indexch.htm

The Chinese government summarizes the characteristics of China's current energy situation in the following four points: First, while the total amount of fossil energy resources, centered on coal, is abundant; second, the per capita average energy resource possession is significantly low, as indicated by the fact that per capita average reserves of oil and natural gas are only one-fifteenth of the world average; third, the distribution of energy resources is highly uneven, with coal concentrated in the North China and Northwest regions, while oil and natural gas are distributed in the Central-South and offshore areas; and fourth, the geological structures of various energy deposit areas are very complex, posing significant difficulties in the development of energy resources (State Council Information Office of the People's Republic of China 2007)... (continued)