China's Energy Policy: Coal, Oil, and Sino-American Relations

Introduction

The production and use of energy in China experienced fundamental changes and dramatic increases during the 20th century. These trends transformed China — which was one of the poorest countries in the world in the 1930s, with electricity generation capacity far below that of neighbors such as Japan — into one of the world's largest economies. This transformation began in large part following the Communist takeover in 1949, and momentum in China's energy sector grew steadily thereafter (Qing & Sullivan, 1999). By the 1980s, however, China's rapid economic growth introduced new demands for energy resources, and the country experienced significant shortages that adversely affected its ability to sustain that pace of progress (Wu, 2004). Heavily reliant on coal as its primary energy source, China's policies at that time focused on increasing production at the local level; by the closing decade of the 20th century, however, the focus of energy policy shifted toward the development and improvement of the electricity sector (Wu, 2004).

These efforts were facilitated by various policies adopted by the Chinese leadership during this formative period. One of the most significant changes during the 1980s was the opening of China's energy market to private enterprises (World Bank, 2000). By the mid-1980s, the build-operate-transfer (BOT) model had been adopted, and by 1999, approximately $15 billion in private funds had been invested in China's energy sector (World Bank, 2000). These shifts in energy policy resulted in an enormous expansion of electricity generation capacity (Wu, 2004). As Campbell notes, "China is the world's most populous country with over 1.3 billion people. It has experienced tremendous economic growth over the last three decades with an annual average increase in gross domestic product of 9.8% during that period. This has led to an increasing demand for energy, spurring China to add an average of 53 gigawatts (GW) of electric capacity each year over the last ten years to its power generation capabilities" (2010, p. 2).

By the late 1990s, China's electricity supply was almost sufficient to satisfy the country's rapidly increasing demand; in fact, some regions were capable of generating a surplus (Wu, 2004). During the past decade, China also increased its oil imports and domestic production of natural gas, so that currently its energy sector is characterized by: (a) oversupply of coal, (b) rapidly growing electricity-generating capacity, (c) a net oil-importing industry, and (d) an expanding natural gas sector. These developments, combined with China's entry into the World Trade Organization, will inevitably affect China's energy policy well into the 21st century (Wu, 2004).

Statement of the Problem

In sharp contrast to the developmental policies that dominated much of the 20th century, China's energy policies today are focused on ambitious, environmentally sustainable approaches. In 2006, China's leadership stated that by 2010 the nation would decrease energy intensity by 20% compared to 2005 levels; in 2009, leaders further committed to reducing carbon intensity by 40% from 2005 levels by 2020 (CIA World Factbook, 2010). To accomplish these goals, the Chinese government intends to expand energy production from sources beyond coal and oil, focusing on nuclear and other alternative energy development initiatives (CIA World Factbook, 2010). As Bradsher notes, however, "even as China has set ambitious goals for itself in clean-energy production and reduction of global warming gases, the country's surging demand for power from oil and coal has led to the largest six-month increase in the tonnage of human-generated greenhouse gases ever recorded by a single country" (2010, p. 2).

According to Gregson (2005), China is currently consuming more than six million barrels of oil each day, and that demand continues to increase. While China remains an important oil producer, approximately 40% of its demand is dependent on imports, which increased by almost one-third in 2004 alone to nearly three million barrels per day (Gregson, 2005). Based on these trends and the most recent energy projections, increases in oil consumption in China are expected to remain above 10% annually for the foreseeable future (Gregson, 2005). These trends have compelled the Chinese leadership to identify opportunities to satisfy demand in sustainable ways, but the issues are multifaceted and complex. A recent special cabinet meeting revealed that coal-fired electricity and oil sales each increased by almost one-quarter (24%) during the first quarter of 2010 compared to the same period a year earlier, following comparable increases in the fourth quarter of 2009 (Bradsher, 2010). These trends indicate that past projections of energy demand may have been understated, and China's ambitious goals will require reevaluation if the country is to continue on its current path of economic development.

Purpose of Study

The purpose of this study was three-fold:

1. Determine China's current energy reliance on coal, and why this is changing.

2. Identify viable energy options for China in the future — including oil, nuclear, and renewables — and examine the likelihood that oil, gas, and nuclear will be the most likely candidates for replacing coal.

3. Assess what these trends might mean for Sino-American trade relations given the global placement of oil reserves and uranium deposits.

Importance of Study

According to Gee, Zhu, and Li (2007), the economic growth of the People's Republic of China will undoubtedly be one of the most significant events of the 21st century for the entire world. China is already undertaking the most ambitious construction schedule in modern times, and the country's demand for energy to drive its economy and industrial revolution is without historical precedent (Gee et al., 2007). During the past two decades alone, China's economy has grown by an average of almost 10% annually, and it "consumes half [of] the world's cement, a quarter of all steel, and two-fifths of all copper. Currently, it is the second largest oil consumer in the world and the third largest oil importer . . . [Its] oil demand growth has accounted for nearly one-third of the world's total oil demand growth during the past decade, and is adding the equivalent of a medium-size country to world oil demand each year" (Gee et al., 2007, p. 421).

Although still a major oil producer, domestic production in China has stagnated and oil imports have assumed new importance as an economic reality in recent years (Prakash & Hart, 2000). According to these authorities, "this represents a fundamental reorientation of China's emphasis on oil self-sufficiency, a legacy of the Maoist era when the Daqing oilfield was held up as a model for national emulation" (Prakash & Hart, 2000, p. 53). Despite the fact that oil imports remained relatively inexpensive throughout the 1990s, China's increasing demand for energy has resulted in growing reliance on foreign supplies, raising concerns among the Chinese leadership about what this dependency means for national security (Prakash & Hart, 2000). Research concerning Chinese foreign policy has therefore focused on the potentially destabilizing impact of this increasing reliance on imported oil, with a number of researchers citing the South China Sea as a potential region for future conflict based on competing resource claims — particularly oil and natural gas reserves — where affected international actors may resort to military methods to prosecute their respective claims (Prakash & Hart, 2000).