China: Energy Leviathan of the Present or Future?

For most of the post–World War II period, the United States stood as the world’s largest energy consumer, as befitted its being the largest economy and largest oil importer, in spite of being a leading oil producer, due its prodigious and profligate oil consumption. After close to 40 years of almost uninterrupted, high economic growth, China has now become the largest global energy consumer and the largest oil importer with an economy that is projected to exceed the size of the U.S. economy in a decade. More than half of incremental global oil demand in recent years has come from China. Chinese demand for coal, natural gas, renewable, and nuclear energy has also had an out-sized impact on global markets.

At the same time, the United States’ shale gas and tight oil revolution, as well as energy efficiency improvement, have dramatically decreased U.S. oil and gas import dependency. In fact, the United States recently became a net exporter of natural gas, in spite of being the world’s largest gas consumer, and net oil imports have declined drastically. The United States used to be the home of global incremental oil demand. China is now the demand center for energy.

It is China that has the surplus capital to invest around the world to support its resource-short economy. Will Chinese parastatal oil companies—China National Petroleum Corporation (CNPC), Sinopec, China National Offshore Oil Corporation (CNOOC), Sinochem—and conglomerates such as China International Trust and Investment Corporation (CITIC) eventually replace Western international oil companies and multinational corporations in their market power even as the influence of the Organization of Petroleum Exporting Countries (OPEC) declines? Will the trend of an ever-growing Chinese energy footprint go unabated, or will it have natural limits in a global economy with diverse centers of growth? And what is the geopolitical impact of increasing U.S. energy self-sufficiency and Chinese energy import dependency? What are their implications for foreign and security policies?

The recently published CSIS report The Changing Political Economy of Energy in China: Market Dynamics and Policy Developments, authored by Kang Wu and Jane Nakano, gives us a good baseline understanding of the Chinese energy economy in order to begin answering some of these critical questions. Their key findings suggest the future may look quite different from the recent past.

The impact for China and internationally, however, may still be profound. For example, the shift from investment and export-led economic growth to domestic consumption and a service economy will not only lead to slower energy demand growth, but also to changes in the fuel mix from industrial to transportation use. Environmental concerns related to energy (air, water, soil contamination, land use, health, and safety) are already significant and will become politically sensitive if they remain uncorrected. These domestic concerns are not yet extended directly to climate change, but the causes of traditional pollution and greenhouse gas emissions are clearly connected, and this linkage informs China’s actions in international climate negotiations, as we saw in the Paris Climate Accord.

Politically, there seems to be a clear policy shift between the Third Plenum of the 18th Central Committee of the Chinese Communist Party in November 2013, one year after President Xi Jinping was elected general secretary, which emphasized deepening reform, to the recently concluded Sixth Plenum, which stressed party discipline. If market competition will no longer play a “decisive role” in the economy, and party control will be dominant as indicated in recent meetings with leaders of major state-owned enterprises, it will impact the way the Chinese energy economy operates.

Can mixed ownership of subsidiaries of major state companies that continue to dominate the energy market and control key infrastructure, along with business partnerships with private investors, without relinquishing state control substitute for market competition by hundreds of independent economic entities? Can innovation in energy be advanced better by well-capitalized (even if loss-making) state companies or by more entrepreneurial smaller independent companies? The U.S. shale gas and tight oil revolution suggests one model. It is China’s stated goal to significantly increase its unconventional gas production. Implementation may be attempted with “Chinese characteristics,” and experimentation is likely before a successful business model is reached.

Chinese state energy companies have the advantage of government support diplomatically and financially as they venture abroad, but will this eventually lead to profitable investments that also enhance China’s energy security and economic competitiveness? The results so far have been mixed, and it may be too early to answer this question definitively. The experience of developed Asian countries, Japan and South Korea, is not encouraging in this regard.

Ultimately, Western national champion oil companies had to shed their strong national identity to be considered true multinationals and to succeed outside of their home markets. Thus, BP is no longer British Petroleum; Shell no longer highlights Royal Dutch; Total is easier to relate to than Compagnie française des pétroles or Eni than Ente Nazionale Idrocarburi, never mind the Standard Oil Company of New Jersey, New York, California, and the Texas Company (the respective original names of Exxon, Mobil, Chevron, and Texaco). Chinese national champion oil companies operating abroad have all retained their “first names,” are majority-owned by the state with management appointed by the party. This brings advantages and disadvantages.

Like the United States, China has a large domestic energy market with significant domestic resources and the financial and technical ability to compete internationally. It can afford to have many companies, large and small, vertically integrated or not, a vibrant and competitive service and equipment sector that is not trapped inside major state companies, all competing vigorously in order to achieve market efficiency and promote innovation. Property rights protection, including for intellectual property, independent transparent regulation, and rule of law are also important for such an energy system to be effective. With maximum competition, China need not fear foreign entrants into its energy marketplace, who can bring capital, technology, and share risks.

Whether this is a path ultimately chosen is a policy decision for the not too distant future if China is to achieve its stated goals for its energy economy. It will be a fascinating journey to follow, and the impact will be felt globally. The Wu and Nakano paper gives us a good start.

Edward C. Chow is a senior fellow in the Energy and National Security Program at the Center for Strategic and International Studies in Washington D.C.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2016 by the Center for Strategic and International Studies. All rights reserved.

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Edward C. Chow
Senior Associate (Non-resident), Energy Security and Climate Change Program