Windfall
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Wang Jinxi and his No. 1205 Drilling Team responded to Mao’s call and endured extreme elements to drill the first well at Daqing. As depicted in a 2009 Chinese film celebrating Wang, they braved blizzard conditions and temperatures of minus 20 degrees Centigrade. Legend holds that, without any other infrastructure, Wang and thirty coworkers transported sixty tons of equipment from railway stations to the oil field by means of long human chains. Equal quantities of water were moved in the same fashion. Wang himself became known for plunging into huge containers of muddy water needed for well operation and stirring the frigid flows with his own body to keep the water from freezing. Foreshadowing his own early death from cancer, Wang is said to have declared upon his arrival in Daqing, “I would give up 20 years of life so China can produce oil on its own land.”
Wang’s enduring celebrity in China attests to the premium the country has put on self-sufficiency and to the great lengths it will go in order to meet its energy demand. Yet despite Daqing’s success, China was eventually forced to turn to the outside world to meet its energy needs. The country’s energy self-sufficiency ended in 1993, when China began to import oil again after a period of self-sufficiency. But it was still more years before China’s energy trajectory became a source of alarm for Chinese officials. The robust economic growth that followed China’s accession to the World Trade Organization in 2001 spurred massive increases in Chinese energy consumption. Whereas it had taken more than two decades for China’s total energy consumption to double after 1979, it did so again in just the first seven years of the new millennium. By 2010, China had become the world’s largest consumer of energy. As of 2014, it accounted for more than a fifth of all energy used in the world each day.
Figure 10.1: Primary Energy Demand for the United States, China, and European Union (million tons of oil equivalent)
Source: Derived from BP, BP Statistical Review of World Energy 2016 and BP, BP Energy Outlook 2017.
China’s rapacious appetite for energy has had major geopolitical consequences, as the need to secure energy has been one of the single largest drivers of its foreign policy over the last two decades. The Chinese government would have preferred to focus on domestic affairs and, in the words of Chinese leader Deng Xiaoping, “hide [China’s] strength, and bide [China’s] time.” But the pace of growth and its intense demands on energy helped push China into the wider world to build deeper relationships in the Middle East, Africa, Latin America, and beyond. A sense of urgency permeated all these endeavors. In 2009, two Chinese officials from the National Development and Reform Commission, the central planning department of the Chinese government, predicted that China would need to import nearly two-thirds of its oil by 2020; the following year in 2010, the IEA projected that four-fifths of China’s oil needs would have to be met by imports in 2030. These expectations, coupled with the perception of global energy scarcity—and a looming peak oil—that existed throughout much of the 2000s, primed Chinese leaders to take extraordinary steps to acquire the energy the country needed.
In few places are the potential and actual benefits of the new energy abundance as significant as in China. As we have seen in other parts of the world, the most expected advantages—while real—require some significant qualifications. Yet in China, the downsides are relatively few. The new energy abundance has provided the opportunity to the Chinese government to shore up its legitimacy. To some extent—but less than might be expected—the boom and low energy prices have also helped at a time of slowing growth and an uncertain transition to a different economic structure. Moreover, abundant natural gas offers China the possibility of extending this growth with fewer of the devastating environmental costs associated thus far with economic progress—perhaps addressing the pollution that has become yet another challenge to Chinese Communist Party rule.
Although less appreciated, it is in the realm of geopolitics where the benefits of the boom to China are now the most consequential. Given the link between Chinese foreign policy and the pursuit of energy, the new energy abundance will inevitably result in changes in Chinese behavior toward the rest of the world. Some of these changes are already apparent. The new and wide range of options for securing energy supplies has quietly shifted the balance of power between China and its energy-producing neighbors in Beijing’s favor. In addition, by loosening the rationale for certain Chinese foreign policy approaches, the new energy realities have at least given Beijing the option to scale back on policies that have produced domestic and international blowback. Finally, the new energy abundance frees Beijing to embrace foreign policy objectives other than securing energy at a time when China’s leadership is interested in gaining a larger international footprint.
In this instance, what is good for China has largely been good for the rest of the world and the United States in particular. As discussed in Chapter Six, perhaps no other geopolitical issue has generated more handwringing from Washington to Tokyo than the question of whether a rising China intends merely to tinker with the current international order, or instead to completely revamp it and, in doing so, trigger a great power conflict. Unlike international orders in eras past, the current one is not determined by one country and geared for the enrichment of that single nation. Instead, while U.S.-led, this order depends on coalitions and cooperation and places a premium on integrating countries that wish to rely on the market. China—although not one of the order’s original architects—has been perhaps its biggest beneficiary. Participation in an integrated global economy has helped lift hundreds of millions of Chinese out of poverty.
The new energy abundance is by no means the only determinant in the complex calculation of China’s rise to global prominence. Other factors, such as China’s strategic thinking, nationalism, and territorial disputes will all have their roles to play. But the current global energy situation does figure prominently, and weigh definitively, in favor of China’s continued adherence to the broad contours of existing institutions. The new energy abundance has increased the comfort of the Chinese government with the market—a key element of today’s order—as the ultimate arbiter of energy resources. It has eroded the rationale for some Chinese nonmarket approaches to securing energy and, in doing so, has given China the opportunity to back away from certain behaviors—such as supporting rogue regimes—that the West has found problematic.
Moreover, the new energy abundance offers an opportunity to both U.S. and Chinese leaders to ameliorate tense bilateral relations. Should leaders from both sides choose, they can use energy as the basis for reimagining a more constructive and, in some places even strategic, relationship between Washington and Beijing. Again, many factors will determine whether a China rising against the backdrop of a dominant United States will lead to conflict or coexistence. But the new energy abundance will matter in this reckoning, not only because it diminishes the possibility of fierce competition over resources, but also because it provides a multitude of avenues for U.S.-Chinese cooperation. Working together to address climate change, an unstable Middle East, and even China’s own energy demands will yield benefits on their own—and could also provide critical paths for dialogue and models of cooperation that extend beyond these issues.
Hear China Roar
The transformation of China over the last four decades is one of the most remarkable and consequential tales in the history of the human race. In 1978, when China began to open up its economy to the world, China’s GDP accounted for only 1.8 percent of the world’s economic output, and China’s trade with other countries amounted to only $20 billion a year. In less than forty years, China has grown its economy more than twenty-six-fold. It now constitutes approximately 15 percent of the global economy. In the mere three years from 2009 and 2011, China laid down substantially more cement than the United States did in the entirety of the twentieth century.
As recently as 2005, China’s economy was less than half the size of that of the United States. Yet China is now the world’s largest economy by the standard of pur
chasing power parity, if not in absolute measures. It is also the planet’s biggest manufacturer, merchandise trader, and holder of foreign exchange reserves. During the first decade of the twenty-first century, nearly 700 million Chinese left behind lives of poverty; more than 200 million attained middle-class status. The scale of this transformation is unprecedented and apparent to the casual eye on the streets of China. In 2005, U.K-based singer-songwriter Katie Melua released a hit song about Beijing’s “Nine Million Bicycles” after visiting the Chinese capital. Had she visited five years later, she might have crooned about the less romantic sounding “Five Million Cars.” She would have noticed how many Chinese had swapped their baskets and bells for steering wheels, a point she could have contemplated extensively had she gotten stuck in one of the worst traffic jams in history—a sixty-two-mile-long snarl on the Beijing–Tibet expressway that lasted for twelve days in 2010.
This growth has provided the Communist Party with the legitimacy to continue to govern China. No longer the purveyor of Marxist-Leninist ideology, the party today is more pragmatically oriented to staying in power. Officials are aware that the party has maintained its mandate to rule because it has been able to deliver continued advances in the standard of living to the Chinese population. As long as their material well-being was improving, few Chinese felt compelled to challenge the Chinese government on other grounds. In the words of China scholar Susan Shirk, the party considers “rapid economic growth a political imperative because it is the only way to prevent massive unemployment and labor unrest.”
Energy has been a critical component of this story—at least since the turn of the millennium. The growth that occurred in China in the two decades after Deng Xiaoping launched his economic reforms in 1978 was actually less energy intensive than previous growth. Just twenty years earlier, China had suffered the Great Famine, in which an estimated 45 million Chinese died. Concerned about the possibility of the return of widespread starvation, Beijing relaxed constraints and strictures on farming collectives. Motivated by more market incentives, Chinese farmers began to produce more. With more disposable income in the rural areas, investment started to flow into local labor-intensive light industry, and away from inefficient, energy-intensive heavy industry—a development that actually brought down the energy intensity of the Chinese economy over the 1980s and 1990s.
No one—in China or in the international energy agencies—seemed prepared for the reversal of this trend in the early 2000s. In 2002, both the Chinese government and the IEA expected economic growth to run in the 7–8 percent range for the rest of the decade and for China’s energy intensity to continue its downward trajectory. They also predicted annual energy demand growth would be 3–4 percent between 2000 and 2010. They were wrong—dramatically so—on both counts. China’s economy grew rambunctiously—more than 10 percent a year over the course of this decade. Overall energy consumption grew four times faster than had been predicted. But what was even more shocking was the uptick in the energy intensity of this growth, at least in the early part of the decade. Chinese growth was no longer driven by garment factories, but by investment in manufacturing, real estate, heavy energy-intensive industry, and the building of cities for urbanization. By the mid-2000s, almost half of the world’s cement and flat glass production came out of China, as did more than a third of the globe’s steel and more than a quarter of its aluminum.
Figure 10.2: Energy Intensity of GDP at Constant Purchasing Power Parities (kilogram of oil equivalent per 2005 U.S. dollar)
Source: “Energy intensity of GDP at constant purchasing power parities,” Global Energy Statistical Yearbook 2016, https://yearbook.enerdata.net/energy-intensity-GDP-by-region.html.
Figure 10.3: Chinese GDP Growth Targets vs. Actual GDP Growth
Source: Bloomberg, “Why China’s Economy Will Be So Hard to Fix,” February 29, 2016.
Just-in-Time Energy
In many ways, the boom in American oil and gas arrived at just the right moment for China, given the scale and energy intensity of its growth. As China grew at an average growth rate of more than 8 percent from 2011 to 2014, plentiful American unconventional production kept oil prices stable when they otherwise would have been considerably higher. During this period, China consumed an average of 10 million barrels of oil per day, roughly half of which it imported at global prices. One study estimated that, in the absence of the unconventional boom, global prices for oil could have been as much as 36 percent higher during these years. If we simplify things to assume that a higher oil price would have not influenced China’s demand significantly, China may have needed to devote several hundred more millions of dollars a day, or close to $100 billion a year, to importing oil from 2011 to 2014 had the boom not occurred.
Moreover, the actual price plunge came at a time when China’s leaders were—and are—struggling to maintain growth. Xi Jinping assumed the presidency in 2012 with a new economic vision for China. The global recession of 2008 had underscored the fragility of an economic model that relied heavily on government-driven investment and exports to the rest of the world. Xi and his party counterparts pledged to transform this Chinese economy into one that was more consumer-oriented. Future Chinese growth would rest more in the hands of China’s 1.4 billion citizens than in the appetites of consumers around the world or in the initiatives of the Chinese government. The benefits of this transformation would be twofold. Not only would future Chinese economic fortunes be less hostage to the health of other economies, but a domestic demand-driven, service-oriented economy would be far less energy intensive than one dependent on heavy industry.
On paper, accomplishing all that sounds straightforward enough, but in reality this transition is proving to be a complex and high-stakes one. What’s more, China is seeking to complete it over a much shorter time frame than other countries have done. The United States, for instance, took decades to achieve a similar transition. For China, the shift involves not only changing the drivers of the economy as well as its structure, but also accepting lower overall rates of growth. In March 2015, Premier Li Keqiang set the target for China’s growth for the coming year at 7 percent, the lowest in fifteen years. The Chinese government wanted to orchestrate a “smooth landing,” in which fiscal and monetary policies ease the rate of growth and the inflationary pressures that go along with it, while avoiding a slowdown that could have destabilizing effects politically and socially. The unexpected contraction of Chinese exports in the spring of 2015, and the crash of the Chinese stock market later that summer, fueled speculation among experts that the real growth in the Chinese economy was significantly below the 7 percent per annum reported by officials and deemed to be the minimum rate at which China must expand to avoid social unrest. By 2017, there was less speculation about growth rates being misrepresented, but attention had shifted to the ways in which the current growth rates were being sustained. While consumer demand in China was growing at a healthy pace, economic reforms seemed to have stalled and the balance of growth was primarily generated by increases in government consumption.
What is inarguable, though, is that low energy prices helped make a difficult financial situation significantly better. For every one-dollar drop in the price of oil over the course of 2014, 2015, and 2016, China saved $6.8 million every day, or $2.5 billion annually. Put another way, given that the price of oil dropped by $59 from June 2014 to December 2016, China’s daily oil import bill at the end of 2016 was roughly $400 million less than it was eighteen months earlier for the same amount of oil.
However, despite such benefits, energy abundance has scarcely been a panacea. As has been the case in America, low energy prices have not actually provided an obvious stimulus to the Chinese economy. Low oil prices have also wreaked havoc on China’s own sizable oil industry. As high-cost producers, Chinese oil companies struggled, pumping oil domestically at a significant loss. This has led to stress on the industry, which risks adding to the growing pool of unemployed workers in China.
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bsp; True, the low price of energy has been a welcome development for much of China’s society and economy. Yet, the large structural problems of China’s economy cannot be addressed or resolved with the modicum of relief that the new energy abundance has brought to most sectors; serious economic reforms will be required. While creating some space for Chinese policymakers, China will need much more than the serendipity of low energy prices to resolve its enormous economic challenges.
Lubricating Legitimacy
Fabled to have lived thousands of years ago, Da Yu—or Yu the Great—is a legendary Chinese ruler credited with taming the devastating flooding of the Yellow River and thereby enabling agriculture to emerge along its banks. This remarkable feat allegedly won Yu the adoration of the people and their consent to be ruled by him. The story of Da Yu cements in every Chinese mind the delicate but vital link between the environment, civilization, and the mandate of the ruler. At no time in modern history have these connections been so clear—and under such threat—as today. In recent years, the woeful state of the Chinese environment has become a major preoccupation of Chinese citizens. In February 2015, a video titled Under the Dome about China’s environmental degradation went viral, and was reportedly viewed by 117 million Chinese within twenty-four hours of its release. Simple scenes seemed to resonate with the Chinese. At one point, a six-year-old girl named Wang Huigin tells the filmmaker that she has never seen “a real star,” blue skies, or white clouds in her life. The stature of many of the individuals interviewed suggested the documentary was originally approved by the government. But the chord it struck with the Chinese public clearly unsettled authorities, who banned it only a week after it was released.