China Energy: A Guide for the Perplexed

Daniel H. Rosen (PIIE) and Trevor Houser (PIIE)
May 1, 2007

China’s energy profile provides a window into its economic soul. It tells us much about what China does, how fast it is doing it, and how efficiently. Energy is also a finite global commodity, demand and supply for which affects us all both in terms of the costs of running our nations, firms and households, and in terms of the environment that surrounds us. So for financial analysts trying to gauge the effect of China’s rise on world prices, for policymaking realists formulating responses to China’s emergence, and for economists and political scientists seeking to understand the workings of China’s economy behind the veil of international cooperation departments in Beijing, a clear understanding of China’s energy sector dynamics is important.

The urgency to acquire that understanding is clear: In 2001 China accounted for 10 percent of global energy demand but met 96 percent of those needs with domestic energy supplies; today China’s share of global energy use has swelled to over 15 percent and the country has been forced to rely on international markets for more of the oil, gas, and coal it consumes. Between 1978 and 2000 the Chinese economy grew at 9 percent while energy demand grew at 4 percent. After 2001, economic growth continued apace, but energy demand growth surged to 13 percent a year. It is this fundamental shift in the energy profile of China’s economic growth that has created shortages at home, market volatility abroad, and questions about the sustainability of China’s trajectory. China is now the world’s second-largest energy consumer and is set to become the leading source of greenhouse gas emissions as early as the end of 2007. 

Despite its importance, China’s energy profile has been hard to make sense of for those whose jobs don’t entail watching the sector full time. It is in flux, changing quickly in its constant effort to keep up with the rest of the economy. It is a fusion of plan and market forces, formal regulation and seat-of-the-pants fixes, central intentions, and local interests. And while retail consultants can trawl through supermarkets in Shanghai counting cereal boxes to measure trends, in energy many key metrics are obscured by national security considerations or habits of secrecy at state-owned enterprises.

The purpose of this policy analysis is to make visible the internal dynamics of the Chinese energy situation, which most observers glimpse only second hand as the impact of demand on world markets, the behavior of Chinese firms abroad and the effect of Chinese emissions on the global environment. Our hope in doing so is to facilitate energy policy cooperation between China and other countries, more rational conception of and reaction to China’s energy behavior by markets and governments, and more effective prioritization of the energy reform agenda in China, the United States, and elsewhere.