Dr Faith Birol

The World Energy Outlook is the International Energy Agency‘s annual report on the state of the international energy market, and the current report is remarkable for its analysis of the tectonic shift centred around China.  As the Chinese demand for fossil fuels grows, it will control the pricing of key commodities and dominate the market for efficient and renewable energy technologies.   Of more interest to the security community, China is also likely to end up with an interest in the Middle East similar to that traditionally held by the United States.

China at the Centre

When China closed a series of coal mines due to unsafe working conditions last year, China’s share of imported coal rose by 2.7%.  It was an unnoticeable difference domestically, but for a six-month period, global average coal prices jumped to $120 from $90.  This was a taste of things to come.  As China grows, it will become the lynchpin of the global energy market, and its policies and decisions will have global repercussions.

The good news is that China has invested heavily in renewable energy, so much so that it will account for almost a third of its added power generation capacity by 2035.  In that time, China will have added the equivalent of the entire US and Japanese power grids to its capacity.  Given such enormous expansion, any measure taken by China to reduce its call on limited resources is good news for the world.  Better still, its massive investment in renewable and efficient technologies will yield global benefits as the price of these technologies drops and development costs are absorbed.

The bad news is that China is destined to depend heavily on imported fossil fuels, a situation in which neither China nor anyone else feels secure for reasons that are all too familiar to security analysts.  The Chinese economy depends on oil coming through the Indian Ocean and the Malacca Strait, a strategic supply line which China is keen to protect.  It also makes China all the more hungry for closer fossil fuel resources, bad news for the region as disputes over oil chains with offshore drilling potential heat up.

China currently imports about 15% of its natural gas and about 50% of its oil.  By 2035, it will import more than 80% of its oil with a corresponding increase in gas.  Some of this will come from overland pipelines, but much will still have to transit the Indian Ocean, and China has already begun to expand its involvement in oil-producing countries throughout the Middle East and Africa.

The Middle East turns to the Far East

Middle Eastern exports of fossil fuels are in the process of a dramatic shift away from traditional markets in Europe and North America and toward India and China.  OECD countries will decline to one third share of world energy use by 2035 as compared with two thirds in 1975, while China and India take the lion’s share of the difference.  90% of Middle Eastern fossil fuel exports will go to Asia.  At the same time, American imports from the Middle East will drop to an all-time minimum as the United States develops unconventional oil sources with new extraction technologies.  This represents perhaps the most dramatic shift of influence in the region since decolonisation.

China in Iraq

Iraq has huge oil resources that were unexplored under the old regime.  It has been inviting foreign investment in the energy sector, and enjoys comparative advantages that should help it to do rather well.  Production costs per barrel of oil are much lower than in other countries (15 times cheaper than Russia, 13 times cheaper than the Canadian oilsands) due to a lack of geological obstacles.

Because China is the largest expanding market, it is expected that most of Iraq’s oil will go to China.  Chinese investment in the country has risen accordingly, and 30% of expanding oilfields in Iraq are owned directly or indirectly by Chinese companies.  One cannot help but think of the old charge that the United States went to war in Iraq to get oil.  It seems that China will be the main beneficiary.

Challenges Ahead

One of the most interesting findings of the IEA is that the United States, thanks to new extraction technologies and exploitation of previously unexploitable resources, is on a path to energy self-sufficiency.  China, by contrast, is on course to increasing energy insecurity.  Oil has been a major factor in great power conflicts for the past century, most notably between import-dependent Japan and the United States- and Japan’s sources were much closer than China’s are now.  Many ascribe the rising territorial tensions in East Asian waters, the growth of China’s navy and the expansion of Chinese influence and military presence in the Indian Ocean at least partly to this dilemma.

Of perhaps more immediate concern is the strain China’s heavily-subsidised fossil fuel consumption will place upon the market, upon the environment, and upon their regional neighbours, who are already feeling the effects of China’s wandering smog fronts.

Related Articles

• Assessing China’s economic figures – IEA tries another way (forexlive.com)
• IEA Believes 20% Energy Savings Possible by 2035 (tomshardware.com)
• China claims it leads the way with safe nuclear energy by using thorium (chinadailymail.com)

Categories: Mining & Energy

Tags: China, Fatih Birol, Indian Ocean, International Energy Agency, Iraq, Middle East, United States, World Energy Outlook, World Energy Outlook 2012