China in Transition

Ways to Overcome the Oil Crisis
Energy conservation more important than development of supply sources

Chi Hung KWAN
Consulting Fellow, RIETI

As crude oil prices reach record-high levels, the actions of China, which has surpassed Japan to become the world's second-largest oil consumer after the United States, are becoming a focus of attention. Huge demand for oil in China is accelerating the rise in oil prices, which in turn is becoming a factor that threatens to constrain China's own economic growth. Since there is a limit to the world's oil deposits, the promotion of energy conservation, rather than the race to develop and secure oil fields, is more important for China if it is to overcome the oil crisis. This would also help solve environmental issues while avoiding friction with the rest of the world.

China is going all-out to secure supplies of energy sources such as crude oil. A good example of this is China National Petroleum Corp.'s purchase in August 2005 of Canada's PetroKazakhstan Inc., which holds the rights to develop oil fields in Kazakhstan. However, if Chinese firms are to venture into overseas markets, they will have to compete against oil's major players, which are far superior in such areas as funding and management, on their playing field. Considering the disadvantageous position of the Chinese side, there is no guarantee whatsoever that it can get energy more cheaply than market prices just because it invests in a firm and can directly take part in its management. It is doubtful whether the recent flurry of activities in deep-sea exploration and the securing of domestic oil reserves have taken profitability into due consideration.

When considering "energy security," having imports cut off is a more serious problem than rising energy prices. In order to avoid such a scenario, it is more important to maintain good relationships with other countries so as to avoid being the target of economic sanctions or coastal blockades. Since China falls short of being a global military power, it lacks the might to protect its overseas investments or bring resources home in case of crisis. Therefore, direct investment overseas in the energy sector will not necessarily help China boost energy security.

Indeed there was a time when emerging powers could only secure resources such as oil by conquering colonies through wars. However, in today's globalized world, resources can be obtained easily so long as a country maintains good diplomatic relations with other nations and can afford to buy. Moreover, because every country must procure resources under the same conditions in this market, even if oil prices were to rise as a result of China's increased demand, its competitors would also have to shoulder this burden. Therefore, the key to maintaining international competitiveness lies in how much costs can be reduced through the promotion of energy conservation.

The Chinese government is also aware of the importance of saving energy, and is formulating a strategy to this end. Specifically, it has begun stressing the following four transitions. First, energy supply must not simply satisfy the basic demands of economic growth, but must also take the environment into consideration. Second, policy priority must shift from securing supply to improving energy efficiency. Energy conservation must be taken seriously, and economic growth that relies heavily on input expansion must be revamped. An energy-saving economic system that focuses especially on the construction and transportation sectors must be established. Third, price formation at the final consumption stage should be left to the market as much as possible, and at the same time companies should pay for drilling rights to boost the efficiency of resource production. Finally, not only domestic but also overseas resources and markets must be utilized to shift from the traditional policy of maintaining balance among domestic resources to a strategy of globalization, and to secure energy supplies.

The energy environment facing China now is similar to that of Japan at the time of the oil shock of 1973, when the entire nation started to devote itself to energy conservation and environment protection, with admirable results. Japanese companies will find many business opportunities if they utilize the technology and experiences they have so far amassed to meet China's rising demand.

October 14, 2005

October 14, 2005