Energy security is a pressing policy issue for many governments. Energy is the lifeblood of modern society – whether it is powering manufacturing industries, households or transport systems, economies could not function without a stable, affordable and reliable supply of energy. And as an energy transition from hydrocarbons to new energy sources gathers pace, policymakers are again turning attention to how 21st century energy systems can be designed. Nearly every government today maintains some kind of energy security policy.
Yet China cares about energy more than most. With a rapidly industrialising and urbanising economy, the Chinese government has made energy security a centrepiece of its economic reform program. Since the Twelfth Five-Year Plan (2005-10), it has gone to great lengths to develop its energy systems. On the domestic front, it has rapidly built-out its electrical distribution system, while actively promoting a range of new energy sources – including nuclear, hydro, solar, wind and natural gas – in order to foster a move away from high-polluting oil and coal sources.
China has also looked abroad for its energy supplies. Since 2004, the Chinese government has actively encouraged its energy firms – especially, but not only, its state-owned enterprises (SOEs) – to Go Out and acquire energy projects in other countries. This was supported through extensive investment subsidies through the state banking system, as well as forms of ‘resource diplomacy’ targeted at energy-rich governments in Asia, Africa and Latin America. In the decade to 2016, Chinese companies spent $827 billion acquiring over 1,000 energy projects in foreign countries. No other government has so aggressively bought-up foreign energy supplies.
China’s overseas energy acquisitions have proven extremely controversial. Critics have suggested it is attempting to ‘lock-up’ global oil supplies in competition with other importing countries, particularly Japan and South Korea. Others have criticised its resource dealings with several ‘pariah’ states – such as Libya, Sudan and Zimbabwe – noting that Chinese diplomatic support has propped up regimes with poor human rights records. It has also been suggested that China is triggering a neo-imperialist ‘scramble for Africa’, as other countries ramp up their energy investments in the continent to match Chinese efforts. Both the EU and US have publicly criticised China for what they view as a mercantilist approach to energy security, that threatens to undermine the transparency and openness of world energy markets.
Why has China adopted such a contentious strategy for securing its energy supplies?
First, China faces an accelerating ‘external dependence’ problem. While well-endowed with coal, its lack of high-quality domestic reserves has seen the Chinese economy become reliant on imports for oil and gas. As rapid industrialisation has driven energy demand upwards, China’s import dependence rate for oil has risen from 27 percent in 2000 to 60 percent today. This means China is far more exposed to the vicissitudes of international markets than previously, as energy costs are no longer captured within the Chinese economy, but are lost abroad as imports. Acquiring oil at the site of production thus provides a hedge against price movements, by enabling prices rises to be ‘internalised’ by Chinese firms.
China’s energy SOEs have also played a role. Three SOEs – CNPC, Sinopec and CNOOC – dominate the oil sector. These are highly powerful within the Chinese political system, with their heads holding vice-ministerial rank – a higher political rank than the energy agency heads, which supposedly regulate them. The SOEs have been one of the principal beneficiaries of China’s overseas energy investment program, as it has given them preferential access to subsidised credit through the state banking system. Indeed, the initial impetus for foreign energy investments came from the energy SOEs, who wished to use foreign investment as means to escape the unprofitable and declining domestic oil sector.
Geopolitical considerations have also loomed large, given China’s emerging rivalry with the US. Because most multinational energy firms are domiciled in the US, Chinese policymakers believe that global energy markets are ‘controlled’ by, and thus serve, US interests. It is also feared that during any future military confrontation, the US could use its naval supremacy in the Pacific to interdict China’s seaborne energy imports in the Straits of Malacca. The fact that approximately 45 percent of China’s oil and gas imports come from the Middle East – a region dominated by the US Navy, and comprised of US-aligned states – further contributes to these concerns. The consequence is a tendency to view energy security as a matter of national security, and to look for solutions that minimise Chinese dependence on US-secured energy supplies. Chinese investment in ‘independent’ energy producers assists this agenda.
For these reasons, China suffers from a much greater degree of ‘energy angst’ than other comparable economies. While energy is a major concern for many governments, it is of almost existential importance for China given its external dependence, powerful SOEs and geopolitical rivalry with the US. Unwilling to leave its energy supplies to the international market, it has instead committed to a strategy of acquiring energy at the site of production through a massive, multi-billion dollar state-backed investment program. And as this has put China on a diplomatic collision course with the US, Japan and EU, it threatens to further destabilise energy relationships between the world’s major economic powers.
About the Author
This article was written by Dr Jeffrey Wilson of Elgar Blog. Dr Jeffrey Wilson is Senior Lecturer in International Political Economy, Murdoch University, Australia. His new book International Resource Politics in the Asia-Pacific is out now.