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China: An Energy Influencer

July 29, 2016
In the world of energy policy, the Organization of Petroleum Exporting Countries (OPEC) looms large in influence. In recent times, these nations have featured prominently in newspapers and editorials across America as the major source of the global oil glut, which has produced oil prices at decade-long lows. However, much of the common analysis fails to incorporate a crucial market aspect: demand, which is determined by Chinese (and, to a lesser extent, Indian) consumption. As a result, changes to the Chinese economy, through societal change and policy intervention, drastically affect U.S. policy, business, and finance.

By Max Morant, Eng’16

The United States economy depends on oil and natural gas, and the two are extremely interlinked: oil use accounts for nearly 4% of GDP, and a 10% increase in the price of oil is associated with a drop of approximately 1.4% in U.S. real GDP.[1] As a result of globalization, energy is a truly interconnected market, where every participant’s actions impact those of every other participant. As the world’s largest energy consumer,[2] China’s consumption, and expected future consumption, of energy affects U.S. households and businesses. As China transitions from a manufacturing economy to a service economy, its oil consumption and climate impact will factor into U.S. business and policy decisions.

China currently imports the most oil, burns the most coal, and utilizes the most energy of any nation in the world.[3] Due to the size of their energy market, the status of the Chinese economy significantly impacts global energy prices. Recently, Chinese manufacturing outputs have fallen, and economic growth dropped to 6.9% last year.[4] As a result, global energy demand, in particular global oil and coal demand, shrank significantly, directly affecting the bottom lines of major U.S. energy firms as oil prices fell. Although demand for energy on a per-capita basis in China is expected to rise significantly (currently about 25% of that of the United States) [5], China has invested heavily in new energy sources. It is the largest foreign investor in Africa, [6] giving it access to the continent’s oil. In the foreign policy arena, America finds itself opposed to China for influence in Africa, in the South China Sea, [7] in the Pacific Rim, [8] and in the Middle East,[9] influence which originates from China’s growing energy and economic influence. China also dominates in the international market for solar panels, so much so that the United States government levied tremendous tariffs on those panels to give American firms close to even footing.[10]

As a result of their dominance in demand, Chinese polices dramatically influence American businesses and households. Oil price levels, driven by Chinese demand, produce high oil prices, which dampen American GDP. [11] While this has recently helped certain parts of the U.S. economy by keeping oil prices high in the face of the global supply glut, oil prices and oil volatility contribute to higher costs which then funnel abroad, depressing U.S. domestic growth. Most experts expect demand to continue to grow in China, but the Chinese economy is slowing as it transitions from a manufacturing-centered economy to a service-based economy, and, at the same time, Chinese leaders are trying to limit oil use on environmental grounds. [12] These changes will have meaningful impacts on the American economy in the years to come.

Environmental and climate concerns have echoed across global politics, culminating in the Paris Climate Conference last December. China, a signatory to the Paris Climate Accords, must now begin to implement policies which reduce its carbon footprint, for the good of its citizens (air quality has become the number one cause of social instability in China[13] as well as for the globe.  China plans to implement higher efficiency in coal use, a limit on the total amount of coal used, fast development of solar, wind, hydro, nuclear, and gas sources, energy efficient and low-carbon industrial systems, and the cutting of emissions from buildings and transit.[14] Chinese supercities will invest heavily in mass-transit, reducing the need for vehicular consumption of gasoline. Steel, copper, and other metal processing plants will close or become more efficient as infrastructure and industrial construction wanes, causing a decrease in coal consumption. As China looks to the future, its government plans for a service-based economy with a carbon-footprint that compares favorably to the OECD nations. This, in turn, will greatly influence American firms: as oil demand decreases, profits of American shale natural gas firms and oil multinationals shrink.

American policy makers, business leaders, and informed citizens must look to changes in China as a source of energy instability over the next few years. As China’s international influence grows, Chinese policy will increasingly shape the world in which the U.S. government creates policy and the private sector makes business decisions.

References 

  [1] FXCM Market Insights, How Does The Price of Oil Affect the U.S. Economy. https://www.fxcm.com/insights/how-does-the-price-of-oil-affect-the-u-s-economy/

  [2] Andrew Stocking, Terry Dinan. China’s Growing Energy Demand: Implications for the United States. Congressional Budget Office, June 2015. Pg. 3

  [3] Clifford Krauss, Keith Bradsher. China’s Global Search for Energy. New York Times, May 21, 2014.

  [4] Mark Magnier. As Growth Slows, China Highlights Transition From Manufacturing to Service. Wall Street Journal, January 19, 2016. 

  [5] Stocking and Dinan. Pg 3

  [6] Stocking and Dinan. Pg 8

  [7] Council on Foreign Relations, Global Conflict Tracker. Territorial Disputes in the South China Sea. http://www.cfr.org/global/global-conflict-tracker/p32137#!/conflict/territorial-disputes-in-the-south-china-sea 

  [8] Editorial, Dawn News. 12 nations sign trade deal as US seeks to counter China.  February 5, 2016. http://www.dawn.com/news/1237461

  [9] Stocking and Dinan. Pg 17

  [10] Diane Cardwell. U.S. Imposes Steep Tariffs on Chinese Solar Panels. New York Times, December 16, 2014 

  [11] Stocking and Dinan. Pg 18 

  [12] Oil Prices, Low-Carbon Energy, and Climate Policy CFR, 4

  [13] Jeffery Sachs. Pathways to Deep Decarbonization in China. http://deepdecarbonization.org/wp-content/uploads/2015/09/DDPP_CHN.pdf

  [14] Frank Jotzo. China’s War Against Carbon Begins. National Interest, July 1, 2015 http://nationalinterest.org/blog/the-buzz/chinas-war-against-carbon-begins-13235

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