Hu boldly struts into the minefield of energy efficiency

PUBLISHED : Friday, 14 October, 2005, 12:00am
UPDATED : Friday, 14 October, 2005, 12:00am

Presenting the Communist Party's 11th five-year plan this week, Hu Jintao said China would cut energy consumption per unit of output by 20 per cent between now and 2010.

This bold target was widely interpreted as a measure to limit the damage inflicted on China's environment by rapid economic growth. But for China, boosting energy efficiency is not merely a matter of environmental virtue; it is an economic necessity.

China is a wildly profligate energy user. According to the Asian Development Bank, the mainland consumes almost six times as much energy to produce each dollar's worth of economic output compared with Hong Kong. Most of that energy is from coal, which China has in abundance, but about 30 per cent comes from burning oil.

As China's economy has grown, more of that oil has had to be imported. Last year, China imported 40 per cent of the crude it consumed, equal to two million barrels a day. By 2030, according to the International Energy Agency, China's import demand could grow to 10 million barrels a day, or 80 per cent of its consumption.

China has been trying to secure reliable foreign sources for its oil imports but without much success. In August, the United States Congress effectively scuppered an US$18.5 billion bid by CNOOC, a subsidiary of China National Offshore Oil Corp, for California-based Unocal. This week, the Kazakh government introduced a law that would allow it to block a US$4.2 billion bid by China National Petroleum Corp for Toronto-listed PetroKazakhstan.

Those failures make it more urgent for China to boost energy efficiency in order both to make the most of its domestic supplies of crude and to get better value for money from its rapidly rising oil import bills. The most straightforward way would be to scrap the price controls imposed on refined petroleum products. According to Goldman Sachs economists, these artificial price ceilings mean Chinese end-users get their oil for US$18 a barrel less than they would on the open market (see chart).

For example, Chinese drivers buy their petrol at just $3.96 per litre, just half the rate drivers in Hong Kong must pay even before government excise duty. With excise duty, Chinese drivers pay less than a third than their opposite numbers in Hong Kong.

Those kinds of distortions only encourage wantonly extravagant fuel consumption. But while deregulating prices would undoubtedly raise efficiency, it would also inflict unbearable pain on several key sectors of the Chinese economy. One of the most vulnerable is the agricultural sector, which is heavily dependent on cheap diesel. According to Jun Ma, the chief economist for China at Deutsche Bank, the impact on farmers' incomes of complete liberalisation of diesel prices would be enough to wipe all the gains from this year's rural tax cuts and agricultural subsidies.

That alone would probably be enough to rule out full deregulation in the near future but other sectors would suffer too, notably the manufacturing, petrochemical, transport and power industries. The effect probably would be enough to push many companies into the red, with a knock-on effect for the financial system. For Mr Hu, achieving greater energy efficiency will prove easier said than done.