Why China’s economic reopening is not making oil prices jump

For now, China’s coal revival has capped energy imports and prices as it works towards energy self-sufficiency
But in the long run, for true energy security and a stable global energy market, China must boost its nuclear and solar power

Andy Xie

Published: 1:00am, 24 Feb 2023

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China’s reopening and economic recovery is driving an increase in energy demand. Most of this is likely to be covered by the rapid rise in domestic coal and renewable energy production. Demand for oil imports is likely to be limited, as China works towards achieving energy security.

China’s oil imports have fallen for two years in a row, just as the economy was hit by the pandemic. So, many expect the end of China’s zero-Covid policy to bring a return in oil demand, pushing up oil prices. But they are likely to be disappointed.

Coal has made a huge comeback in China. Production last year reached 4.5 billion tonnes, rising by 1 billion tonnes in just five years. Without this coal boost, global energy prices would have shot up into the stratosphere.

A decade ago, China’s coal production and use began to falter as smog and mining accidents grew. Total coal use peaked at 4.3 billion tonnes in 2012 and plunged to 3.8 billion tonnes in 2016, according to the National Bureau of Statistics.

But over the years, the government’s anti-pollution campaign has returned cleaner air to cities, sharply reducing public resistance to coal. And with the increasing use of automation in mining, accident rates have dropped off, paving the way for coal to return. Last year, coal consumption was back up at an estimated 4.7 billion tonnes.

The national campaign to electrify transport and manufacturing has also made it easier to substitute expensive imported oil with domestic coal. There is every reason for China to continue to meet its rising energy demand with domestic coal first, rather than imported oil.

A coal train ready to leave a mine belonging to China Energy Investment Corporation (China Energy) on January 14 in Ejin Horo Banner, Ordos City, Inner Mongolia. Photo: VCG via Getty Images

With the success of China’s coal revival, imports fell by 9.2 per cent last year. This took pressure off global demand, with Europe also turning to coal as it cuts its consumption of Russian gas and oil in the wake of the Ukraine war. China’s coal story is probably the biggest factor capping energy prices around the world.

But while China’s economy is recovering, demand may not be as buoyant as expected by the market. Yes, the economy is normalising. People who couldn’t go to a restaurant or their workplace for many months last year can do so now. Economic activity will return and that may be enough to deliver 5 per cent growth.

But neither the property nor infrastructure sector – usual drivers of the domestic economy – is in good shape. Most property developers have no money to service their debts and construction is likely to remain slow. Fewer land sales mean tighter budgets for local governments and less money for public infrastructure.

Unless Beijing undertakes deep structural reforms, domestic demand will remain subdued for years.

The coal comeback in China and Europe has raised climate fears. But the longer term picture is more optimistic. China has vowed to reach peak carbon emissions by 2030, and before then, at least 70 per cent of its energy increase is expected to be met by renewables. Its investments in renewable energy and nuclear power suggest these goals can be met.

Wind turbines are seen amid sea of clouds in Jingmen, central China’s Hubei province, on May 29 last year. Renewable energy will meet over 70 per cent of China’s additional electricity demand in the next three years, according to the International Energy Agency’s latest projection. Photo: Xinhua

China’s solar farm on the sparsely populated Tibetan plateau collects plenty of energy, though traditionally, the cost of sending this energy to the country’s densely populated east has slowed down developments. Last year, solar energy accounted for just 2.7 per cent of electricity generation. But with the recent breakthrough in ultra-high voltage transmission, costs should soon fall dramatically.

Already, landing costs have fallen to just 5 US cents per kWh for industrial hubs in the central Yangtze Valley. Compared to Chinese coal-fired electricity, which uses 260g of coal per kWh, probably the most efficient in the world, the new solar power rates are competitive. So, China is likely to boost solar energy use massively in the coming years.

Nuclear power, the ultimate solution for decarbonisation, accounted for 5 per cent of China’s electricity generation last year. In developing a new industry, the government tends to prefer to let the domestic supply chain grow first before allowing a massive take-off. It now appears this point isn’t far off. A secure supply chain for this industry is quite likely before 2030.

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Compared to the US, the bulk of energy consumption in China goes to industry – about 65 per cent to America’s 26 per cent – rather than households. China’s industry also consumes three times as much energy as the US’s does. This is roughly in line with China’s manufacturing being 2.5 times the US’ at market exchange rates.

What this means is that China’s energy supply mainly fuels its factories for the world market, rather than supports its middle class. So when China shifts to domestic demand for growth, the resulting increase in energy demand will be huge. This could destabilise the global energy market – unless China becomes self-sufficient.

I believe China’s energy consumption will be three times that of the US in 15-20 years. How China meets its energy needs has massive global implications. If it continues to depend on coal, global warming could accelerate. If it turns to imports, energy prices would be pushed beyond the reach of the global poor. Only nuclear and solar power have the potential to meet China’s energy needs without undesirable consequences cascading.

But recent developments are promising. The Tibetan plateau is a plentiful source of solar energy and low transmission costs will be a game changer. And when its supply chain for nuclear power is fully developed, China can decarbonise and realise its dream of energy independence.

Andy Xie is an independent economist