Don’t blame China for low oil prices

China’s GDP grew by 6.9 per cent last year, its slowest in 25 years. But that must still be the envy of the rest of the world, which did not even do half as well on average. And while China’s electricity demand rose by only 0.5 per cent, overall energy consumption fell by 0.5 per cent, its first negative growth in 30 years.

While both structural and business cycle factors are responsible for China’s drop in energy demand, it is a mistake to blame China for the dramatic decline of global oil and gas prices.

So, what explains the discrepancy of China adding over US$ 700 billion in value to its GDP in 2015 — the equivalent of 40 per cent of Canada’s economy — but using less power than the year before?

First, the world’s secondlargest economy has become more efficient, with its energy use per unit of GDP decreasing 5.6 per cent last year compared to 2014. Overall, the amount of GDP China produced between 2006 and 2010 was generated by 20 per cent less energy in the subsequent five years, exceeding the government’s 16 per cent reduction target.

Second, China’s industrial sector, the largest energy consumer, has been shrinking; now comprising 40 per cent of the economy. But the ser- vice sector has grown steadily in the past five years, representing over 50 per cent of the economy last year and contributing to over 60 per cent of the country’s growth.

Third, many Chinese manufacturers relied on the leftover inventory they produced or purchased in 2014 to continue their output in 2015, with a minimum increase in power consumption. This “deinventory” process, featuring a gap between high GDP numbers with low power consumption, also happened in both 1997 during the Asian economic crisis and 2008 during the world financial crisis.

But, when it comes to its oil and gas use, data show that China’s appetite continues to grow. China’s oil consumption went up eight per cent in 2015, the secondhighest annual increase after 2010. China imported 7.82 million barrels per day (bpd) of crude last December, and 2015 oil imports averaged 6.71 million bpd, both record highs. The country’s natural gas and LNG demands also increased, although without double- digit growth as in previous years.

Here is the interesting phenomenon of China’s energyconsuming behaviour: While overall power usage remained flat last year, the share of coal use dropped by four per cent over 2014 while other sources of energy increased. And this shift was mainly driven by very determined government policies.

For decades, China’s unprecedented industrialization process has been fuelled primarily by coal, which makes up nearly 70 per cent of the country’s energy mix. Close to 80 per cent of China’s electricity is generated by coal. The country is the largest producer and importer of coal in the world, and uses over 50 per cent of total global output annually.

But the Chinese leadership is facing intense domestic and international pressure to solve its environmental challenges — chiefly air pollution and CO2 emissions.

So China’s central planners have used many regulatory and material incentives to encourage energy sources other than coal. The plan is to increase the share of nonfossil energy from the current 11 per cent to 15 per cent by 2020, and the portion of natural gas and LNG, currently at six per cent, will more than double in five years. To discourage coal use, local governments have been directed to offer higher payments for electricity generated by gas rather than coal.

With all the coal-producing capacity it has accumulated over the past two decades, halting China’s massive coal industry has not been easy. More than 50 per cent of the added coal output last year was neither planned nor permitted.

But the authorities are allocating US$4.5 billion in the next three years to close some 4,900 coal mines, and re-direct one million coal miners, or 23 per cent of its total coalmining workforce, to other employment.

This may not be good news for the coal producers in China or coal exporters around the world. But China’s emerging new energy structure, while less dependent on coal, is good news for oil and gas producers as well as nonfossil energy sources: China is by far still the fastest-growing market for all these energy products.

CHINA’S OIL CONSUMPTION WENT UP EIGHT PER CENT IN 2015, THE SECOND-HIGHEST ANNUAL INCREASE AFTER 2010.