No More Cheap Energy in China

For the last 30 years, China has shown voracious energy consumption, but as has always been the case for developing countries throughout history, it was coupled with low efficiency. Along with abundant and cheap labor China was able to gain a huge world market in industrial goods and this stimulated its economic development.

Although the Chinese people’s lives have been improved tremendously, the approach has been associated with excessive energy utilization, energy shortages, and extreme environmental pollution. China’s energy intensity (i.e., energy use per unit of the GDP) has been much higher than that of the United States, although it has been declining. However, cheap energy that has been subsidized and controlled by the government has prolonged inefficiency and has weakened the endurance of the nation’s development.

Worse yet, since 2000 energy intensity, instead of decreasing, has started to increase, an eminently undesirable event. Although China uses only 75 percent of the energy that is used by the United States (about 75 vs 100 quadrillion Btu and per capita that would translate to about 58 vs 330 million, Btu, one sixth of the United States (http://tonto.eia.doe.gov/country/country_time_series.cfm?fips=US#prim), the energy intensity, measured in how much energy it takes to generate one dollar of GDP puts China at a far more inefficient13,800 vs 8,800 Btu/$ GDP, almost 60 percent larger than the United States.

Clearly, the Chinese economy has to be sharpened significantly to compete internationally at par with developed nations, especially as imported energy prices will continue their upwards trends and as increasing Chinese labor costs no longer offer their advantages. Manipulated low energy prices have not reflected the true energy cost and the balance between energy supply and demand.

The government has taken a series of actions to relieve the situation for over a decade, such as reorganizing the national oil and gas industry in 1998, separating the ownership of power plants and the transmission grid in 2002, and introducing the coal industry into market competition in 2005. Those measures have had some positive effects on the domestic energy market, but the roots of the problem, partially planned economy and controlled energy prices, are still there to hamper effective energy utilization.

So far, the government has yet to stop subsidizing energy costs.After importing more and more energy from foreign sources at much higher prices than the controlled domestic ones, China can no longer afford to subsidize all energy components. Reforming energy pricing, or to be clear, raising energy prices, has becomes inevitable. In fact, some of the wealthier areas, such as Shanghai, have already seen higher energy prices.
Raising energy price around the nation has been in the plan, but implementing it has not been easy. The dilemma is that during good economic times, the government is afraid of market inflation; but during an economic downturn, personal and business financial sustainability is a big concern which is very much tied to social stability.

The international financial crisis since the end of 2008 has resulted in the decrease of international energy prices. China’s Consumer Price Index and Producer Price Index have had negative increases since then. Beijing’s Tianze Economic Research Institute CEO Zhang Shuguang believes that this provides a golden opportunity for China to reform energy pricing and to let China’s energy prices to be consistent with international ones. As China’s industrial growth has slowed down due to the crisis, the conflict between energy supply and demand has eased, making it easier to initiate energy pricing reform. Zhang also thinks that the total removal of governmental control can improve the flexibility of market competition.

Energy experts suggest that the reform procedure should first raise the electricity price and the price of oil products at the same time; then increase the resource tax and the energy usage cost, use of strict environmental protection and energy saving regulations and laws to punish energy wasteful and high-pollution businesses, encourages service industry and high technology/low energy consumption businesses. In the long run, while increasing the energy cost to realistic levels, China needs to use high technology strategy to enhance its competitiveness in the international market and extricate the nation from heavy pollution. This may translate to fewer “made in China” cheap products in the world market.

The people who object to the energy pricing reform complain that price increases alone are to protect the state energy monopoly. They indicate that the energy industry has to be reformed before the energy pricing, the monopoly has to be eliminated and market competition has to be introduced to keep energy prices fair. They warn that higher energy cost can substantially reduce the business profit and drive a lot of businesses into bankruptcy.

Liu Kegu, an advisor for the National Development Bank, thinks that raising the energy tax may slightly increase the product cost, but it won’t cause big inflation. Higher energy prices will stimulate energy utilization efficiency, technological improvement, and reduce overall cost. He also admits that energy efficiency improvement may neither reduce overall energy consumption, nor decrease pollutants and greenhouse gas emission.

All said, cheap energy will no longer be an option in China.

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