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A Look at China's energy Future and What it Means for Oil Prices

A Look at China's energy Future and What it Means for Oil Prices

I was recently asked to participate in an energy roundtable at Focus on China’s Energy Future and the Shale Gas Question. It is no secret that I feel that China’s moves stand to continue sending shock waves through the energy markets over the upcoming years. In fact, energy news from China warranted inclusion in My Top 10 Energy Stories of both 2009 and 2010. In 2009, I stated my belief that “China will be the single-biggest driver of oil prices over at least the next 5-10 years.” In 2010, the news was reported by the International Energy Administration (IEA) that China had become the world’s top energy consumer. BP confirmed this in their just-released Statistical Review of World Energy 2011.

While the roundtable was ostensibly about China’s shale gas developments, the discussion covered China’s energy future in general. I will excerpt from the transcript below, but there were several key points that I made during the roundtable. They were:

• China can’t possibly be energy independent in the foreseeable future, and they will be out in the world markets competing for energy. Thus, anything the U.S. can do to help China meet their own energy needs — such as sharing shale gas technology — stands to benefit U.S. consumers by helping to keep global prices in check.

• China’s potential for growth is frightening. China uses about two barrels a year of oil per person. In the United States we use 23 barrels of oil per person per year. If China’s usage grew to the U.S. equivalent, it would be 85 million barrels a day, which is about the total consumption of oil for the world. However, there simply isn’t enough oil available for that to happen, so it sets up some challenges in the years ahead.

• China is one of the world’s largest producers of renewable energy, leading in categories like wind power and solar hot water. A statistic I recently read said that China’s energy production from solar hot water is equivalent to the energy output of 40 nuclear power plants.

• Oil prices are being driven by both fundamental supply/demand issue and speculation. With a narrowing of the supply/demand gap over the past decade, it makes the influence of speculators in the market more significant. If there was still plenty of excess oil production capacity, speculators couldn’t have nearly the same impact on oil prices.

You can read the entire transcript here. The transcript is a bit garbled at times, so let me offer some quick corrections. I worked for Hoechst, not Hertz, and Celanese, not Selamese. I referred to Sasol several times, and that got transcribed as Sasaw.

Now a few excerpts from my portions of the roundtable. On China’s energy situation in general:

I’ve written about China for a few years and I think China is going to drive global energy prices more than any other factor over the next decade probably. Just to put things into perspective, China uses about two barrels a year of oil per person. In the United States we use 23 barrels of oil per person. If China’s usage grew to where ours is, it would be 85 million barrels a day, which is about the total consumption of oil in the world. Over the past few years the U.S. actually has had some decline in petroleum consumption because of high prices, but for China and India, their usage grew more than ours fell.

So global demand has remained very high, such that even in a recession we’re still dealing with $100.00 oil, something we wouldn’t have seen in past times. China is out doing deals all over the world. They’re bidding against ExxonMobil to develop fields. They’re in Iraq, they’re in Venezuela, they’re in Africa, and the other thing as David mentioned, they did become the number one energy consumer in the world in 2010 according to the International Energy Administration. People may not realize they’re also very big producers of renewable energy. They’re the largest, and this happened in 2010, they became the largest producer of wind power in 2010 surpassing the United States and they have by far the largest solar hot water heating capacity.

They have over half the world’s capacity of solar hot water. A statistic I read said it’s the equivalent of 40 nuclear power plants is how much solar hot water they produce. So China has a lot going on in energy. On the shale gas subject they use very little gas today actually. It’s only about 3 percent, so there’s a lot of room for that to grow as well.

On speculation versus fundamentals:

Well there is a speculation component and when supply and demand gets tighter it becomes the speculators can have a field day because the oil markets are much more volatile. So there is a component of speculation there that wouldn’t be nearly as easy if there was a lot of global excess capacity. So it’s hard to separate that and say it’s not speculation it’s supply and demand. Well it is supply and demand, which makes the speculation easier.

Ten years ago there was a lot of global spare capacity laying around, and when somebody went offline or there was tightness in, say, Libya, somebody else could bring on more capacity and ease those shortages. Over the past ten years demand has grown faster than we’ve added new capacity and so there just isn’t much excess capacity anymore and that’s likely to be the case going forward. It may be that we can add a little more incremental capacity, but if you see where China is starting from and where they would like to go it’s hard to imagine that we will ever return to the days of cheap oil.

On the difference between China’s shale gas resource and what may be a much smaller recoverable reserve:

I can’t speak to the specific technology how much of that is recoverable because I’m not a shale gas expert per se. I will say that on the previous conversation there just to give an analogy, in the U.S., and we’ve known this for 100 years, we’ve had trillions of barrels of oil shale in the western United States and that’s Utah and that’s Colorado and those states, and that’s different from shale gas in that you can take oil shale and you can actually extract oil from it. We have talked about the resource base there of 1 trillion barrels or 2 trillion barrels and this has never been produced.

The reason it’s never been produced, it’s just too energetically intensive to go out and produce it. I have a headline, newspaper headline from I think it’s 1905 that says “Shale oil development imminent” and it’s been that way for 100 years. It gets into how much energy it actually takes to go out and get it, and that’s gonna be the situation as well with the shale gas. You may have gas that’s technologically recoverable in much larger amounts than say the reserve, so you may be able to get maybe the majority of that resource but not economically because ultimately you’re spending more money and you’re spending a lot more energy to get that gas out than it’s worth on the market.

On my understanding of the technology initiative that President Obama made with China, and what’s in it for the U.S.:

My understanding is that it’s technology, that we will provide them and share technology with them that allows them to exploit their resource there. As I said if you look at it from the perspective what’s in it for us, there’s a lot in it for us if they are able to produce more of their own energy domestically and aren’t out there on the open market driving up prices and competing with the U.S. So that’s I think the basis of it.

But to the extent that we can help them reach their goals I think it’s very beneficial for us. If not for China, oil is not at $100.00 a barrel. If not for the growth that they’ve had over the past decade. We’re now at these oil prices and they’re not going back. So I think to avoid continued escalation in oil prices it’s in our interest to help them achieve their own energy goals, otherwise they’re in there in Iraq outbidding us for development of fields. They’re outbidding us in China. They’re doing deals with people that we don’t deal with, so they’re out there on the global market if not dominating it at this point very soon to dominate the global market in petroleum.

On what other alternatives China may consider. This section was a bit garbled, so I am editing it to more clearly reflect the point I was making:

One major one that they have that we’ve talked about just a little bit in the U.S. is dimethyl-ether, which can be made from coal. They can make methanol from coal and that can be used for fuel. So from their coal they can produce liquids and not necessarily the more capital intensive Fischer-Tropsch process that say Sasol uses. Of course Sasol sunk their capital costs at much lower oil prices, so probably now that process makes a lot of money for Sasol. But to build a plant like that today you need ever higher oil prices (or at least a large differential between natural gas prices or coal prices and oil prices).

To build a methanol plant based on coal or to build a dimethyl ether plant based on coal you can probably produce fuel for less than current oil prices. And China is building dimethyl ether plants. Dimethyl ether is a fuel that can be used in a combustion engine, it can be used in a compression engine like a diesel engine. It’s a gas at room temperature but it’s very easily compressible, non-toxic, so it has quite a lot of things going for it. We just don’t have the infrastructure here in the U.S. for it right now. So that’s one alternative. China is doing a few things as a result of having so much coal that we really haven’t touched upon a lot.

We can produce methanol in the U.S. as well just like we can produce ethanol except via a different process, but we haven’t had the need for that. For instance, methanol on the global market sells for like $1.00 a gallon or something and it has half the energy content of gasoline. But it has its own issues. It’s corrosive and it’s toxic and things like that, but the same can be said about gasoline. There are a few options out there that I think don’t get a whole lot of attention that probably have a lot of potential for mitigating declining oil production.

All together, a good discussion of China’s energy situation, with excellent contributions by fellow participants David Fridley (from Lawrence Berkeley National Laboratory) and Kurt Cobb. (Arthur Berman was scheduled to participate, but had some technical difficulties).

By. Robert Rapier

Source: R Squared Energy Blog

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  • Anonymous on June 10 2011 said:
    Excellent article. Filled with valuable information. The only things left out were 1) OPEC's strategy, and 2) the farce in Libya, and how it can be tied to the global oil situation.

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