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    China Business
     Jun 3, 2006
Auto boom worsens China's energy crunch
By Wu Zhong, China Editor

HONG KONG - Rapid industrialization, urbanization and enormous increases in the country's motor-vehicle fleet are the major factors boosting China's growing demand for energy, posing a serious challenge to Beijing's energy strategy. These key points emerged from remarks made by Feng Fei, a senior official with the Development Research Center of the State Council, a top Chinese government think-tank.

China's economy has undertaken a dramatic restructuring due to its high-speed development. The restructuring is characterized by rapid industrialization, which now has entered its final phase. Last year, the output of heavy industry accounted for 69% of China's total industrial output, Feng said at a forum in Beijing on Thursday.

Urbanization has also accelerated. At present, some 15 million



rural residents settle down in China's cities each year. At this pace, the country's rate of urbanization will reach 55-60% by 2020. That means up to 60% of its projected 1.5 billion 2020 population, or 900 million people, will live in cities. Currently, only about 30% of the 1.3 billion Chinese population dwell in cities - about 390 million people. Normally, the average per capita energy consumption of urban citizens is 3.5 times that of rural residents. Therefore, the demand of energy will steadily grow with the pace of urbanization.

Furthermore, energy demand in China is and will be boosted by the sharply growing number of cars. As autos become increasingly affordable, more Chinese want to buy them. According to figures from the Ministry of Public Security, there are now about 30 million motor vehicles on the road across the country. The number is expected to shoot up as sales of automobiles in China continue to grow.

According to industry statistics, some 5.7 million motor vehicles were sold in 2005. It has been predicted that some 9.6 million units will be sold in 2010. If the current pace of expansion continues, there will be 140 million motor vehicles on China's roads by 2020.

The sharp increase in vehicle uptake is boosting China's demand for oil, so much so that Chinese experts now expect oil shortages to become a chronic problem, fundamentally threatening the country's energy security.

Zhu Jianjun, an official with the China National Petroleum Corp (CNPC), the parent of Hong Kong-listed PetroChina, said that as international oil prices continued to rise, China has had to spend more and more foreign exchange on oil imports. In 2004, oil imports cost China US$43 billion, which increased to more than $50 billion last year.

Also, China faces increasing political and diplomatic risks in the competition with other countries for oil imports, Zhu said. Therefore, China must make efforts to increase its domestic oil production, to increase oil reserves, and to search for new energy sources.

But other analysts do not believe China can sharply increase its oil production, simply because China is geologically oil-poor. This remains true despite a recently increased estimate for China's prospective oil reserves by the Ministry of Land and Resources, which put reserves at 22 billion tonnes, sharply up from the previous estimate of 16 billion tonnes, after recent exploratory efforts.

China's 11th Five-Year Plan for Social and Economic Development (2006-10) projects annual oil production over the next five years to remain at a level between 185 million and 195 million tonnes. The static oil-production projections reflect the geological realities of China's mature oilfields, notwithstanding the traditional bias in Five-Year Plans for over-optimistic production increases. It is unrealistic to expect such small, or non-existent, increases in annual production to meet the raging growth in demand.

China's oil demand is growing rapidly indeed. Oil consumption totaled more than 300 million tonnes last year, which is expected to jump to 500 million tonnes by 2020. However, China's oil consumption will not reach its peak until 2040, according to a recent estimate - which means oil demand will continue to grow between 2020 and 2040.

Therefore, China's oil imports are expected to grow steadily. According to official statistics, China imported 120 million tonnes of crude oil in 2004. Last year, China's oil imports grew to 136 million tonnes, accounting for 42.9% of its total consumption. It is generally expected that by 2010, half of China's oil demand will be met from imports.

To be sure, various technological solutions for the looming oil crunch have been suggested. For example, many state-owned or state-controlled coal producers in China are investing tens of billions of yuan in coal-to-liquid-fuel projects. But such projects only turn one form of fossil fuel into another, which cannot solve China's energy shortage in the final analysis.

Feng said worsening energy shortages brought about by industrialization, urbanization and growing numbers of cars pose a serious challenge to Beijing's energy policy, threatening the country's energy security.

He suggested that China can reduce energy consumption by improving energy efficiency, since currently China is one of the most energy-inefficient countries in the world, in terms of energy used per unit of GDP (gross domestic product). Also, he argued, the government should encourage the research and use of new energy sources.

In fact, Beijing has already begun to address the problem of energy inefficiency. During the annual session of the National People's Congress in March, Premier Wen Jiabao set the target that energy consumption per unit of GDP must drop by 20% from its current level.

However, analysts generally believe that to ease its energy shortage, China will have to build more nuclear power plants and hydroelectric power stations in upcoming years. How to do this without harming the country's environment will be another huge challenge for the government.

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