Smog over Shanghai
Smog over Shanghai

Policy Innovations Digital Magazine (2006-2016): Briefings: China's Catch 22

Dec 28, 2006

Here's the situation. You are a booming country that has garnered nearly double-digit GDP growth rates every year over the past decade. As your economy integrates into the world economy, you establish yourself as the premier location for exports, which lifts millions of people out of poverty.

But to sustain this growth, you need coal, oil and liquefied natural gas (LNG). Although you have a natural abundance of coal, it burns inefficiently and drastically adds to your burgeoning pollution problem. You don’t have enough oil and gas and to meet your soaring demands. You can get it, but it you will likely need to buy it from dictators and thugs who will use the revenue to kill millions of people in other countries.

What to do?

China is in this very situation right now—and none of its choices look favorable. By 2030, China is slated to be second only to the United States in its overall energy consumption. With high energy prices and scarce resources, China is importing oil from countries like Angola, Nigeria and Sudan—which provides funding for the genocide in Darfur. China has just signed a deal to import natural gas from Iran.

In the short-term, China may not have much of a choice. First, there is the problem of its refineries. Right now, Chinese refineries can only process oil that has sulfur content between 0 and 0.4 and an API Gravity of about 27 to 37. Oil from Sudan, Equatorial Guinea, the Congo and Nigeria match these specifications. In other words, China must import from these countries, at least until it builds new refineries.

Pursuit of oil has forced China to make some difficult ethical tradeoffs. In the case of Sudan, China has gone against Western pressure and refused to support sanctions on Khartoum and members of the Sudanese government in order to stop the ongoing genocide. As a result, China continues to be Sudan’s largest investor: China ultimately receives the oil it needs, but in the process, it is helping to fund genocide.

Angola—which recently surpassed Saudi Arabia as China's central source for oil—offers the Chinese a similar ethical challenge. Oil revenues account for 40 percent of Angolan GDP and about 90 percent of total government revenues. According to China Economic Information, China-Angola trade is slated to hit $10 billion in 2006, up from $6.95 billion in 2005 and $4.9 billion in 2004.

These funds are keeping Angola afloat, even though it is on the heels of a 27-year civil war and the majority of its people continue to live in poverty. The United States has repeatedly criticized Angola's government for corruption and mismanagement of oil revenues. As in Sudan, China has chosen an ethically questionable oil investment to fuel its economic growth.

The situation for gas imports looks just as bleak. The Chinese government is trying to up the amount of gas that China consumes from 3 percent of total Chinese energy consumption today to 10 percent by 2020. But where will the supply come from? Neighboring Russia, with its abundance of natural gas, would be an obvious choice. But the Russians recently signed a large deal with the Japanese, effectively cutting China out.

To the dismay of the United States, China's Plan B is to invest in Iran, which has the world's second-largest reserves of natural gas after Russia. Last year, the China National Offshore Oil Company began serious discussions with Iran’s National Iranian Oil Corporation to explore Iran's North Pars Gas Field. Though the deal is currently undergoing a few pricing setbacks, the two companies have signed a Memorandum of Understanding in which Iran will sell North Pars Natural Gas to CNOOC for 25 years in exchange for CNOOC's help in constructing gas-to-LNG conversion facilities

In addition, Sinopec's $100 billion deal to import 250 million tons of LNG from Iran’s Yadavaran oilfield goes against the US Iran-Libya Sanctions Act, which penalizes companies that invest more than $20 million in Iran or Libya. The result is much the same as in Sudan. China has refused to allow harsh penalties on Iran in the U.N. Security Council for Iran's illegal enrichment of uranium, which the United States says is part of Iran's grand plan to build a nuclear bomb.

None of China's choices for energy imports are simple. China has a natural abundance of coal, but it burns inefficiently and greatly contributes to China's greenhouse gas emissions. China is also toying with the idea of liquefying its coal, though this too would have drastic environmental consequences. China needs to import. But with that said, China is the world’s fastest-growing economy and it needs to examine whether it plans on being a responsible stakeholder in the world economy.

In terms of global responsibility, nations can work to help China become more efficient with the energy it does consume. This cooperation would not only calm U.S. anxieties, but would help China as well—allowing China to lower its projected energy imports and improve its dangerous air pollution problem in the process. Until then, China will continue to face the ethical implications of its energy-related choices.

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