Not easy weaning China off oil

By Shihoko Goto
UPI Senior Business Correspondent
Aug. 16, 2006 at 3:38PM

Can paying more for gas make people use less of it?
      That's certainly what the Chinese government is hoping for as it considers opening up its oil market. Earlier this week, local media reports said that the world's second-largest oil-consuming nation is considering easing price control on its energy markets in an attempt to get consumers to use less oil and electricity.
      "We will allow the scarcity of resources to determine their price ... that's the basic principle of the price reforms," said Bi Jingquan, vice minister of price reform at the National Development and Reform Commission, in a speech to policymakers last week, according to the People's Daily. He said that "the proposed price reform is in an effort to cut widespread waste of natural resources due to low prices," though he noted there was still no indication about how much the prices might change.
      He did acknowledge, however, that while liberalization would mean higher prices, the government was determined to make prices better reflect market forces, adding that the government would consider offering subsidies "to lessen the impact on disadvantaged groups."
      In the near-term, though, China's priority is to use less energy even as its economy continues to expand rapidly. The government had been planning to reduce energy consumption by 4 percent in relation to GDP by the end of this year, yet consumption actually nudged up 0.8 percent during the first six months of this year, according to the National Bureau of Statistics.
      While domestically produced coal continues to provide for the bulk of the country's energy needs, there have been growing concerns about how environmentally destructive mining for and burning up the fuel can be, in addition to it being particularly harmful to health. The shift toward using gasoline as well as electricity has thus intensified, but given that most oil in China is imported, it makes particularly good economic sense to wean the country off from too heavy a dependency on oil.
      The move to deregulate the energy market and push up prices should certainly bring about the desired effect, but it would likely take some time for the policy to make any significant impact on reducing China's oil consumption, said Jerry Taylor, senior fellow at the libertarian Cato Institute, a Washington think tank.
      "In the short run, consumers respond sluggishly to oil price changes," Taylor said. He said that a 10 percent decline in oil costs from present levels would only decrease consumption by four-tenth of 1 percent to 1 percent over the course of a couple of years. Over the longer term, however, a 10 percent decrease in energy prices could lead to a reduction in consumption by as much as 10 percent, Taylor said.
      "So it's better (for the Chinese government) to go ahead" with opening up to market prices, so long as it accepts the fact that that alone will not lead to a significant reduction in the country's energy needs. Taylor also pointed out that given that the current electricity system in China is poorly maintained and susceptible to breakdowns, heavy investments have been made in back-up energy generation, including diesel. By making energy more costly, there would be a bigger incentive for electricity grids to become more stable and thus reduce the demand for oil products.
      Still, it seems unlikely China will meet its own target of reducing energy use this year. On Wednesday, the Organization of Petroleum Exporting Countries reported that while global demand for petroleum has been revised down by 80,000 barrels a day to 1.3 million barrels per day, demand in China was revised up by 40,000 barrels per day "due to unexpected strong demand in the second quarter."
      China's appetite for oil is anticipated to remain just as strong next year as well, according to OPEC's latest monthly report, as the cartel said "in 2007, world oil demand growth is forecast at 1.3 million bpd or 1.5 percent, unchanged from the previous month, with China and the Middle East expected to be the leading growth regions."