China is now the world’s biggest energy user.
The International Energy Agency (IEA) reported that China consumed 2,252m tonnes of oil equivalent in 2009. That compares to 2,170m tonnes used by the US in the same year. That includes all energy – so not just fossil fuels, but nuclear power and renewables too.
So what does it mean for investors?
How the energy sector is tied to China
China’s rampant GDP growth has, unsurprisingly, seen its energy consumption grow strongly too. This is not just “a domestic issue for China,” IEA economist Fatih Birol told Bloomberg. It also has an impact on both supplies for the rest of the world, and “also in how energy is consumed… If China uses electric cars, hybrids and so on, they will impose the manufacturing line on most of the rest of the world.”
China’s oil imports have almost doubled since 2005. Net crude imports rose to a record 22.1m tonnes in June. Annual use came in at 405m tonnes. That’s less than half of the amount consumed by the US, on 843m tonnes. But China burned 1,537m tonnes of coal last year, more than three times the 498m burned in the US.
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The US is of course, still the world’s largest energy consumer per head. The average US citizen uses five times as much energy per year as the average Chinese person. But that just shows you how much further the Chinese could potentially go.
That all sounds pretty bullish for the global energy picture. And in the long run it probably is. But China’s growing importance in the energy sector also makes prices more vulnerable to economic conditions in China. While the jury’s out on how bad any Chinese slowdown could be, it can’t continue to grow at the current pace. We’d be very cautious for example, about expecting oil prices to rise much further in the near-term.
What’s more interesting is that the Chinese themselves are not keen to acknowledge their new role as global energy gluttonnes. As Shai Oster at the Wall Street Journal points out, Beijing has denied that it is top consumer, splitting hairs over the IEA figures. However, it’s keen to point out that it is “the largest primary energy producer”.
The reluctance is little wonder. “Historically, the world’s biggest energy user tended to be the most dominant global power,” Oster notes. That’s certainly not the case just now – the US has a more powerful military. But if China acknowledges its new position, it will be under pressure to take more responsibility for its impact on energy prices across the globe. And that’s not an issue it wants to add to all the other internal problems it has to juggle.
China is going green
But it also gives China an extra incentive to invest in ‘green’ power. The country is already the biggest polluter in terms of carbon dioxide emissions, mainly due to its dependence on coal. The government has said that it hopes to spend around $740bn over the next decade on developing cleaner energy sources, including nuclear power and gas. The country put up more wind turbines in 2009 than anywhere else in the world, so it’s serious about going green.
Green energy and energy efficiency in particular are certainly interesting areas for investors. Sectors such as smart grids (How to plug into America’s $4.5bn energy upgrade) and more efficient lighting via LEDs (Profit from the next generation of lighting) have already featured in MoneyWeek magazine in the past. The trouble with all these early-stage technologies is finding the winners of course. But if you get in (and out) at the right time, you can make a lot of money.
We have a Roundtable on the future of energy, covering oil, fossil fuels and the most promising renewables in the next issue of MoneyWeek, out on Friday (if you’re not already a subscriber, subscribe to MoneyWeek magazine). We’ll also be looking at how to invest in the growth in nuclear power.
Good news from the European stress tests
Oh and before we go, some good news out on the European stress tests this morning. Apparently, German bank Hypo Real Estate Holding has failed, says Bloomberg (according to two people “familiar with the results”. The bank has quite significant exposure to Greek, Italian and Spanish government debt.
Why’s this good news? Because it means the results aren’t going to be a total whitewash at least. And of course, the German government won’t let Hypo collapse. The group has already had €7.87bn in bail-out money from Germany’s Soffin bank rescue fund this year. And back in the 2008 financial crisis it had a rather chunkier €100bn-odds in credit lines and debt guarantees.
But reportedly, Hypo is the only one that’s likely to end up failing. So this might be a case of throwing the most egregious offenders to the market and then hoping that investors don’t ask any more difficult questions. We’ll find out on Friday after the markets close. Expect next weekend to be a busy one for news as regulators and governments rush to sort out any plans for recapitalising banks before Monday’s trading opens.
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