Q: First, why didn’t the IEA and the EIA foresee China’s huge oil consumption surge in 2004?

A: They failed to account for the roles of outsourcing and off-shoring. Thousands of factories have moved to China from the U.S., Europe, and Japan. These new factories competed with existing factories for electricity and increased demand for it. The agencies didn’t foresee that the information technology industries moving to China would be using huge amounts of energy. And the IEA and EIA failed to account for electricity shortages, which forced factories to use private generators that burn oil. That oil had to be imported.

Q: Why hasn’t China’s demand for oil continued to grow at the same rate as in 2004, even though economic growth continued at about the same pace?

A: The surge in oil prices has meant that private oil-fired electricity generation has become very costly relative to the cost of electricity provided by the government. The drop in private electric generation reduced the demand for oil. I have spoken with a Chinese manufacturer in a suburb of Shanghai who told me that private generation was enough to run the machines, but not enough to run the machines and the air-conditioners at the same time. The weather in eastern China is hot and humid in the summer months. The lack of operating air-conditioners in these facilities violated labor laws, and manufacturers feared a government crackdown. They decided to stop private generation and stick to the grid.

Further, while China has continued to generate additional electricity from coal and nuclear, the number of foreign factories that have moved to China since 2005 declined relative to the previous period.

Q: Will China’s push for additional nuclear plants reduce its demand for oil?

A: No. For the last few years, the government has managed electricity shortages by scheduling factories’ operating hours. Chinese factories have been forced to operate for only a few days a week. Some open for just two days a week, and sometimes they worked only on the weekends. Meanwhile, worldwide demand for Chinese products continues to soar. Factory orders have been delayed for months. New nuclear power plants will provide electricity for those factories and enable many of them to operate around the clock. As a result, China’s economic growth will increase and that will spur its oil demand.

Q: What is the impact of the yuan’s revaluation on Chinese demand for oil?

A: Since oil is priced in U.S. dollars, any yuan revaluation would make oil cheaper from the Chinese point of view. For example, the yuan exchange rate relative to the dollar has increased by 6 percent in the last two years. This increase has lowered the cost of every barrel that China imports by 6 percent. In today’s oil markets, this change could produce over $600 million in savings a year. Any additional revaluation would increase China’s demand.

Q: Why does China invest in areas whose oil will never go there?

A: China enhances its energy security through these investments, even if the oil from these projects does not go directly to China. If the U.S. or any other power threatens China or its energy supplies, China can use this oil as protection. For example, China might invest in West Africa and export the oil to the U.S. If for some reason the relationship between the U.S. and China sours and the U.S. threatens China’s oil flow, China’s ability to cut off oil exports to the U.S. would enhance its bargaining power. Therefore, it is not entirely about securing oil supplies to satisfy China’s thirst for energy. This is a geopolitical tool to enhance China’s bargaining power. Further, if these investments bring additional oil to the global market, it also enhances China’s energy security by keeping a lid on oil prices and reducing their volatility. Again, that’s good for China, but other oil consumers benefit as well.

Dr. A. F. Alhajji is an associate professor of economics at Ohio Northern University.

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