China's Pending Energy Crisis

China Energy Crisis
China Energy Crisis

As mature economies like the U.S. and Europe sputter postrecession, China has caught the world's attention as an economic power. The country's nearly double-digit growth is the envy -- and the concern -- of the traditional economic powers of the world.

One thing China needs to keep its economy clicking is fuel -- lots and lots of fuel. And for China, that's becoming an increasingly dangerous problem.

China Is Acting Pretty American

As we watch China continue to grow its economy, consider what it means for the country's energy future. China is already reliant on the rest of the world for the power that drives the economy.

We talk a lot about the U.S.'s depending on foreign oil -- rising gas prices, sending money overseas to buy oil, energy security concerns. However, unlike China, our dependence on foreign oil has actually fallen, from 60.3% of consumption in 2005 to 47% of consumption over the past six months.

From being an exporter of oil in 1993, China has headed quickly in the opposite direction and is now more dependent than the U.S. on foreign oil.

And You Thought We Were Dependent on Foreign Oil

In 2004, before the price of oil exploded to $140/barrel, China imported 120 million tons of crude oil, or 40% of its oil consumption. At the time, China knew this was a concern and the director of the Foreign Trade Department of the Ministry of Commerce predicted that China would import less oil and oil products going forward.

Fat chance.

Last year, crude oil imports grew 17.5%, to 4.79 million barrels per day, just over half of what the U.S. imported last year. But that represents a greater percentage of China's consumption than ours. So far this year, China has imported 55.2% of its oil, compared to 40% in 2004 and 47% in the U.S.

While companies like ATP Oil & Gas (ATPG) expand domestic oil supply offshore, and explorers like Kodiak Oil & Gas (KOG) expand oil production on land in the U.S., we become less dependent on foreign oil while China goes the other way.

China's Other Energy Problem

Oil isn't China's only energy concern. Coal provides about 80% of the electricity generated in China and fuels the export machine that is Chinese manufacturing.

It was only 2008 when China became a net importer of coal, but by 2009 it imported 130 million tons, or net, 103 million tons of coal. This year, analysts expect total imports to rise to 180 million metric tons as the economy continues to grow. As we put pressure to reduce reliance on U.S. coal miners like Patriot Coal (PCX) and Walter Energy (WLT), China is picking up the slack by boosting demand for coal.

But even the fast growth of imports probably won't provide enough juice for the country.

China has had problems with blackouts for years, and the problem has recently become more pronounced. When coal prices spiked earlier this year because of flooding in Australia, one of China's major suppliers, power plants refused to generate enough power to supply the country.

In a clash of capitalism and socialism, generators are forced to buy coal at market prices, but are forced to sell the power at utility-regulated prices. When that results in a loss, there's not a huge incentive to keep the generator running.

The blackouts hurt not only Chinese citizens, but also the businesses that are driving economic growth.

No End in Sight

As China's economy grows and more people join the middle class the problem is only going to get worse.

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Auto sales grew 32% in 2010, pushing a continued rise in oil demand. General Motors (GM) and Ford (F) have made big investments in the country and are expecting vehicle sales to continue growing at a rapid clip.

As far as coal goes, there doesn't seem to be a great alternative for China right now. It needs electricity to power its manufacturing base and alternatives to coal aren't ready for prime time yet.

The government is making a big push into solar power with a recently adopted feed-in tariff, and set a goal of 50 gigawatts of installation by 2020. The government banks have supported expansion in manufacturers like LDK Solar (LDK) and JA Solar (JASO), but they still don't have enough capacity to make a huge dent in the country's power demands. So the reliance on coal continues.

A Disaster Waiting to Happen

Unless the economy slows or China finds oil and coal reserves domestically, I see this as an increasing problem for the world's second-biggest economy. It's a problem that could cause a domino effect in our increasingly interconnected world.

Motley Fool contributor Travis Hoium owns shares of LDK Solar. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of General Motors and Ford Motor.

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