The Economics of Energy for China and the U.S.
AEI Newsletter

On May 9, AEI hosted its annual conference with scholars from the Central Committee Party School of China (CCPS), who, like their AEI counterparts, perform independent public policy research and do not speak on behalf of their government. This year, the panelists focused on energy policy and economic development and how the two countries can work together to help China meet its growing energy needs more efficiently.

AEI’s James K. Glassman opened the conference with an overview of global energy usage, citing recent reports that global oil demand jumped by 5 percent overall and 2.5 million barrels per day last year--more than double the average annual growth between 1994 and 2003. The United States and China accounted for 20 percent and 40 percent of the growth in demand respectively.

Spencer Abraham, until recently U.S. secretary of energy and currently a Hoover Institution fellow, projected that by 2025, today’s global demand for 84 billion barrels of oil per day will grow to 121-130 billion barrels a day, electricity demand will increase 100-125 percent, and demand for natural gas will grow 67 percent; in other words, higher energy prices are likely long into the foreseeable future. He warned that achieving fuel diversity is imperative and advocated greater investment in cleaner coal technology and nuclear power as more efficient methods of keeping pace with energy demands.

AEI’s Kevin A. Hassett considered how energy prices affect economic development, noting that while high energy prices encourage conservation, they can also cause recession. Past energy price spikes have stemmed from supply disruptions, but the current spike comes from soaring demand. Hassett found that sharp declines in energy price do not increase economic growth, in part because price uncertainty causes many companies to delay the purchase of new capital.

Zhenhua Zhao of the CCPS detailed problems in energy supply and consumption in China. The state’s energy production consists of 74.2 percent coal, 15.2 percent crude oil, and 7.7 percent hydroelectricity, with a small remainder from other types. He concluded that China thus relies too heavily on “unsustainable sources of energy” like coal and petroleum and needs to develop more renewable sources like hydro, solar, and biomass energies. According to Zhao, in industries like electric power and petroleum, competition has been stifled by oligopolies and by government intervention.

Zhao expressed some optimism for greater energy efficiency, however, noting that the Chinese government is adjusting the state’s economic structure; encouraging the development of high-tech industries, which are more efficient; and passing laws such as the Renewable Energy Law. This law, which takes effect in June 2006, provides a new legal basis for the exploitation, utilization, and protection of renewable energy sources, granting priority tax treatment and financial support for renewable energy projects. Zhao hopes that new policies such as this will encourage the use of cleaner energy sources in rural areas, recycling, and international energy cooperation.

Panelists also discussed cooperation between the United States and China on energy policies. According to Abraham, the U.S. Department of Energy established the U.S.-China Energy Working Group with its Chinese counterparts, and the two countries have begun a joint venture to make the Beijing Olympics in 2008 environmentally sound. AEI’s Newt Gingrich argued that as China’s energy needs increase, it will likely want to expand its naval fleet to protect the flow of oil or negotiate with the United States to do so, just as Japan and South Korea have done. Xiaojun Ma of the CCPS contended that while China would benefit from greater regional cooperation on energy policies, East Asian nations must consider the reaction of the United States, which he accused of reinforcing “control of global energy resources as a way to contain challenges from other countries.”

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