The Iron Denominator

I've taken two courses on China this term, with one on Japan coming in the new year. So, I've had Asia on the mind lately. More specifically, the implications for the world as China and India achieve greater wealth and greater energy demands. When reading about Chinese energy policy, you encounter a wonderful phrase - "The Iron Denominator". Everything in China, everything, has to be divided among 1.3 billion people. Obviously, how this gets divided up is a rich area for economists.

Some basic facts about China, first. Everyone knows that China is the world's largest country, in terms of population. It is also one of the largest in terms of area, coming just behind the United States. This is not to say it's at all roomy - the bulk of the population is concentrated in the easternmost third of the country, especially along the coast. China's GDP is currently $6.5 trillion, with a per capita GDP of roughly $5,000. (all figures US.) If current growth rates continue, China's economy will double every 10 years. Even according to the more realistic OECD figures, China will surpass the US as the world's largest economy (in absoute terms) by 2015. If China were to acheive a per capita GDP identical to the US, the GDP of China would be roughly $60 trillion, or greater than the current gross world product ($51 trillion).

This has some obvious implications for oil. China's own oil reserves are rather meager, comparable to those of the US. Not surprisingly then, China's fraction of oil imports has grown rapidly, to the point where by 2010, China will be in a situation identical to the US today - more than half of all oil will have to be imported. By 2020 (about the time China will be approaching a mature economy) all but a tiny fraction will have to be imported. Given that Asian oil fields are rapidly being depleted (even OPEC-member Indonesia will have to import oil soon) the bulk of China's oil will come from the middle east. Currently, China's oil consumption is about 4.5 million barrels per day. In comparison, for a population 25% that of China, the US uses four times as much oil. Were China to bring its oil consumption up to American levels, they would consume at least three-quarters of the world's daily production - 60 out of the currently 80 million barrels per day. Those numbers could go as high as 80 million, meaning essentially the Middle East would be China's gas stop.

(Before anyone thinks thay the US are profligate wastrels, we should note that as in all things energy-related, Canadian consumption patterns are even worse. If China were to adopt Canadian habits, their oil use would be almost 70 million barrels per day.)

The stated policy of the People's Republic is for every household to have a car. In order to make this happen, China has invested billion over that last decade in building a modern road infrastructure. Since the 1997 Asian Crisis, China has used road-building as a way of keeping the economy afloat, to the point where China now has almost as much mileage of highways and expressways as Canada does. Still, the numbers above are sobering. For China to be able to fuel as many cars and trucks as they're hoping for, the world needs to find productive capacity for 55 million more barrels of oil per day. Even assuming nobody else's demand grows at all, that would push world oil production from 80 million barrels to 135 million barrels a day.

This is not just unlikely, it is probably impossible. Given current proven oil reserves, oil production might be pushed to 100 million bbl/day. However, doing so would deplete all proven oil reserves before 2020. This is according not to chicken-little Malthusians, but the International Energy Agency, a branch of the OECD. Finding another Saudi Arabia's worth of oil would only delay this by about a decade, and their is almost certainly not another Saudi Arabia out there.

All of this is just a roundabout way of getting to the obvious: China cannot build a modern car-based economy. Full stop. Those thousands of kilometres of highway they're building now are likely to seem like a mightly big waste of money, come 2020. So the world needs to find another option, and fast.