Seven Reasons Why We Should Not Depend on Imported Goods from China

It seems to me that the situation in China is far different from what most people think it is. Even if we would like to depend on China, we really cannot.

Reason 1. When we depend on goods from China, an amazingly large share of the world’s industrial activity gets concentrated in China.

The five largest users of energy in the world are China, the United States, India, Russia, and Japan. The International Energy Agency shows total energy consumption as follows for the year 2016:

Figure 1. IEA’s estimate of energy consumption (total fuel consumed, or TFC) by sector in 2016 for the top five energy consuming nations. Mtoe is million tons oil equivalent. Source: IEA. Non-energy use is the use of fossil fuels as a material to create end products that are not burned. Examples include medicines, plastics, fertilizers, asphalt, and fabrics.

When these countries are compared, restricting our analysis to the portion of energy used by industry, we find the rather disconcerting result shown in Figure 2:

Figure 2. Chart by the International Energy Agency showing total fuel consumed (TFC) by industry, for the top five fuel consuming nations of the world.

China consumes more fuel for industrial production than the next four countries listed (United States, India, Russia, and Japan) combined. Of course, we don’t know exactly the corresponding amounts for other countries of the world, but we can observe that if a country is concerned about its CO2 emissions, the easiest way to reduce these emissions is to send heavy industry elsewhere, such as to China or India. There are likely many countries that are primarily service economies, thanks to the option of outsourcing most industry to other countries.

Much of the discussion I have read regarding sending industry elsewhere has been in the direction of, “As advanced as our economy is, we don’t need heavy industry; service jobs will substitute. Industry can be developed at lower cost elsewhere. Everyone will be better off with this arrangement. The invisible hand will provide jobs and goods and services for everyone.” In addition, corporations saw the possibility of adding customers from around the world. Not too many thought about the real-world problems that might result.

Clearly there is a problem with the jobs being lost to China and other Emerging Markets. When new service jobs are added, they often do not pay as well the industrial jobs they replaced. In fact, there might not be enough jobs in total, if automation plays an important role as well.

Another issue is that the level of industrial concentration can be a problem. We are now depending on China and perhaps a few other countries to provide for a large share of the “stuff” we use. Even if China is not the only provider, it is often an important part of the supply chain. If something should go wrong (for example, widespread riots in China), we don’t have a Plan B.

Reason 2. China needs energy products to make the goods it uses for itself and for the goods it exports. China’s own energy supply is faltering. Because of China’s huge size, it is becoming increasingly difficult to keep China’s energy consumption rising sufficiently rapidly using imported energy.

China’s own energy production is shown in Figure 3. (Note: Hot off the press! New BP report released this week.)

Figure 3. China energy production by fuel, based on 2019 BP Statistical Review of World Energy data. “Other Ren” stands for “Renewables other than hydroelectric.” This category includes wind, solar, and other miscellaneous types, such as sawdust burned for electricity.

It is easy to see that China’s coal production hit its highest point in 2013 and has stayed at a lower level since that date. Also, China’s highest oil production occurred in 2015, with lower production since that date. China’s total energy production has been rising recently, but only with great effort. Total energy production is only 8.9% higher in 2018 than it was in 2012, implying an increase of less than 1.5% per year, relative to 2012 amounts.

A standard workaround for inadequate energy production growth is imported energy products. Even with these imports, it has been impossible to keep total energy consumption rising as rapidly as it rose in the 2002 to 2007 period. The cost with imports is greater, also.

Figure 4. China energy production by fuel, plus line showing its total energy consumption (including imports), based on BP 2019 Statistical Review of World Energy data.

In 2018, China imported 71% of its petroleum (either as crude or as products), and 43% of its natural gas. It was the largest importer in the world with respect to both of these fuels.

In 2018, China’s coal imports shrank as its own coal production surged. This was almost certainly a change planned by China. China would much prefer producing its own coal (and keeping the jobs within the country) to importing coal from elsewhere. China imported 4% of its coal from elsewhere in 2018.

Reason 3. The commodity demand from China is so huge that, to a significant extent, it determines world commodity price levels. Where regional energy prices exist, China’s choice regarding whether or not to import from a country can influence local price levels.

Chile is the largest copper producer in the world. A recent article regarding problems associated with lower copper prices notes that the demand for Chilean copper has been driven “almost entirely by the expanding Chinese economy over the last three decades.” For many commodities, China consumes over half of the world’s commodity supply. If China’s industrial demand is growing, prices will tend to rise, allowing more of the mineral to be extracted. Higher commodity prices tend to be needed over time because the ores of highest concentration (and otherwise easiest to extract ores) tend to be extracted first. Ores extracted later tend to be more expensive to extract, so higher prices are required for extraction to be profitable.

This situation of China playing an extremely large role in commodity prices holds for a very large number of commodities. If China is building widgets or any other product, using a particular commodity, China’s need to buy this commodity in the world market will tend to hold up world prices for the commodity. This situation holds even for fossil fuel prices.

Reason 4. Over the next few years, China’s coal supply is likely fall significantly because of depletion. This lower fuel supply is likely to lead to a shrinkage of China’s industrial capability, and, indirectly, falling world commodity prices of all kinds.

The problem that China is encountering in Figure 3 is “peak coal.” This is a similar problem to that encountered by the United Kingdom immediately before World War I, and to that Germany encountered just before World War II.

Figure 5. The timing of the peaks is peculiar, relative to wars.

Coal tends to be the industrial fuel of choice because it is cheap. Goods made with coal tend to be inexpensive, especially if wages paid to workers are low and if the company making the goods does not spend much money on pollution prevention. Hydroelectric can be an adequate substitute for coal, if the water flow can be depended upon. Wind and solar are too intermittent and not sufficiently inexpensive to be adequate substitutes for coal. Wind and solar (included in “Other Ren” on Figure 3) are also far smaller in quantity than coal.

Outsourcing a large share of the world’s manufacturing to China seemed like a great idea back when it was started, often in the early 2000s. If, at some point, China cannot really handle the responsibility it has taken on, outsourcing gets to be a huge problem.

The reason why coal prices cannot rise very high is because if they do, the prices of finished goods will need to rise as well. Wages of workers around the world will not rise at the same time because the higher cost of production takes place due to something that is equivalent to “growing inefficiency.” The coal mined is of lower quality, or in thinner seams, or needs to be transported further. This means that more workers and more fuel is needed for each ton of coal extracted. This leaves fewer workers and less fuel for other industrial tasks, so that, in total, the economy can manufacture fewer goods and services. Because of these issues, countries experiencing peak coal are pushed toward economic contraction.

Unfortunately, rather than leading to high prices (to compensate for the higher extraction costs), running short of inexpensive-to-extract fuel tends to lead to war, or to tariff fights. Countries whose coal is depleting will try to maintain their own supply as long as possible. They will invent excuses to stop importing coal. Back in September 2018, the Financial Review reported, “China has introduced unofficial restrictions on coal imports in a bid to prop up domestic prices by slowing down customs approvals at key ports.” China needed higher internal prices to make it profitable to extract coal from its depleting coal mines.

Figure 6. Chart showing prices of Brent Oil, China Qinhuangdao Spot Coal price, and Asian Marker Coal, all in US$ of the day. Amounts from BP 2019 Statistical Review of World Energy. Note also that the units of coal (ton) are much larger than the units of oil (barrel) used on this chart. Thus, the same number of dollars of buys a much larger quantity of coal than of oil; coal is cheaper.

If higher coal prices really were possible over the long term, it would make it possible to open new mines in more distant locations. The location of coal mines is important because transport costs by rail or truck tend to be high. China built the large ghost city of Ordos, Inner Mongolia, on the expectation that coal prices would rise, making development of coal in the area profitable. Unfortunately, coal prices fell, making the project not economic. I visited the area in 2015, after teaching a short course on Energy Economics in Beijing. There was a large almost empty airport, and few vehicles were using nearby multi-lane roads.

Reason 5. All of the concern about future tariffs artificially raised China’s 2018 industrial production and commodity prices. Because production was brought forward into 2018, China’s production and world commodity prices can be expected to be lower in 2019 and in future years.

Manufacturers wanted to front-run tariffs, so they tended to ramp up production in advance of the tariff implementation date. This higher production in turn tended to raise commodity production and prices around the world. Note on Figure 6, above, that coal and oil prices are both higher in 2018 than in 2017. Prices in 2019, not shown, are tending to trend downward again.

China badly needed higher coal prices in order to help its coal extraction. Thus, part of the reason that China was able to continue to function as well as it did in 2018 was because of all of the discussion about future tariffs. If this discussion had not taken place, employment in China would likely have been lower. With this lower employment, sales of automobiles and smartphones would have been lower as well.

Note, too, that even with the demand brought forward into 2018, China’s economy was not functioning very well in 2018. Private passenger automobile sales for the year fell by 4%. Smartphone sales fell by a worrisome 15.5%. Clearly, workers were having difficulty buying the kinds of goods a person would expect a growing economy to be selling. I would attribute these problems to the peak coal problem mentioned earlier, making it increasingly difficult to increase the amount of industrial operations provided by China’s economy.

Reason 6. The Chinese economy has been gradually changing and adapting to hide its energy problems. Even more changes will be needed in the future, potentially affecting the world economy, with or without tariffs.

The Chinese economy reports carefully massaged GDP numbers, which many analysts consider to be inflated in recent years. Its debt level keeps rising to try to keep all of its operations going.

We know that China discontinued one major industry at the beginning of 2018: recycling plastic and other types of low-valued recycling. With low oil and natural gas prices, this type of recycling cannot be profitable. Of course, discontinuing a major industry can be expected to lead to a loss of jobs within China. But, on the positive side, it frees up coal and other energy resources in China for other industries that can (perhaps) make more profitable use of them.

On a world basis, the loss of the plastic recycling industry becomes a problem. If rich countries are willing to subsidize the cost of sending plastic recycling to China, this subsidy allows containers that bring goods to rich countries to be sent back to China with a paid load inside. Thus, operating the plastic recycling industry helps keep the cost of shipment of goods from China to the US or Europe down because the shipping costs only need to cover the one-way cost of transit, rather than also covering the cost of shipping the empty container back. Without the subsidy to pay the freight of the plastic recycling, costs for the shipping industry rise, making international trade more expensive. Eliminating the subsidy that rich countries are paying to ship otherwise-empty containers back full of mixed trash is part of what pushes the world economy to contraction.

Other countries are not taking over very much of China’s role in recycling plastic, either. The net effect is that the loss of recycling is one of the things pushing the world toward contraction.

China has no doubt been cutting back in other ways as well. It is likely that it is not building as many uninhabited cities and roads that are really not needed. Ugo Bardi recently posted this chart showing global cement production.

Figure 7. World Cement Production by Ugo Bardi from a blog post on January 19, 2019.

China produces over half of the world’s cement; part of the reduction we are seeing relates to China’s falling use of concrete in new buildings and roads.

In some cases, China is moving in the direction of being a service economy. A recent video states that of the $237.45 cost of producing an iPhone in China, Chinese workers only provide assembly services, worth $8.46. The US contributes $68.69 of the cost, mostly in the design and distribution phases. The parts are generally outsourced from other parts of the world.

One way of looking at what is happening in China’s economy is to analyze the country’s oil consumption in terms of the relative amounts of diesel (used primarily by industry) and gasoline (often used by private passenger vehicles).

Figure 8. Gasoline and diesel consumption for China, based on data from 2019 BP Statistical Review of World Energy.

Based on Figure 8, it appears that China’s industrial growth suddenly leveled off about 2012. This, not by coincidence, is about the time that China’s coal problems were becoming apparent in China. China’s gasoline consumption has continued to rise, however. It appears that once it became apparent that its coal supplies were starting to seriously deplete, China began to “grow” China’s economy more as a service economy. After 2012, most growth seems to have come in the non-industrial sectors of China.

Reason 7. A major concern should be a financial collapse, far worse than 2008, both in China and for the world as a whole.

The world needs growing energy supply to support the world economy. China is increasingly having difficulty with its energy supply. When China has trouble with its energy supplies, the world as a whole has a problem with its growth in energy supplies.

A few months ago, I showed the role China has played in the world economy is this chart:

Figure 9. Ten year growth in world energy consumption, divided between the blue portion associated with rising population, and the red portion associated with higher energy consumption per capita, which I have called “Living Std.”, meaning “Higher Living Standards.”

China added a little bump in GDP growth at the end of the nearly 200-year time period shown, after it joined the World Trade Association in December 2001. The energy added by China (mostly in the form of coal) allowed the world economy to continue to grow, when it otherwise would have been up against limits.

Now we are reaching a situation where China’s energy production is likely to flatten or fall because of the depleted state of its coal mines, and the fact that coal prices can’t rise high enough, for long enough, to open new mines. The world economy, over the period shown, has always had rising energy consumption. In most cases, energy consumption rose faster than population growth, allowing some growth in the standard of living over time.

Changing to a situation of shrinking energy consumption per capita would likely be extraordinarily traumatic. Population would likely fall. Commodity prices would drop to low levels. Debt would tend to default; prices of shares of stock would fall. Many governments would fail. If shrinking energy consumption per capita starts in one country (whether China or elsewhere), it could easily spread to other countries around the world.

We don’t know what is ahead, but we know that the low points on Figure 9 were very bad times, even though energy consumption in total was not contracting. The decade of 1860 to 1870 was the decade of the US Civil War. The decade of the 1930s was the decade of the Great Depression. The decade of the 1990s was the decade of the collapse of the central government of the Soviet Union.

We also know that world energy consumption and GDP growth tend to be highly correlated.

Figure 10. World GDP Growth versus Energy Consumption Growth, based on data of 2018 BP Statistical Review of World Energy and GDP data in 2010$ amounts, from the World Bank.

This is as we would expect, because energy consumption is required for the many aspects of GDP growth. Transportation, heating and/or cooling, and electricity all require energy consumption, for example.

The recent divergence between GDP and energy consumption on Figure 10 may be the result of overstated GDP amounts by China, India, and other countries. If a country wants to appear inviting for new investment, there is a temptation to overstate GDP since other countries seem to be doing so, without penalty.

Back during the Great Recession of 2008-2009, our problem was with homeowners who took out loans that were far higher than they could really afford. Today, we have whole economies taking on more debt than properly stated GDP reports would suggest they are able to handle. We go from one version of optimism regarding debt levels to another.

Conclusion. If a person doesn’t understand how badly the energy situation is working out for China, or how important energy consumption is, it is easy to think that the problems China is facing are primarily tariff-related. In fact, China’s situation is a very worrisome one, with or without tariffs being added.

To fix the situation, China would need a very cheap, non-intermittent, locally produced, non-polluting additional energy source. This energy source would also need to be rapidly scalable. Such an energy resource doesn’t appear to be available.

 

 

 

 

 

 

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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359 Responses to Seven Reasons Why We Should Not Depend on Imported Goods from China

  1. Nonplused says:

    I find one of the most interesting arguments made in these last few articles to be that falling energy production will not necessarily result in corresponding energy price rises. The energy prices will be high by historical measures, but “demand destruction” so that increasingly only the most valuable economic activities will be undertaken.

    Another way of thinking about this I like is to look at the “Energy Return on Energy Invested” or “EROEI”. It is a pure physical measure that looks at the amount of energy required to bring a new unit of energy to the market. In the early days of the oil boom in Texas this number was as high as 100 (100 barrels of available oil for every barrel of oil consumed to produce it). Now the number for new wells including shale is a low as 20 and is destined to continue dropping. This is a clear indication that is is not just China but the whole world that is facing significant energy related problems going forward.

    It makes economic sense in any extractive industry to produce the easiest and cheapest materials first and then move on to more difficult and expensive resources. This has been going on now for a long time. So it makes sense that prices continue to rise until at some point in the future certain activities are no longer worth the effort. For example at some price point it becomes impossible for people to fly to the beach once a year, so air traffic drops.

    In 2000, offshoring to China was probably the only way to keep world energy prices low by developing China’s coal potential. But if that is now at a peak then some other energy source must be found that can scale cheaply.

    Gail, what do you think of the potential of so-called Gen-IV nuclear? And what do you think of the proposition that the energy situation in China may be the real reason behind Trump’s tariffs? My thinking would be that if China is going to manufacture widgets using imported energy instead of their own, there is no longer a compelling reason to locate manufacturing there as the energy can just as easily be imported to the US or Europe.

    • I would not be at all surprised if the energy situation is behind the tariffs for China. I expect that Trump’s advisors know more than they let on to the public. Energy problems tend to be things that are kept hidden from view. I would agree with you that if China no longer has an adequate energy supply of its own, there is no compelling reason to locate manufacturing there. But the fact that many factories are already there is an issue. The fact that labor is cheap there is an issue. And so is China’s history of looking the other way regarding pollution.

      I am very well aware of EROEI, and of what it does and does not do. I have spoken at most of Charlie Hall’s Biophysical Economics conferences, relating to EROEI. I do not agree with Charlie Hall on a lot of topics, however. There is a lot he doesn’t understand about how the economy operates.

      The economy is a networked system that operates under the laws of physics. EROEI has essentially nothing to do with price. It (sort of) has to do with the cost of production. The selling price is determined by what consumers in the aggregate can afford. This in turn is determined by levels of debt, interest rates, and generally how well the economy is functioning. Everything I can see says that Peak Oil, Peak Coal, and Peak Resources of all kinds come because the selling price for these commodities falls below the cost of production.

      Many, many, many economies have collapsed over the years. Most people who follow EROEI consider Peak Oil to be something totally different from collapse, but they have not studied history. Peak Oil (and Peak Coal) leads to just another version of collapse, as far as I can see. We know that when Babylon collapsed, its prices fell very low. See Revelation 18:11-13, warning of a similar fate to Babylon’s.

      11 “The merchants of the earth will weep and mourn over her because no one buys their cargoes anymore— 12 cargoes of gold, silver, precious stones and pearls; fine linen, purple, silk and scarlet cloth; every sort of citron wood, and articles of every kind made of ivory, costly wood, bronze, iron and marble; 13 cargoes of cinnamon and spice, of incense, myrrh and frankincense, of wine and olive oil, of fine flour and wheat; cattle and sheep; horses and carriages; and human beings sold as slaves.

      I have written many, many posts on topics related to these issues over the years.

    • Perhaps what I should say about EROEI is that China’s big problem is that its “Delivered EROEI” of coal has been dropping badly, making it non-economic to sell. I have seen an academic report from some of the Chinese professors working on this subject to this effect.

      One of the big issues with EROEI research is that there has not been a proper “floor” set for required EROEI. It is not really 10:1 or 3:1. I think it is much higher than this. Also, it is the average EROEI of the overall system that matters, not the individual pieces. The “surplus energy” of the system comes from the excess energy over this floor. It turns out that coal is the energy source that has been providing most of the world’s surplus energy. Hydroelectric has been adding some as well, especially in cold, wet areas where it is fairly reliable. Natural gas has huge delivery energy costs, so it tends not to provide much net energy. Oil’s overall system is quite expensive in terms of energy use as well, so it doesn’t add much surplus energy.

      Wind and solar have not been measured properly on an EROEI basis. There need to be at least two adjustments made:
      (1) They need to have sufficient storage capacity, so that the rest of the electrical system does not need to subsidize their operation.
      (2) The calculation of EROEI needs to be done on a year by year (or month by month) energy in vs. energy out basis. In other words, hoped-for future energy production from wind and solar cannot be counted in the calculation, because the physics of the real world economy does not work that way.

      When these adjustments are made, wind and solar seem to be energy sinks. They simply pull forward demand for resources needed to make these devices. Wind turbines tends to be very polluting when they are made and installed; solar panels leave materials in place that degrade over time and are likely to damage the water supply. Calling wind and solar helpful is a huge stretch. They are not particularly clean. They represent part of the production sent to China. Entire solar panels are imported from China. For wind turbines, it is essential parts that are imported from China.

      • GBV says:

        Gail,

        Have read your criticisms of solar power several times in the past, but never thought to ask you if those criticisms are specific to solar photo-voltaic (PV) power. Curious if you have any insight into solar hot water systems and how they compare to solar PV, at least in terms of your EROEI and pollution criticisms?

        Obviously the electricity created by a solar PV system can heat water just as a solar hot water system, but can be used for a multitude of other purposes… which is why I suspect so many commercial / industry websites suggest that solar hot water is “dead” and that solar PV is the way to go. But I’m guessing that they’re probably not looking at both systems from a social collapse / energy crisis / sustainability / systems analysis point of view, though perhaps you have an in previous article?

        Cheers,
        -GBV

        • Tim Groves says:

          In the tropics, all you need are two oil drums on the roof—one painted black and kept in full sun, the other painted white and shaded from the sun—connected up to a water source with enough pressure to keep both drums filled and connected to two taps in the kitchen or shower room below.

          The black drum will get so hot on a sunny day that you can almost make tea with it. The white tank is there in order to mix water from both tanks on the way down to get a comfortable temperature. Basically, it’s free hot water forever apart from the cost of the materials, installation and very occasional maintenance.

          Away from the tropics things aren’t as hot year round, but you can still get a lot of free hot water out of an oil barrel and it’s something to talk about when friends or neighbors pay you a visit.

          • GBV says:

            Too bad I live in Ontario 😦

            On the plus side, I only have to put up with mosquitoes for 4-5 months of the year!
            Oh, and frigid-cold weather for 3-4 months of the year too… ugh…

            Cheers,
            -GBV

        • As Tim already hinted, solar hot water is site specific / restricted.
          But the advantages are obvious, not preferred, but could be completely done non electronics or electric pump dependent, e.g. hybrid of passive and hand/animal power pump system, very low tech construction. Something which is impossible via the PV route..

          On the other hand we can’t predict the sequencing of the future, so perhaps “the injustice wins again”, i.e. people loaded now on fraudulent debt won’t have to pay it back, and their PVs, EVs will merrily work for them over few next decades..

    • The new reactors are basically just bigger pot cookers (volume) with slapped upon adage of very expensive extra tail risk protection. Apart from some obvious real advancement in material quality, precision manufacturing, and digital control which all appeared in past few decades.

      The problem is that older smaller “dangerous” gen reactors say <.5GW could be theoretically manufactured if committed by any of the few dozens industrial hub countries, in reality and practice lets say by at least ten such top countries and their industries.

      However, today's NPP behemoths attacking almost two GW per unit, it seems can't be reliably finished on schedule and budget or at all even by US or France (not mentioning UK), which were part of the top core of such exclusive list of countries previously.

      It's about cross-complexity intersecting on many levels: gov's long term commitment despite energy market volatility, labor market, education system, wider political-social consensus in given country (forced upon or implied), .. apart from the various technology -safety aspects, ..

    • Tom Kelly says:

      Seems like EROEI of 20 very optimistic. Wikipedia article states 16, 13, 8, etc. https://en.m.wikipedia.org/wiki/Oil_shale_economics
      No doubt local petrogeology has huge impact.

      • This wiki has to do with a totally different product than tight oil from shale deposits. The fact that it is talking about “in situ deposits” should tip you off. You should not pay any attention to it. It has to do with a high heat process. There has been a great deal of confusion because the name “shale oil” was already in use for something else, when all of the fracking began. I believe that is why the name “tight oil” was picked, to try to distinguish it from shale oil baked out of rocks. But in practice, you see shale oil used to refer to both products.

        The EROEI of tight oil from shale seems to be quite high. In this paper, it is called “Net Energy Ratio.”

        https://econpapers.repec.org/article/eeeenergy/v_3a93_3ay_3a2015_3ai_3ap2_3ap_3a2191-2198.htm

        Net energy analysis of Bakken crude oil production using a well-level engineering-based model
        Adam R. Brandt, Tim Yeskoo and Kourosh Vafi

        Energy, 2015, vol. 93, issue P2, 2191-2198

        The median NER is 29.3 MJ/MJ. The interquartile range is 24.3–35.7 MJ/MJ, while the 5%–95% range is 13.3–52.0 MJ/MJ. NERs have declined in recent years, with a decline in median NER of 23% between 2010 and 2014. Results are most sensitive to modeled estimated ultimate recovery, and embodied energy.

        I think the high EROEI of tight oil from shale is somewhat of an embarrassment to those writing about the issue. Most references you see are to the old Cutler Cleveland paper relating to the heat process. It says, ”EROI is approximately 2:1 for shale oil.” This process was never used commercially because it was simply too expensive.

  2. Rob says:

    Gail authors another great piece of work. However, if you think China is off course…. read “China’s Vision of Victory”, by Johnathon Ward. Very eye opening.

    • Thanks! I need a few more hours in the day to look at everything. Ward’s book does get very good reviews.

      The thing that I think very few US people realize is how important China’s coal supply for the continued operation of its country. I have co-authored four academic papers with Chinese authors over the years. These academic papers were on energy issues, so I got their insights into how they saw the system operating in China. It would be interesting to read what Ward has to say about China’s coal situation.

  3. It is almost impossible to think or write usefully about China or its economy if one’s information comes from Western media, as this article’s does. China is not just a bigger, Asian version of us, bound to the fate we have created for ourselves. It is utterly different and requires years of obsessive, sympathetic study to comprehend.

    Statements like “The Chinese economy reports carefully massaged GDP numbers, which many analysts consider to be inflated in recent years” and “Its debt level keeps rising to try to keep all of its operations going” are both silly and flat out wrong. China’s stats are rock solid and its debt burden is one-third of America’s, while its absolute levels are the same as the US and the EU, as BIS data makes abundantly clear.

    And saying airily that, “China would need a very cheap, non-intermittent, locally produced, non-polluting additional energy source” shows the author is utterly unfamiliar with China’s immense investment in developing very cheap, non-intermittent, locally produced, non-polluting additional energy sources.

    Don’t write about China unless you really STUDY China. It’s a different world.

    • It seems we have different views.

    • DB says:

      Please enlighten us about the coming breakthrough that China (or any other country, for that matter) will achieve with a “very cheap, non-intermittent, locally produced, non-polluting additional energy source.” Gail also noted that “this energy source would also need to be rapidly scalable.”

    • Rodster says:

      “Don’t write about China unless you really STUDY China. It’s a different world.”

      Gail has visited China on several occasions and has given lectures there as well as traveling to parts of the country with Chinese professors.

      • GBV says:

        With articles like this, perhaps Gail won’t be permitted to travel to China in the near-future…
        😦

        But hey, at least Gail isn’t a Canadian. They seem to be handing out death sentences like candy to us over there! A shame too, as I would have loved to have visited China… heard they’ve got a wall over there that’s pretty, uh… great!
        😀

        Cheers,
        -GBV

    • adonis says:

      ah the BIS stats are their information coming from the chinese without a lie-detector test how can we tell it is the truth ithink godfree
      you are in delusinastini land

      • Rodster says:

        So what you’re trying to say is: “it goes to show how figures lie and liars figure”. To the OP who obviously is pro China, maybe he missed out on Chinese analyst and economist in the past who have called out China for fudging their numbers.

    • Harry McGibbs says:

      “For many who have long believed that China’s economic growth figures seemed too good—and tidy—to be true, they now have official confirmation of that skepticism…

      ““Officials produce the numbers, and the numbers produce officials,” Chen added, referring to the idea that massaging data can help one get ahead in Chinese officialdom.”

      https://qz.com/887709/chinas-liaoning-province-admitted-that-it-inflated-gdp-figures-from-2011-to-2014/

      • Respect for the “truth” and the “right way of doing things” seems to be lower in China than in the US.

        Back when I first went to China in 2011, it became clear to me that the whole system revolved around bribes and payoffs of officials. Part of my first trip involved a commercial tour. Our tour guide would repeatedly tell us things like, “Don’t worry if your luggage is too heavy to fly on China’s internal airplanes. I have cousins everywhere. The situation will be fixed on your behalf.” Manipulating data a little would fit into this whole operation as well.

        I found out through my correspondence with Chinese researchers (and my visits to China) that the individual regions have quite a bit of autonomy. Promotions and prestige depend on each particular area meeting or exceeding their 5-year targets. So local officials would do whatever was needed to exceed their goals, even if it was not really permitted by the plan. They would build more coal fired power plants than required, for example. And of course, missing goals, for subregions, was hidden.

        There have been allegations that part of China’s solar panel purchases occurred because of bribery, and the fact that they could not dump them anywhere else. There were limitations on new solar panel installation added in 2018. Net solar panel additions dropped by 17% in 2018, compared to 2017, according to the new BP report.

        BP shows that added wind capacity in 2015 was close to double that that was added in 2016. 2017 and 2018 have stayed relatively lower as well. I wonder if bribery was behind its big increase in wind turbine installations in 2015, as well.

        With this kind of “wheeling and dealing,” a person wonders about debt arrangements. A person reads about one company guaranteeing another company’s debt. This can strengthen the system, but it can also lead to a whole chain of simultaneous failures.

    • Harry McGibbs says:

      “Data disappears when it becomes negative,” said Anne Stevenson-Yang, co-founder of J Capital Research, which analyzes the Chinese economy. “When you go around and meet state-owned industry people, everybody laughs at the national statistics, so I don’t know why foreigners believe them.”

    • Xabier says:

      Oh, quite so: how foolish of us to believe that the demonstrable laws which govern the rise and fall of civilisations do not apply to China in the 21st century!

      They did in the past – universally – but now it seems, according to you, they do not.

      Please do enlighten us as to China’s novel energy plans. It all sounds very exciting; above all for the Chinese miners, whose labour and deaths have kept the show on the road until now.

      And by the way, in studying China in such depth, you seem to have lost your basic good manners along the way. An insulting tone when addressing our host, Gail, is not appreciated here.

      • Tim Groves says:

        Good point, Xabier. Godfreed seems to have totally forgotten his etiquette in his haste to trample this spark of dissent. My guess is that his panic-stricken Mandarin-speaking handlers must be giving him hell. If Gail’s analysis goes viral and gets read by enough people who matter, the whole world could be viewing China in a new light.

        Godfreed, I was expecting you to pay a visit here. I enjoy reading your articles on The Unz Review as they are informative, entertaining and provide an excellent contrast with the run-of-the-mill hit jobs that are the staple of the Western media. But I can’t take anything you say about China at face value because your 110% pro-Beijing line stretches credulity well past breaking point and takes you into Lord Haw Haw territory. Propaganda aimed at the cognoscenti is only effective if it’s subtle. And yours recently has been about as subtle as as a Red Guard reactionary counter-revolutionary denunciation session. If I might venture a tip, try to aim for the appearance of even-handed balance. That way you will influence a lot more people to take a more positive attitude to China than you currently do.

      • doomphd says:

        ++++++++++++++ here, here!

    • Sven Røgeberg says:

      «Everything About the BBC/CNN Account of Tiananmen Square Is a Lie». This i a quote from you ( G.Roberts) on Twitter, if i understand it right?
      So would you say that what the official China are telling about the incident is as «rock solid» as their statistic regarding the economy?

  4. Lastcall says:

    It is amazing how many stocks of loss making companies are valued on a future that simply won’t arrive. Hype, hope and conjecture seem to influence stock valuations far more than so called old fashioned ‘fundamentals’.
    The music is still playing, and the deckchairs keep moving. So its going to be a bull ‘market’ based on Bullsh*te until the very last breath; then it isn’t.
    How long has shale got now? I am so impressed with how much ‘good’ money has followed bad, but whose was it?

    https://www.zerohedge.com/news/2019-06-11/can-shale-survive-low-oil-prices

  5. Harry McGibbs says:

    “Global trade flows are flat or falling in all major regions as the world economy flirts with recession for the first time since 2008/09…

    “Freight volumes handled through major ports such as Long Beach and Singapore as well as air cargo handled through hubs such as Hong Kong, Memphis, London and Frankfurt are either flat or down compared with 2018…

    “Forward-looking freight indicators suggest the slowdown is likely to continue for the rest of the year and could turn into an outright recession.

    “Global manufacturers report new export orders have been falling for nine months and are now declining at the fastest rate since 2015/16, according to the JPMorgan global purchasing managers’ index…

    “At the moment, however, the global economy appears to be on the leading edge of a recession, and it seems more likely than not the downturn will deepen in the next six months unless action is taken to turn it around.”

    https://www.reuters.com/article/us-global-economy-kemp/column-global-economy-on-leading-edge-of-recession-kemp-idUSKCN1TD29J

    • Harry McGibbs says:

      “World oil markets have undergone a U-turn, switching from supply-side risks like OPEC’s production cuts or U.S. sanctions against producers Iran and Venezuela, analysts said, to concerns of slowing consumption amid fears of a global recession.”

      https://uk.reuters.com/article/uk-global-oil-demand-graphic/oil-demand-growth-grinding-to-lowest-in-years-as-global-economy-stalls-idUKKCN1TD2VU

      • Harry McGibbs says:

        “Global foreign direct investment (FDI) flows slid by 13% in 2018, to US$1.3 trillion from $1.5 trillion the previous year – the third consecutive annual decline, according to UNCTAD’s World Investment Report 2019… Hardest hit by the earnings repatriation were developed countries, where flows fell by a quarter to $557 billion – levels last seen in 2004.”

        https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2118

        • According to the report:

          The underlying FDI growth trend has been anemic since 2008. If one-off factors such as tax reforms, megadeals and volatile financial flows are stripped out, FDI over the past decade averaged only 1% growth per year, compared with 8% between 2000 and 2007, and more than 20% before 2000.

          “The stagnating trend of the decade is ascribed to a range of factors that include declining rates of return on FDI, the increasingly asset-light forms of investment and a generally less favourable investment policy climate,” said UNCTAD’s investment and enterprise director, James Zhan.

          In some sense, the surplus energy of the world economic system has been falling in such a way that smaller and smaller amounts are available for foreign direct investment. Implied rates of return are lower. This is why interest rates have to be falling farther and farther.

          The same falling returns lead to more and more wage disparity and lower profits for companies. Government have trouble collecting enough taxes. The whole system tends toward collapse, because the surplus energy is too low.

  6. DJ says:

    I recommend the BP report. 2018 was a great energy year.

    • The push to increase output ahead of tariffs really increased output and commodity prices during 2018, at least up until October 2018.

      Now we are seeing the reverse of this situation.

      Once producers saw that the $80+ prices of Brent would not hold, they decided to withhold production. OPEC decided to cut back production. US drillers decided to complete previously drilled wells that had not yet been completed, rather than drill so many new wells. I see 2018 as the peak in oil production for this reason.

      World coal production has been on a bumpy plateau since 2011, according to the new BP report. The highest single production year was 2013, which was China’s peak in coal production. I expect lower coal prices will send world coal production down, as well. The timing could be a little different, say 2020.

      Peak oil and peak coal will occur at roughly the same time. In fact, we will likely see peak resources, as these energy sources peak in supply.

      • Bill Simpson says:

        If you are correct about peak oil production being near, expect a major financial crisis whenever the global oil supply begins to actually fall, after some period of oil output stability, because the global economy will contract if forced to use less transportation services which oil provides. That is physics which we can’t change. Less movement of goods will mean the globalized economy must shrink. That is known as a recession.
        With debt so high in virtually every sector and location, and with interest rates already so low, a recession could rapidly spiral out of control. It will be like 2008-9, only on a far larger scale.
        Expect governments to try some rather radical ‘solutions’ which might work for some limited period. But since the problem is the physics that it takes energy to do work, no government or central banking solution can work for long. But they will try.
        I expect that governments will eventually start sending people money created out of thin air. That might lead to eventual hyperinflation. But nobody can predict what will happen with any degree of certainty.
        Whatever happens, the billionaires will force some US government action. They won’t just sit around and watch their huge fortunes disappear as civilization melts down around them. They know the collapse will eventually spread even to New Zealand, where a surprising number of the super rich have purchased refuges of last resort. I’ve read some articles about that tread in major publications. They aren’t buying farms down there because they want to work on the farm and raise sheep to sell to China, Indonesia, and the Middle East. It is too far away for a weekend trip. Vegas, Hawaii, Florida, and the Bahamas are a lot closer to New York, Silicon Valley, and Los Angeles, than New Zealand is. They can experience all the nature they need at their homes on ‘billionaires row’ near Yellowstone, in Wyoming. Self made billionaires didn’t get rich by being stupid. They know how dangerous the financial situation has become after witnessing the 2008-9 Financial Crisis. Lehman Brothers’ bankruptcy was a big wake up call for folks with real money.
        I hope I’m wrong about what is coming after peak oil production occurs, but I don’t see how I am.
        You’re doing important work. Thanks.

        • I expect that the financial crash will occur, and then all types of energy consumption will decline, even wind and solar. Oil plays a role in the story, but coal is probably more important. All energy prices collapsed in the Great Recession, and I expect that will happen again.

          The peak oil story is someone’s conception of how things will happen. It is not particularly correct. It was put together by people who don’t understand how the economy works.

          In the energy world, “cheap” seems to trump “high quality” or “energy dense” or “non-polluting.”

          • Azure Kingfisher says:

            Coal is more important than oil. Here’s why:

            https://lhcrazyworld.wordpress.com/2016/06/09/green-stupidity/

            “Steel is an alloy of iron and carbon in which the carbon content ranges up to 2%.

            By far the most widely used material for building the world’s infrastructure and industries, it is used to fabricate everything from sewing needles to oil tankers. In addition, the tools required to build and manufacture such articles are also made of steel. As an indication of the relative importance of this material, in 2013 the world’s raw steel production was about 1.6 billion tons, while production of the next most important engineering metal, aluminum, was about 47 million tons. (For a list of steel production by country, see below World steel production.) The main reasons for the popularity of steel are the relatively low cost of making, forming, and processing it, the abundance of its two raw materials (iron ore and scrap), and its unparalleled range of mechanical properties.

            Kill King Coal and you will kill industry. Period.”

            – – – – – – – – –

            https://lhcrazyworld.wordpress.com/2016/06/10/more-green-stupidity/

            “Steel Metallurgy – a complex topic if there ever was one. So what are the basic chemical reactions associated with manufacturing steel? Iron ore, coke (carbon, coal) and limestone are fed into the blast furnace.

            But if you kill off coal mining, and also reduce emission of CO2, then you would need to also close iron ore mining and downstream steel/iron manufacturing process to remain consistent in reducing CO2 emissions.

            Reducing CO2 emissions thus entails not only killing off coal mining but also iron mining and terminating the iron age.”

            • I think you may be very close to right. This is a publication from the World Steel Organization, April 2019. https://www.worldsteel.org/en/dam/jcr:f07b864c-908e-4229-9f92-669f1c3abf4c/fact_energy_2019.pdf

              If the blast furnace route to making steel is made (using iron ore), this publication says, “About 89% of the energy comes form coal, 7% from electricity, 3% from natural gas, and 1% from other gases and sources.” If the electric arc route to making steel is used, the article says, “The energy input from coal accounts for 11%, from electricity 50%, from natural gas 38% and 1% from other sources.”

              It is my understanding that the electric arc method uses some combination of pig iron and scrap steel as input, so part of the “work” has already been done. I am guessing that quite a bit of the steelmaking in the US is of the electric arc furnace type.

              It is hard for me to believe that we could get along solely with steel from electric arc furnaces, but maybe we could, for a while. If we go the blast furnace route, natural gas can perhaps be substituted for coal, if it is cheap enough. But if natural gas is transported very far, it quickly becomes too expensive for this purpose.

              The issue with all of this is affordability. In theory, a person could burn oil, but that would be horribly expensive.

            • Well, it depends on the perspective (lets zoom out a bit), but the “iron age” ends not with the debacle of IC and gigantic machine operated coal mines, but when people can’t make tools (e.g. axes, knives, shovels, ..) with iron/steel tip blades anymore.. And that’s not very probable within next decades since it’s a known ~low tech process, well perfected through many centuries.. And this knowledge as well as practice is distributed.

  7. Harry McGibbs says:

    “Euro-area inflation expectations slid to a record low, adding pressure on the European Central Bank to step up policy support for the region’s economy. Five-year forward five-year inflation swaps, a gauge of investor estimates of price increases in coming years, dropped Wednesday to 1.1830%, well below the ECB’s target of close to, but below 2%.

    “That suggests the central bank may have to take further steps to revive inflation, such as restarting bond buying, or potentially even cutting interest rates deeper into negative territory.”

    https://www.bloomberg.com/news/articles/2019-06-12/europe-inflation-expectations-at-record-low-worsens-ecb-headache

  8. Yoshua says:

    Two tankers hit in the Gulf of Oman

    https://www.reuters.com/article/us-mideast-tanker/two-oil-tankers-struck-in-suspected-attacks-in-gulf-of-oman-shipping-firms-idUSKCN1TE0OI

    …and oil prices rise…

    China has been supporting oil prices, not only through consumption, but also by hording crude. China imports almost 10 mmbpd and domestic production is almost 4 mmbpd, but their refineries only process 10 mmbpd. So…their inventories grow by 4 mmbpd?

    China doesn’t release official crude inventory data.

    • Rodster says:

      This just has “false flag” written all over it. The USSA is just itching for a war with Iran.

      • Xabier says:

        Attacking tankers would be just about the dumbest move possible on the part of Iran, so we may draw our own conclusions as to the veracity of this claim and just who the authors might be……

      • John Doyle says:

        Not so sure about that “itching”. Iran is known to the warmongers in Washington as a “nightmare” scenario, No explanation but elsewhere I read that Iran if it closed the straits of Hormuz [i assume they think they can] it would be a catastrophe for the oil business. since so much oil is shipped through it.[80%?] It’s easy to guess the fallout!

        On a similar note to China’s energy woes is this statistic from Art Berman saying that the USA now produces 50,000 barrels per month more than during the 1970 peak, but it still has to import 7 million barrels/ day on top of the 11 Million barrels/day production plus taking oil out of storage as well, to sustain itself, He says we are nowhere near self sufficiency. and “We are in deep trouble”

      • Yoshua says:

        The Houties in Yemen are attacking Saudi oil infrastructure with drones. The Houties are backed and armed by Iran and China.

        The U.S has imposed sanctions on Iran and is in a trade war with China.

        The U.S is the guarantor of safety in the region…but obviously falling.

        Russia has joined the war in the region.

        Things are heating up in the region.

        I don’t know who’s behind the attacks on the tankers…I just know that everybody is lying.

        • the “end of oil” will not come through lack of it, but by fighting over what’s left of it

          That much is being made obvious by what been happening in the Gulf region for the last 20 years or so

          • Duncan Idaho says:

            Iran could reduce SA to a flaming mess in 30 minutes.
            What no one talks about is they hold the trump card.

    • That is a good point about China’s big inventories being part of demand. This is true for metals as well as for oil. China tends to buy when prices are low, so this has helped prices not to fluctuate as badly as they might otherwise.

      With respect to oil inventories in China, there is (or was?) a company that does aerial surveys of China, and estimate oil inventories by looking at storage tanks and seeing how high the lids are floating, to see how full they are. I haven’t seen any recent estimates, however.

    • MM says:

      The wessels were headed for Asia. claim “make Asie small agein” becaus sending ships there is dangerous…

  9. Using the just published data from the BP Statistical Review I did this graph on CO2 emissions:

    The graph shows that oil price changes and spikes resulted in annual CO2 emissions going flat or declining – for a short period:

    1973 1st oil crisis following the US peak

    1979 2nd oil crisis with Iran oil peak mid 70s

    2008/09 Oil price shock and financial crisis as explained here:

    World crude production outside US and Iraq is flat since 2005
    http://crudeoilpeak.info/world-crude-production-outside-us-and-iraq-is-flat-since-2005

    Therefore, I work under the assumption that only an enduring oil and financial crisis will bring down annual CO2 emissions – provided oil is not replaced by coal (which will be hard and not efficient)

    • I agree that an enduring financial crisis is what will bring down CO2 emissions.

      The higher the price, the higher the demand, and the greater the increase in emissions. Low prices tend to lead to lower CO2 emissions. It will be a price collapse that brings down the system. A price collapse for oil will likely be a price collapse for coal within a year or two, because of the way the system is connected together.

    • Tsubion says:

      Who gives a flying fark about CO2 emissions… except for the ones you’ll be putting out when your machete wielding neighbor is chasing you down the road the day after BAU goes bye byes.

  10. Thanks for the new article.
    That -fig9- red graph of living standard per capita is a clincher in terms of depicting past ~40yrs of borrowed or extended time.. I guess many people still can’t wrap their heads around it, as the so-called technological progress supposedly brought more toys/stimuli per the same token of energy burned-transformed, so everything should be much better today (for the people inside IC hubs at least).. but it is not on many/most levels.

    • doomphd says:

      Thanks for the new article, Gail. Your first two figures are jaw droppers. It seems the USA expends a lot of energy “commuting”. Maybe this is due to Jim Kunstler’s curse of suburbia, the biggest misappropriation of resources in the history of the world.

      • I thought those figures were jaw droppers too. In the US, we spend an awfully lot of energy on getting around. People seem to think that as long as their personal transportation continues, there will be no problem, not realizing how much energy is used elsewhere in the economy.

        For what it is worth, based on the new BP report, US oil consumption was divided as follows in 2018:

        Gasoline: 45.5%
        Diesel: 20.8%
        Other Uses: 33.7%

        Gasoline use isn’t all personal, because some smaller vehicles like police cars and salespeople’s cars are used for business purposes. Even if we all stopped all personal driving tomorrow, business uses would likely account for over half of oil consumption.

        Of course, it doesn’t work to stop using just one part of the barrel. The situation is like anything else–all of the costs must be divided among a large number of users. Just as the internet depends on the video game players to pay part of the cost, the oil system depends on personal drivers to pay part of the cost.

        And of course, the parts of the barrel aren’t very interchangeable. Diesel can be changed to gasoline by cracking, but gasoline cannot be changed to diesel. We can make shorter hydrocarbon chains by cracking, but not longer ones.

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