Introduction
Let me start by paying tribute to our hosts. The China Council is a unique and imaginative body. On behalf of Shell, we welcome the opportunity for dialogue brought by the Council.
While the Council will give advice to the Chinese government, it is clear to man y of us that China has much to teach, as well as to learn. The remarkable improvement in living standards which has occurred over the last decade (in fact, since 1978) has few historical parallels and none in a country of this magnitude. It has done much to improve people's livelihood and to alleviate the environmental stresses associated with poverty. Rapid economic growth and restraint in population growth have both played a part. The fact that China is now having to confront environmental problems associated with relative affluence - vehicle emission s; refrigerants; solid waste disposal - as much as those associated with poverty, is a mark of real progress.
I also note the way in which energy use in China has evolved in a strikingly different way from other industrializing countries. Energy demand is growing at around half the speed as the economy ,in countries at a comparable stage of development it usually grows faster than the economy. This phenomenon points to a substantial depth of experience in energy conservation and to improvements in energy efficiency.
Finally China has played an important role-at Rio and subsequently -in the international negotiating process relating to environment and development. There is a temptation in developing countries to argue that, since the rich world has already utilised a large fraction of the world's national resources and ecological capital, they themselves have no responsibility for conservation. While this attitude may be understandable it is not constructive or wise from a long-term perspective. I am glad to see that China has taken statesman-like position on global environmental issues.
In speaking for Shell, I shall try to avoid simply advertising my own company's accomplishments but, rather, describe how we-as global company with a business presence in most countries of the world -see the interrelationship between energy, environment and economic development.
The Central Dilemma
A central issue facing China, and the rest of world, is how to reconcile the need for rapid development with that of using energy in a sustain-able manner and, more broadly, prudent environmental conservation. I take the view that these are compatible objectives.
We need to beware of pessimists who underestimate the scope for technological advance and human ingenuity. Over a century ago the British economist Thomas Malthus predicted catastrophe because of the pres-sure of rising population on food supplies. Even though the world 's population has tripled since Malthus's day, most people are better fed and, except regrettably in a few African countries, the fear of famine has largely disappeared all thanks to improved agricultural technology and organization.
The "Doom and Gloom "approach has also been applied to supplies of raw materials including energy, in the early1970's when there was particular concern about this problem in relation to the so-called Club of Rome "Limits to Growth" argument. Subsequent analyses and events have shown that the capacity for raw material substitution and conservation, and for new exploration and production, had been seriously underestimated.
We continue to hear pessimism about "limits to growth" expressed whenever it is suggested that populous, less-developed countries like China might be aspiring to the living standards of the West. However, mainstream development thinking represented for example by the re-port of the World Commission for Environment and Development (the Brindtland Report), repudiates that vies. It recognises that provided economic growth is pursued in an environmentally sustainable way-in particular, by ensuring that market market signals fully reflect environmental costs an d benefits-it is desirable, indeed necessary, to raise living standards to accept able levels.
I would go further, I see no reason why Chinese families, any less than European families should not aspire to own a refrigerator, electric heating and air-conditioning; a motor scooter; and in due course, a car. The progression from the simpler lifestyles of rural, farming house-holds to the level of affluence observed in a growing number of Asian countries will involve difficult challenges and policy choices if the environment is not to be seriously damaged; but China should be able to rise to these challenges as it already has to others that are, arguably, greater.
Energy and Development
Energy has always been a key element in economic development. From the very beginning of history mankind has sought to gear his own physical output. First he mastered domestic animals to carry people and goods, and power implements, Then he coupled these and other and goods, and power implements. Then he coupled these and other natural energy sources such as water and wind to machines. Later he used chines to provide goods, comfort and transport.
Not surprisingly, energy demand has grown.Fig.1 shows the growth in energy demand since 1860. For disbelievers in exponential growth, Fig 2shows the fitting of this curve with a simple exponential equation The post-war period from 1945-1973 showed a higher rate of growth. The supposed slow-down since the first oil shock has simply reduced growth rates to their long -term level; approximately 21/4%p.a., compared to a world GDP growth since 1973 that has averaged 2.9%p.a.. In developing countries over the 1970-1990 period energy demand grew by 5.6%.
Most commercial energy however is used in rich countries. This is not because rich countries are more wasteful or more stupid. Being rich means people are more productive (i.e. they have more machinery to make things with) and can afford to consume more. This consumption includes more comfort, more labour-saving device and more freedom to travel. There is a clear correlation between energy use and wealth. But it is by no means perfect. Clearly factors other than income deter-mine energy use. The size, coldness and population levels of countries are obvious considerations. Other seems to be political and economic systems. More centrally planned economies seem to use more energy than market economies of similar income levels. We have a clear message here-economic signals such as price which are used for resource allocation have a major influence on the efficiency of the use of that re-source.
Another important message is that technological progress, which is a key driver for economic growth, also has the effect of reducing how much of any input (including energy)is required to produce a certain amount of output .Fig.3 shows the history of energy intensity (how much energy is required for a certain value of energy intensity 9how much energy is required for a certain value of output)for a number of countries. Over a long period of time the trend has been going down.
We need, however, to be very careful with such a simple ratio as energy to GDP, There are many factors at play; the proportion of energy intensive parts (e.g. steel) to non-energy intensive parts of the economy (e.g. banking), the volume change s within each sector(e.g. tons of steel, miles driven per vehicle )and the efficiency of each part (miles per gallon).There can be powerful trends pulling in different directions, In the case of China it is clear that a mixture of structural change and a drive to improve efficiency together explain the extraordinary decline in intensities seen in the 1980's
Past experience tells us that with development the demand for mobility will increase exponentially with time. For reasons of technology, cost and convenience, this demand is met overwhelmingly by road transport and, where it can be afforded, the car. There has been a recent dramatic increase in demand for cars in developing countries and many countries would seem to be on the verge of an explosion in the number of cars. China is likely to be one of them.
Clearly then history would seem to indicate that economic development, particularly in the less-developed countries, will require a higher demand for energy.
Two arguments are however advanced to suggest that the past experience of rising energy use with development cannot be extrapolated for-ward. The first, which does not merit very elaborate attention, is that there is a fundamental problem of scarce energy resources. This is simply not true. There is more complex, but also reassuring. Oil reserves at 1 trillion barrels have never been higher. These reserves represent the known amounts that could be produced at today's prices. Allowing for higher prices and technologies higher extraction rates are possible from known resources, as well as exploiting presently marginal re-sources such as tar sands. Reserves could be multiplied by seven or more and our industry is constantly advancing in terms of exploration and production techniques. It may amuse you to know that, for over a century the US Bureau of Mines has been expressing concern over the imminent depletion of proven reserves, vet even in this-the most mature of producing areas major discoveries continue to be made (most recently in the Gulf of Mexico). Let us not worry therefore about the world running out of energy before China reaches the level of affluence to rival the Western world.
The second reason for concern is the environment, and here there are some serious and immediate issues which have to be squarely ad-dressed.
Development and the Environment
I have already referred to the argument which is at the heart of the current concerns about "sustainable "development: that it is poverty which is the underlying source of much of the world's most acute environmental pressure. Poverty leads people to have short time horizons (which aggravate problems of deforestation and desertification) to put survival before sustainability; and to have larger families than is desirable in the long term. To the extent that economic growth-and associated energy use-helps societies to escape poverty, it is environmentally friendly. Empirical work at the World Bank shows, from a cross section of countries, how rising per capita income is associated with a reduction in the severity of insanitary urban conditions, and a variety of major air and waterborne pollutants (Fig.4)
But there is one respect particularly in which economic growth and higher living standards leads, through higher energy consumption, to a potential major problem; the rising level of carbon dioxide emissions. The debate about CO2 emissions and global warming is currently a formative stage and there is still a high degree of uncertainty about the magnitudes, and even about the basic hypothesis. None the less, we in the industry accept that because of the very long time lags between e-there may be a problem and to work within the scientific consensus developed by the Inter-governmental Panel on climate change.
Fig 5 shows one projection ,based on the IPCC Working Group Ⅲ estimates. It shows that the growth in developing countries will mean that total emissions from he se countries will soon surpass those of the OECD, though economic reform in the former Communist countries and Eastern Europe will cause a decline in car bon emissions there.
It does not follow from this that there is any reason for panic, let alone any reason for environmentalists in rich countries to question the energy needs of developing economies like China. What is clear is that there is much scope for increasing energy efficiency without sacrificing growth. China has made remarkable progress in the 1980s.Its economy has grown at almost 10%p.a.but its energy use at only half that rate. This has been done with central initiatives and in some cases, uneconomically but, developing countries has been slower (Fig.6), but the potential is being seen. Deregulation and the opening up of these economies to competition will create further improvements.
A further source of slower energy demand growth which would not undermine growth and development could come from economic pricing .In some countries, rural electricity is subsidised to promote irrigation Not surprisingly agricultural pumps are not very efficient. Prices of gasoline are often heavily subsidised in oil exporting countries. The riots in Venezuela show what can happen what can happen when governments try and correct these subsidies. OECD countries are also not avers e to wildly distorting energy prices, sometimes upwards and sometimes downwards for reasons of political equity or expediency. One good lesson from all this is that sensible economic policies which will accelerate economic development will also help rational resource allocation (e.g. through pricing, competition, access to technology, etc.) This will result in lower energy intensities, so that energy demand growth in LDCs-not just in China-could fall below economic growth and may even fall to levels that have been typical of developed countries.
This issue also has a bearing on the energy mix. There are many choices available and many considerations: economic as well as environmental. The most abundant and cheap source of energy, coal, is also the worst CO2 offender, though coal gassification holds out the possibility of a more environmentally benign technology. Heavy oil and tar sands will also incur environmental penalties. Gas is relatively abundant and relatively clean and has already been picked as the fuel of the 1990s.Nuclearis an enigma delivered a bad blow by the Chernobyl disaster but picking itself off the floor as several nations, including France, Japan and South Korea, forge ahead with their nuclear power progrgmmes. Commercial renewable will probably grow but from a negligible base.
There is therefore much that developing countries including China, can do which promotes development and growth while simultaneously acting to use energy more efficiently and in a less environmentally threatening way. It may be that more still will have to be done globally, should scientific evidence on global warming harden .If that is the case, responsibility for preventive action would fall predominantly on the richer countries which have the resources to adapt. It would be fundamentally wrong to force China and other developing economies to hold back their growth.
I recognise that we in the industry have obligations by cleaning up our own act, through high self -imposed environmental standards, and by making our knowledge available to others in our refineries for example efficiency has doubled over the last 30years and we continue to invest heavily in improved quality and emission control. And in common with the rest of the industry, we have cut by half the energy input into polypropylene manufacture in the last decade. This is very much the spirit in which we shall approach our business activities in China cost competitiveness combined with environmental awareness within a sensitivity to local needs.
Conclusion
We share with China a common interest in ensuring that the central, positive, role of energy in development is properly understood. Energy is not a luxury but a necessity. I shall quote Fritz Schumacher, the apostle of "intermediate technology "who said in1964.
"There is no substitute or energy. The whole edifice of modern life is built upon it. Although energy can be bought and sold like any other commodity, it is not just another commodity', but the precondition of all commodities, a basic factor equally with air, water and earth."
We also share with China a common long term interest in the idea of sustainable energy, which reflects the need for resource stewardship and environmental protect ion. In this spirit, I would like to conclude by posing a series of questions on which discussion might be productive.
First, with China developing at remarkable speed, Chinese families can plausibly look forward to many of the comforts of modern industrial society, including increased personal mobility and high car ownership. How far is China thinking ahead to anticipate the needs for urban planning, traffic management, motor ways and low e mission fuels (sulphur in diesel; lead in gasoline, catalysts)? Lying behind that question is the fact that if levels of car ownership in China were to reach those of the UK today, another of car ownership in China were to reach those of the UK today, another 430 million cars would have to be manufactured and fuelled-about the entire car population of the world today. The fact that this is mind-boggling doesn't make it impossible, or unworthy as an aspiration.
Second, how will China balance competing concerns--cost, social need, environment and self-reliance--in fuel choice, given the wide range of options which are open to it? How far will market pricing guide choices?
Third, given China's probable need for the growing import of liquid fuels to sustain rapid growth, how does it see the future of the international energy system, balancing consumer and producer interests and recognising the importance of security as well as price?
Again, my apologies for being unable to deliver my paper in person, and best wishes for the Council meeting which promises--and deserves -to be a great success.