Thursday, June 23, 2011

Double Choke Point: Demand for Energy Tests Water Supply and Economic Stability in China and the U.S.

Double Choke Point: Demand for Energy Tests Water Supply and Economic
Stability in China and the U.S.
22 June 2011

By Keith Schneider
Circle of Blue

The coal mines of Inner Mongolia, China and the oil and gas fields of
the northern Great Plains in the United States are separated by 11,200
kilometers (7,000 miles) of ocean and 5,600 kilometers (3,500 miles) of

But, in form and function, the two fossil fuel development zones�the
newest and largest in both nations�are illustrations of the escalating
clash between energy demand and freshwater supplies that confront the
stability of the world�s two biggest economies. How each nation responds
will profoundly influence energy prices, food production, and economic
security not only in their domestic markets, but also across the globe.

Both energy zones require enormous quantities of water�to mine, process,
and use coal; to drill, fracture, and release oil and natural gas from
deep layers of shale. Both zones also occur in some of the driest
regions in China and the U.S. And both zones reflect national priorities
on fossil fuel production that are causing prodigious damage to the
environment and putting enormous upward pressure on energy prices and
inflation in China and the United States, say economists and scholars.

�To what degree is China taking into account the rising cost of energy
as a factor in rising overall prices in their economy?� David Fridley
said in an interview with Circle of Blue. Fridley is a staff scientist
in the China Energy Group at Lawrence Berkeley National Laboratory in
California. �What level of aggregate energy cost increases can China
sustain before they tip over?�

�That�s where China�s next decade is heading�accommodating rising energy
costs,� he added. �We�re already there in the United States. In 13
months, we�ll be fully in recession in this country; 9 percent of our
GDP is energy costs. That�s higher than it�s been. When energy costs
reach eight to nine percent of GDP, as they have in 2011, the economy is
pushed into recession within a year.�

Economies of Scale
China is growing and modernizing at a pace and scale never before seen
in history, while the U.S. is mired in an economic downturn, caused
largely by rising energy prices.

Indeed, given the different economic circumstances that grip both
countries�one soaring and the other in a serious slump�they nevertheless
view energy production as the top national priority. Growth and
development at such a scale demand innumerable resources, particularly
water. As a result, the water needs of Chinese and American energy
producers take precedence over any other economic sector.

�The United States confronts the same kind of resource conflicts as
China,� Fridley said. �There are increasing expectations of
confrontation over water as a factor in energy production.�

Coal production in Inner Mongolia and shale oil drilling in the northern
Great Plains reflect this homage to carbon-based fuels. The development
of carbon resources in both regions uses more water than any other
industrial sector except agriculture. It also is pouring into the
atmosphere millions of metric tons of the climate-changing gases that
climatologists say are warming the planet, changing patterns of
precipitation, and increasing the intensity of droughts and storms.

The extremes in weather, in turn, make it even more difficult to
generate carbon-based energy as severe droughts affect mining and
drilling operations.

Yet, by insisting on developing new sources of carbon-based fuels that
are drawn essentially from the desert both nations are testing the
limits of their national water reserves and challenging the capacity of
other important economic sectors�agriculture, large metropolitan
regions, major manufacturers�to use much less water.

�China�s continued growth and stability hinge on finding a more
sustainable strategy to cope with its water and energy demand,� Parag
Khanna told Circle of Blue. Khanna is an author, global strategist, and
senior research fellow at the Washington, D.C.-based New America
Foundation. �The external risk of friction with its southern neighbors
over water diversions and internal tensions due to falling water supply
and environmental pollution are both growing.�

Droughts Affecting Fossil Fuel Development
Despite national agendas that are focused on domestic energy security,
there are a score of environmental, economic, and political impediments
that lie in the path to large increases in Chinese and American energy

Few, though, are more significant than the steadily diminishing reserves
of fresh water in both countries. China lost 35 billion cubic meters
(9.3 million gallons) of water every year over the past decade,
according to figures from the National Bureau of Statistics. The U.S.
also lost water, a total of 19 billion cubic meters (5.02 trillion
gallons) in the period from 1985 to 2005.

In the last year, energy-water choke points have become more urgent and
visible in both countries.

From January to June, a severe drought in southern China not only
reduced hydroelectrical generation in the Yangtze River Basin, but low
water levels also curtailed coal shipments to manufacturers and power
plants down river. Similarly, northern China endured its driest winter
in the past 60 years, which put pressure on already limited water
resources used by coal producers. This led to further coal supply
reductions, higher coal prices, and contributed to inflation.

Though coal prices are soaring, China�s energy producers can�t raise
consumer prices because of tight state control over electricity fees.
Instead, they are cutting power output to save money.

In May, China�s top five power utilities�which generate half of the
country�s electricity�reported $US 1.62 billion (RMB 10.5 billion) worth
of losses in their coal-fired power plants during the first four months
of the year, according to the Xinhua News Agency. China�s main
electricity distribution company, the State Grid, warned that power
shortages this year could reach 30 to 40 gigawatts, even if coal and
water supplies are normal for the rest of the season.

Texas has faced similar drought conditions. The period from October to
May has been the driest since the state began keeping records in 1895,
according to Texas A&M University.

The Texas drought is prompting shale oil and gas producers to seek tens
of millions of gallons of water from farmers. The water is needed for
hydraulic fracturing�the process of injecting water, chemicals, and sand
at high pressure into sedimentary rock formations to free up the oil and
natural gas trapped inside.

As the price of water is climbing, farmers and ranchers are deciding how
much they are willing to sell.

In 2009, there were 358 natural gas drilling rigs in Texas alone, and
that number had increased to 709 rigs by 2010, according to the Natural
Gas Supply Association. Each rig can drill multiple wells in a year and
each well typically uses upwards of 19,000 cubic meters (5 million
gallons) of water for �fracking.� In southern Texas� Eagle Ford Shale,
however, fracking one well can use as many as 49,000 cubic meters (13
million gallons), due to the region�s unusual geology.

Additionally, because of the severe drought in Texas, water supplies
have become a big issue for opponents of a coal-fired power plant
proposed for Matagorda County. On June 16, the Lower Colorado River
Authority (LCRA) delayed a vote to decide whether to sell more than 30
million cubic meters (8 billion gallons) of water per year to the owners
of the planned White Stallion generating station.

�This delay is a victory for those opposing the coal plant and a step in
the right direction in convincing the LCRA that this project is not a
beneficial or responsible use of water from the Colorado River Basin,�
Ryan Rittenhouse wrote in an article for TexasVox, an online publication
of Public Citizen in Texas.

Droughts Affecting Hydropower Generation�Three Gorges and Hoover Dams
In both China and the United States, hydropower is a significant source
of energy that does not rely on carbon-based fuels. But this spring�s
drought in central and eastern China has crippled hydroelectric power
generation throughout the Yangtze River Basin, creating a power deficit,
the effects reverberated across the country.

In late May, the operators of China�s Three Gorges Dam began releasing
torrents of water to revive the drought-depleted Yangtze River and to
protect water supplies for downstream farms, fisheries, people, and
livestock. Since January, more than 19 billion cubic meters (5 trillion
gallons) of water have been released from the world�s biggest dam to
China�s largest river, with 5 billion cubic meters (1.3 trillion
gallons) flowing just in the last few weeks.

The emergency action had a cascading effect on the country�s energy
supply. At the peak of the drought, water levels at the reservoir had
dropped four meters (13 feet) below the minimum level needed to operate
its turbines efficiently. Hydroelectrical output fell during the time of
year when output should be at its highest: spring melt. According to
official figures, nearly 1,400 dams in Hubei Province�home of the Three
Gorges�do not have enough water to generate any electricity at all,
Reuters reported.

To compensate, China has increased electricity prices and cut diesel
exports by half, making the fuel available for domestic power
generation. As a result, analysts speaking with Bloomberg News predicted
rising demand for coal. Still, the seven-month drought has China bracing
for its worst summer of power outages since 2004.

Though they did not endure power cuts, water and power customers in the
American Southwest can certainly commiserate. Just eight months ago,
water levels in Lake Mead�the reservoir behind the Hoover Dam�dropped to
record lows and came within two meters (six feet) of triggering a
first-ever shortage declaration on the Colorado River.

The Colorado River Basin supports more than 30 million people and
irrigates a $US 3 billion agricultural industry. Dams in the basin,
including the Hoover Dam, are a key source of base-load power for much
of the Southwest.

Electrical generation at the Hoover Dam fell steadily during the
decade-long drought, with its output in 2009 registering 30 percent
lower than in 1999. Like their Chinese counterparts, utilities in the
Southwest turned to fossil fuels to make up the shortfall. If climate
change, as it is widely assumed, causes river flows to decline even
further, lower-than-capacity electrical generation could be the new
standard in both countries.

Regional Droughts�What Do They Mean?
The regional droughts are a warning of the much bigger energy production
and economic challenge facing both nations, according to Fridley.

�People say to me, �Oh, you�re so negative.� I say, �Let�s face up to
what we�re up against,�� Fridley said. �It�s energy. It�s food. It�s water.�

Adequate water supplies are more essential than ever for producing
energy from reserves of coal, oil, and natural gas that are increasingly
difficult to tap, process, and move to market. Both nations are trying
to stave off energy shortages that would drive prices to such a high
level that their economies could tilt to sharp and enduring declines.

�I don�t see how you can look in-depth at these issues of water use and
not understand�we do not make water,� Fridley said. �We have a problem
that, to me, is going to force us to be much more mature about how we
live and what we need to change.�

Solutions: China Ahead of U.S.
Though both nations are investing in water-sipping and much cleaner
renewable energy sources�particularly solar and wind production�make no
mistake about their primary economic objectives. China and the United
States are pursuing development strategies largely devoted, at least for
the next two decades, to perpetuating the fossil fuel economies of the
20th century.

In both countries, freshwater reserves are in erratic supply in
important energy-producing regions�northern China�s coalfields and
southern China�s hydropower region; the oil shale region of the northern
Great Plains and the coal fields of the Rocky Mountain West.

While China and the U.S. share many of the broad trends in energy
production and water supply, there are big differences when it comes to
anticipating and developing rational responses to the tightening choke
points between these two critical resources.

China�s business, provincial, and central government leadership have
developed a long-term growth plan, and a number of the conservation
steps that have been enforced have actually worked:

* Since 1995, China�s economy grew eight-fold, but its water consumption
increased about 1 percent a year, or just less than 16 percent over 15
* China�s big northern cities, led by Beijing, are developing innovative
water recycling programs to convert wastewater to gray water, which can
be used for flushing toilets, washing cars, and landscaping.
* Big industrial plants are required to recycle nearly all of the water
they use in manufacturing steel, cement, glass, vehicles, and other

And China is not afraid of acting quickly to avoid making its water
shortages worse. For instance, as recently as 2008, China had planned to
build a total of 23 large coal-to-liquids refineries, where, instead of
being burned for power generation, coal is pulverized to dust, mixed
with water, and heated to produce diesel fuel. At first, the pay-off
seemed well worth it�roughly $US 50 a barrel to produce in the current
$US 112-per-barrel global oil market�until the water investment was

When Chinese authorities learned that an operational refinery�owned by
Shenhua Group, China�s largest coal producer�annually used 10 million
cubic meters (2.6 billion gallons) of water to convert 4.1 million
metric tons (4.5 million short tons) of coal into 1.1 million metric
tons (1.2 million short tons) of diesel, the government curtailed the

Just three other coal-to-liquids plants, already under construction and
much smaller than the Shenhua plant, were allowed to proceed to completion.

In contrast, there has been a surprising lack of urgency among U.S.
state and federal leaders despite clear evidence of rising energy demand
and diminishing freshwater. Within the last year, however,
administrative changes have been proposed to prod the government to do
more to understand the trend:

* The U.S. Department of Energy has deliberately prevented public
disclosure of an important 2009 study�commissioned by Congress in
2005�to develop a scientific roadmap to outline the areas of research
that should be pursued to resolve energy-water choke points.
* In June, the U.S. Senate began considering the Energy and Water
Integration Act, legislation that would mandate more studies on water
and energy efficiency, conservation, current water use for energy
production�both in transport fuels and electricity generation�and
technological evaluations.

Perpetual Fossil Fuels and Chronic Water Shortages
By no means, though, does China have all the answers. While China is
doing a better job than the United States in anticipating and responding
to new trends, neither country is close to resolving the confrontation
between rising energy demand and unstable freshwater reserves.

Unless China either gets much wetter or pushes harder to conserve water
or more speedily develops bigger wind, solar, and seawater-cooled
nuclear sectors�which do not use much fresh water�the country faces a
crippling energy shortage by the end of the decade.

Because of its prominence as the world�s largest market for food,
energy, steel, cement, cars, trains, and other goods, how China resolves
the confrontation between rising energy demand and scarce water supplies
will affect not only the economy of the United States, but also those of
almost every other industrialized nation.

�China recognizes the sheer magnitude of extracting as much coal as it
is now in a single year,� concluded David Fridley of Lawrence Berkeley
National Laboratory. �They have talked about capping coal production at
3.6 billion metric tons annually in the new Five-Year Plan. It�s not at
all clear from their available water supply, transportation limits, and
production costs that they can sustain coal production at 4 billion
metric tons per year for even a couple of years.

�All of these limits feed into price increases that can change behavior
before China runs into an absolute energy shortage,� Fridley added.
�That�s what we don�t know�will price impacts be enough to change
behavior? Or will there be absolute energy shortages?�

Keith Schneider�who has reported on energy, water, and climate change
from four continents�is a Traverse City-based senior editor for Circle
of Blue. Reach him at

Contributions by Aubrey Ann Parker, Brett Walton, Nadya Ivanova, and
Travis Miller�reporters for Circle of Blue. Also from Jennifer Turner,
Washington, D.C.-based director of the China Environment Forum at the
Woodrow Wilson International Center for Scholars.

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