How to Play the Changing Shape of Energy Consumption

by Lara Crigger

It's official: China, not the U.S., is now the world's top consumer of energy, according to a report released Monday by the International Energy Agency.

Last year, China consumed 2.252 billion tons of oil-equivalent (which is a sum-total measure of all forms of energy, including crude oil, natural gas, coal, nuclear and even "green" energy sources like wind or solar). That's about 4 percent more than the U.S., which used 2.169 billion tons.

Granted, the U.S. still consumes the most energy per capita, with the average American consuming five times more energy each year than the average Chinese. And the U.S. still uses the most oil worldwide, consuming roughly 19 million barrels per day, compared with China's 9.2 million barrels per day. But these data haven't stopped the IEA from waxing philosophical.

"The fact that China overtook the U.S. as the world's largest energy consumer symbolizes the start of a new age in the history of energy," IEA chief economist Fatih Birol told the WSJ.

Strong words, indeed. But there's more to the story than meets the eye.

Behind The Numbers

At some level, what the IEA's data truly represent is just how hard the U.S. was hit by the 2008 global recession—a recession that China escaped mostly unscathed. After all, the IEA had predicted China would eventually assume the top energy consumption spot anyway, but not until 2015 or so. The recession just sped things up.

But on a more positive note, the numbers also reflect the U.S.' increasing energy efficiency, at least compared with China. Since 2000, the U.S. has improved its energy efficiency by 2.5 percent each year, while China has only improved by 1.7 percent, according to the Financial Times.

Indeed, many analysts have argued that increasing energy efficiency has led to the peak of energy demand in the States (and developed Western nations as a whole), and usage will flatten out in the future. Obviously, more efficient energy usage means less total energy being used.

At the same time, however, you can't dismiss the Chinese growth story from these numbers. For nearly a decade, China's energy consumption has grown by double digits annually, propelled by the nation's souped-up industrial capacity. Keep in mind that just 10 years ago, China's energy consumption was only half that of the U.S.

And that expansion shows no signs of slowing, either: The IEA also predicts that over the next 15 years, China will add about 1,000 gigawatts of electrical generation capacity—or the equivalent of the entire current U.S. capacity.

The end result of this growth is that China's particular energy demands have begun to redefine the way energy is used worldwide, from the kinds of cars that get made to how many solar panels or wind turbines are constructed.

It also means that global energy consumption will continue to stem from inefficient sources, at least for the time being. China's swelling energy usage isn't exactly efficient: The country may be the world leader in wind, solar and hydropower investment, but it still gets most of its electricity from coal. In 2007, China surpassed the U.S. as the world's top emitter of greenhouse gases.

Disputes

Of course, Chinese authorities—who have become increasingly touchy about claims that the country is swinging global energy prices or contributing to global pollution—have already disputed the IEA's data.

On Tuesday, the Chinese Cabinet's National Energy Administration released a report claiming that the IEA data was "unreliable," adding that the IEA still "lacked understanding about China's relentless efforts to cut energy use and emissions, notably the country's aggressive expansion of new energy development."

Instead, the Chinese NEA said the country consumed just 2.132 billion tons of oil equivalent last year, or 2 percent less than the IEA's figure for the U.S. (Interestingly, though, according to their statistics, China was the world's largest energy producer.)

So who is right?

The IEA claims they hadn't changed their sourcing or methodology to calculate the 2009 statistics, but at the same time, the Chinese government isn't exactly known for its data transparency. As recently as this month's oil market report, the IEA lamented the quality and coverage of Chinese data regarding refining activity and crude oil stockpiles. And back in its December 2009 report, the IEA wrote that "Chinese apparent demand data feature some odd trends. The most glaring is the seeming mismatch between subdued gasoline demand and surging car sales."

Playing The Chinese Trend

Regardless, the march toward increasing Chinese dominance in the global energy scene seems set to continue, and for investors looking to hone in on that trend, there are two main options available at present.

The Global X China Energy ETF (NYSE Arca: CHIE) is perhaps the purer play on the space; it tracks energy companies that conduct the bulk of their business or are domiciled in China. It's dominated by big names like oil giants CNOOC (CEO, 10.52 percent) and PetroChina (PTR, 9.89 percent); Sinopec (SHI), the nation's largest oil refiner (10.39 percent); China Shenhua Energy Co (CUAEF.PK)., the world's top coal producer (9.79 percent); and Kunlun Energy Co., a Chinese oil and natural gas E&P firm (5.32 percent).

Although Russia dominates the Emerging Global Shares DJ Emerging Market Energy Titans ETF (NYSE Arca: EEO) at 34.62 percent of assets, China still comprises a substantial portion (14.47 percent).

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