Part 1: Where the boom came from
The Australian natural gas industry is booming. Technology developed in the US for tapping unconventional gas reservoirs (particularly coal-seam gas, or CSG), and surging demand in China has resulted in massive investment in Australia and the development of export markets to Asia which should see money pouring into the Queensland economy for the foreseeable future. Once capital expenditure slows down, export income from gas sales will flow in.
The gas industry owes its luck in large part to the average Chinese citizen. Two factors are converging to displace the use of coal, which is dirty, and replace it with gas, which burns much cleaner, and it’s the Chinese middle class which is driving this change.
The first factor is the rise of the Chinese middle class. Over 300 million Chinese earn between $US10,000 and $US60,000 a year. Importantly, over half of those living in Chinese cities are middle class. Higher income means better education and greater interest in shaping the political scene.
It also means they have more power as a political entity than they would as subsistence farmers. Why? Because domestic consumption is an increasingly important driver of economic growth in China. The wealthier, and better educated people get, the more political representation they demand.
So, the man on the street finds himself wielding more political power than he would have 30, or even 10 years ago, because there are hundreds of millions of others like him, and they are important to the Chinese economy. Of course, China is not a democracy, and the Chinese Communist Party still has a firm grip on power.
However, unlike other autocracies, like North Korea, Libya or Saddam Husseins’s Iraq, Chinese state power does not come from the barrel of gun. It comes from an unspoken pact between the party and the Chinese people, which is that the Chinese people will accept the legitimacy of the ruling party, as long as they can provide economic opportunity and consistently improve living standards.
When China ‘opened up’ in 1979, living standards were very low. Most of the population were subsistence farmers with little or no consumption. IMF data shows that in 1980 GDP per capita was $309 a year. Starting from a low base, officials found it relatively easy to boost growth, provide jobs-and keep people happy.
Now that many people have shifted to the middle class (with GDP per capita over $6000 in 2012) they crave more than just economic growth. The new middle class want better education, health and environmental standards. Political expression and the environment are gaining importance.
This leads to the second factor – coal. China has vast reserves of coal – enough to last 220 years at present consumption – which is around 4 billion tonnes a year. Coal is cheap, plentiful, and because they can supply 95 per cent of their coal demand domestically, secure. Coal is also dirty. It emits high levels of particulate pollution, like nitrous oxides, sulphur dioxides and mercury. Respiratory disease, caused by air pollution, accounts for 49 per cent of all non-accidental deaths in Chinese cities as of 2010. The OECD average is 30 per cent.
Severe air pollution, much of it caused by burning coal, is killing Chinese in large numbers.
The middle class in China is agitating for better environmental conditions across the board, but in particular they want to improve air quality. The Chinese government knows it now has to provide more than just economic growth to fulfil its pact with the people. They are turning to clean burning gas to replace existing coal power plants, and constructing gas plants to satisfy growing demand for energy. The days of coal are not over, but it will steadily decline in importance.
Natural gas will have its day in the sun in China, not because it is cheaper, or more easily available – it’s not; because it is cleaner, and that is what the man on the street in China is demanding.
Tim Butler holds a masters in international relations and international law, specialising in energy markets. He is currently working for a drilling contractor in the Surat Basin, developing Queensland's CSG fields.