A lot of people who forecast the future tend to draw a straight line forward from existing trends. That's why people forecast a continuation of the breakneck increases in Chinese oil consumption.
There are at least two reasons to question that. One is that the current financial crisis could hammer the U.S. economy, and cut deeply into our purchases of all kinds of stuff, including stuff that comes from China. If that happened, it's doubtful that China would keep up its double-digit economic growth in the coming months.
The other reason is more benign: China has drastically raised fuel prices, effectively slashing its subsidies for motor fuel. And we all know that when retail petroleum product prices rise sharply, we tend to use less of them. Will the Chinese be any different?
It's a question that matters to every one of us, whether a car owner or simply a consumer who buys goods that travel in trucks. That's because the challenge of meeting rising Chinese demand is expected to keep oil markets tight and prices high even if Americans buy more efficient cars.
But Paul Ting, a former top rated Wall Street oil analyst who now has his own firm called Paul Ting Energy Vision, notes in a new analysis (subscription required) that Chinese and U.S. gasoline and diesel prices are nearly the same now. In last September, Chinese gasoline prices averaged about $3.63 a gallon, he says, while U.S. gasoline prices averaged about $3.72 a gallon. (There was a bigger gap in diesel prices between the two countries; Chinese diesel prices are still 21 percent lower than those in the United States, Ting says. But the gap is smaller than before.)
"The real question is that with key fuels such as gasoline price parity, will it result in any demand 'destruction' in China?" Ting writes.
I would think that given the relatively limited means of the average Chinese wage earner, Chinese drivers would be even more sensitive to a sharp increase in fuel prices.
And lo and behold, in August Chinese gasoline demand fell 5.6 percent, or 470,000 barrels a day, below June and 2.7 percent, or 200,000 barrels a day, below July levels.
One month is not enough to reach many conclusions, especially when that month and the months preceding it may have been distorted by stockpiling of fuel in advance of the Olympic games that took place in Beijing in August. (Ting notes that China went on an "inventory building binge" in November 2007 and that its gasoline and diesel inventories grew by 83 percent by August this year.) And the August consumption figure was still up 7.1 percent from August last year.
There are still a lot of confusing factors as more information arrives in the next two or three months. Tax changes might discourage crude oil imports and some inventory sales might occur if Chinese refiners worry about price falling. In addition, the People's Bank of China might cut interest rates to boost the economy
But eventually, new data should tell us more.
"China's longer term demand growth is still expected to be solid," Ting says, "supported by the on-going urbanization efforts as well as long-term economic growth. ... However, we note that the uncertainty of demand growth is for the medium term of six to eighteen months."
I would argue that higher prices will put China on a new, more gradual growth trajectory - with consumption still rising, but at a pace that should ease some of the pressure on oil markets, and prices at the pumps throughout the rest of the world.