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China's Faltering Oil Appetite

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.

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Comments (7)

jaiderbertoli Author Profile Page:

wow very interesting http://www.jaiderbertoli.com/

ericy Author Profile Page:

Steve: What ever happened to the last part of the oilshock series? The 1st 4 parts ran, but part 5 never appeared in print..

AgentG Author Profile Page:

We all know that electric and hybrid vehicles are coming fast. When such vehicles become available on a mass scale, what rational reasoning precludes the Chinese from massively increasing their gas mileage? There is no rational reason to assume that the Chinese themselves will not be making electric and hybrid vehicles to supply themselves and other countries. Therefore, there is a huge possibility that oil consumption has effectively peaked and that the supply pessimists are fundamentally wrong. As the present economic turmoil shows us, change can come much faster than we expect.

micolpaneur Author Profile Page:

Steve,

There is something wrong with the numbers that you quoted about China. The IEA stats say the PRC consumes about 7M b/d; of that, somewhat less than 30% is mogas (they export mogas - some to the US, if you can believe that) so a 5.6% drop would be about 111,000 b/d, not 460,000 b/d.

And the 2.2% drop would be around 45,000 b/d, not 200,000.

While a backed out demand drop of 150,000 b/d is not insignificant, the other odd fact is that Chinese diesel imports are up - I don't have recent numbers - and put against worldwide oil consumption north of 80M b/d this drop is not very important.

The Saudis have (quietly) cut back their exports in October. Watch who follows.

The $140 oil price may have gotten ahead of itself, but anyone whoe thinks the global energy supply-demand balance is going to start to favor consumers, anytime soon, is either running for office or suffering from delusions, or both.

Michael Colligan
Geneva, Switzerland

whocarestibet Author Profile Page:

"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." Come on, the Amercians never recognized how much oil they have consumed, and by the way, what is the proportion of energy-efficient cars sold in the US? I think China did much better in this regard, since most of cars sold in China are below 1.5-liter. In addition, the gas price is much higher in China than that in the US, if deflated by Purchasing Power Parity.

james44 Author Profile Page:

It's important to note a distinction between the U.S. and China here: China has been investing heavily in public transportation, even as car ownership has increased; we haven't.

I lived in China for several years, and I can't begin to say how relieving it was to live in a country where one can get around without a car. Almost every city and town is served by passenger rail, and those that aren't are served by intercity bus. China is also investing in high-speed trains and building subway systems and expanding existing ones.

Here, on the other hand, we have been defunding Amtrak; our one high-speed train (the Acela) is hardly that, and voters routinely reject ballot initiatives to build or expand rail-based rapid transit systems (my hometown of Seattle is a good example) because they're too cheap to pay the taxes for it.

The fundamental problem here is that, as a nation, we lack initiative. Gone is the America that built the Tennessee Valley Authority and the Interstate Highways. We don't think about the big picture anymore. We take our status as a "developed country" for granted to such a degree that we've forgotten that sustaining such a position requires constant investment and upgrades.

upland_bill Author Profile Page:

Who needs China when we have plenty of stupid Americans and their SUV's to keep the demand of oil as high as it can go. USA gets what it deserves.

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