China Slows Oil Demand Growth

An analysis by Michael Lelyveld
2015.02.23
An oil storage base of state-owned giant China National Petroleum Corporation in Huai'an city, east China's Jiangsu province, Sept. 1, 2013.
Imaginechina

After years of driving world energy markets, the growth of China's oil demand is slowing to a crawl.

A recent study by the Paris-based International Energy Agency (IEA) estimates that the country's oil demand will rise at an average annual pace of 2.6 percent through 2020, only about half the rate during China's explosive expansion of the previous decade.

China's oil demand is slated to grow 2.5 percent this year to 10.63 million barrels per day the IEA said in its Medium-Term Oil Market Report.

That compares with consumption growth of 16.8 percent in the boom year of 2004 when China used 6.74 million barrels per day, according to BP Statistical Review of World Energy.

While China's oil demand will increase twice as fast as that of the world as a whole, it will add less than 300,000 barrels per day annually through 2020, or about one-third less than it did in 2009-2014, the IEA said.

The new estimates represent a substantial drop from the IEA's forecast for China last year, shaving as much as 500,000 barrels per day from demand totals for 2017-2019.

The adjustment reflects a perception of significant changes in China's growth patterns, economic policies and energy efficiency, the report indicates.

"President Xi Jinping's 'new normal' encompasses curbed oil demand growth as the closure of excess capacity in many industries, most notably coal and steel, filters through to lessened oil demand growth," the IEA said.

"These heady efficiency gains, coupled with deliberate government efforts to curb energy demand in order to satisfy tightening clean-air regulations, and the recent easing in macroeconomic conditions, explain the definite shifting in gears that has been seen in China," it said.

Taken by itself, China's "new normal" of lower economic growth rates would be a likely cause of slower growth in demand.

Last year's 7.4-percent rise in gross domestic product (GDP) was the smallest since 1990, decelerating from 7.7 percent in each of the two prior years.

In its recently updated forecast, the International Monetary Fund projected further ebbing of growth to 6.8 percent and 6.3 percent for this year and 2016.

‘New normal’ trends

But the IEA report highlights several "new normal" trends taking place in China at the same time, all of which lead to eased oil demand.

Since a surge in construction-related energy waste in 2003-2005, China has gradually improved its efficiency efforts, despite setbacks from its 4-trillion yuan (U.S. $640-billion) economic stimulus plan in 2008.

In 2014, China cut its energy intensity, which measures energy use per unit of GDP, by 4.8 percent, according to the State Council, or cabinet, exceeding the annual target of 3.9 percent for the first time in years.

The performance could put the country on track to meet its current five-year goal of reducing energy intensity by 16 percent this year compared with 2010.

The IEA estimates that China reduced its oil intensity index by 18 percent from 2008 to 2014 and will see a similar improvement by 2020.

The study projected that new cars sold in China this year would be nearly 15 percent more fuel efficient than in 2000 and will be over 20 percent more efficient in 2020.

The gains take some of the impact out of the rise in auto ownership with 154 million cars now on the road, according to the Ministry of Public Security.

Car sales rose 6.9 percent to 23.5 million last year, the China Association of Automobile Manufacturers reported. But the growth was far less than the 13.9 percent increase in 2013, the official Xinhua news agency said.

The IEA also sees China's push to cut overcapacity in construction-related industries like steel and cement as paying dividends.

Significant drops in diesel fuel consumption, for example, cannot be explained by the relatively small decline in official GDP growth numbers alone, it said.

The study reasons that pressures to reduce air pollution are leading to cutbacks at the least efficient production facilities, reducing the huge volumes of coal previously transported to the outdated plants.

"These additional efforts have accordingly curbed the amount of diesel that was then required, tapering truck/rail needs, an important sub-sector of diesel demand that we cannot emphasize enough," the agency said.

Less coal is also being trucked because mines are producing less coal.

China's coal production fell 2.5 percent last year, marking the first decline since 2000, Xinhua reported, citing partial figures from the China National Coal Association (CNCA). It is unclear how much anti-pollution measures have contributed to the drop.

The coal industry itself has been plagued by overcapacity and low prices, forcing cutbacks due to losses.

Last month, northern Shanxi province declared a five-year moratorium on new coal projects, state media reported. The central government also will not approve any new coal projects in eastern China, the CNCA's chairman Wang Xianzheng said.

Areas of uncertainty

While the combination of factors adds up to lower oil demand growth, Philip Andrews-Speed, a China energy expert at National University of Singapore notes at least two areas of uncertainty that may affect the forecast.

One is pricing.

Andrews-Speed argues that the amount of oil or products that China uses in transport may be price sensitive because the country has been aggressively promoting the use of other fuels, namely gas and electricity, for environmental reasons.

"If oil prices stay low, the switch from oil to gas or electricity in the transport sector will be constrained," he said.

The IEA study uses price assumptions based on the futures market rather than forecasts, but these show an expectation that oil prices will rise only moderately from an average of $55 per barrel (2,519 yuan per ton) this year to $73 (3,343 yuan per ton) per barrel in 2020.

If prices are weaker, fuel switching in transport could move more slowly, suggesting greater oil demand.

Andrews-Speed also sees an effect from economic policy decisions, particularly if the government shifts gears again and decides to stop the slide in growth rates with another major stimulus package.

"Then, energy intensity will rise and oil use in transport will rise," Andrews-Speed said.

So far, the government has limited its response to "targeted" stimulus measures, despite continuing expectations in the international business press that it will do more to promote GDP growth.

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