China Oil Demand Fades

Pressure eases on world oil prices.
An analysis by Michael Lelyveld
2012-11-05
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Cars refuel at a Sinopec gas station in Jiangsu province, March 21, 2012.
Cars refuel at a Sinopec gas station in Jiangsu province, March 21, 2012.
ImagineChina

As China's economy continues on its slower-growth course, its effect on world oil prices is likely to wane, experts say.

In past years, China's rising consumption has been cited as a major factor behind price pressures in the oil market.

In 2006, for example, the International Energy Agency (IEA) estimated that China accounted for about one-fourth of the increase in global oil demand.

Three years later, China's growth was expected to contribute 44 percent of the rise in world oil use, the U.S. Department of Energy (DOE) said.

But those days may be over as the result of China's slower economic expansion.

In its recent forecast for the period until 2017, the IEA cited a "steep deceleration" in China's oil needs.

"China has led global oil demand growth this past decade, with gains in the 10 years prior to 2012 averaging 7 percent per annum," the IEA said in its Medium-Term Oil Market Report.

The Paris-based agency estimates that China's oil demand will rise only 2.6 percent this year.

The slippage is the latest sign that China's economy may ease its squeeze on world energy markets after years of runaway growth.

In another rare sign of weakness, China's oil imports have declined two months in a row, dropping 12.5 percent in August and 1.8 percent in September from a year before, according to General Administration of Customs reports.

The IEA estimates that China's oil demand will reach 9.8 million barrels per day in 2013, about 750,000 barrels below its previous forecast last year.

Global economic troubles have caused the agency to trim 930,000 barrels per day from its earlier forecast of next year's world oil demand, suggesting China accounts for 80 percent of the downward revision.

'Flat' growth expected

Although some analysts believe China's slowdown is bottoming out, a senior government economist said the country's gross domestic product (GDP) growth—a measure of the value of a country's economic activity—is expected remain "flat" next year, the official Xinhua news agency reported.

"The economy is currently in a stage of shifting to moderate growth rates somewhere between 7 and 8 percent from an annualized growth rate of 10.6 percent over the past 10 years," said Yu Bin of the State Council's Development Research Center.

The IEA cited several reasons behind its forecast that China's annual growth in oil demand would rise only slightly to 3.3 percent in 2017.

Aside from economic cooling, the agency pointed to an aging population as a result of China's one-child policy and rising incomes, noting that higher wages have reduced energy demand growth in other countries including South Korea and Japan.

Energy-intensive infrastructure spending in the future is unlikely to match the building boom of recent years, while property markets may continue to weaken, the agency said.

High debt levels are also posing a concern for the economy with combined household and corporate debts exceeding 125 percent of GDP, according to the IEA.

Overstated effect

Edward Chow, senior fellow in the energy and national security program at the Center for Strategic and International Studies in Washington, said the lasting effect of China's growth on oil price pressures may have been overstated all along.

"It was always my impression that its sustained global impact was exaggerated, influenced by expectations of ever-increasing GDP growth and anecdotal impressions like traffic jams in major cities," Chow said.

China's oil demand is largely from industrial use and other activities linked to the export-led economy, said Chow.

"Individual oil consumption has not been a big factor in Chinese oil demand in the last 30 years," he said. "The West outsourced some of its oil demand from manufacturing to China and should not be surprised that when our consumer demand weakens, Chinese oil demand also slows down."

During China's boom years of demand growth, officials were sensitive to reports that linked the country's rising consumption to oil price hikes on world markets.

"Some people say that China imports too much oil and that demand is voracious, causing the global rise in world oil prices," said Li Deshui, then-director of the National Bureau of Statistics (NBS), in 2006.

Li denied the implication, arguing that China's oil imports had declined during the previous year according to official statistics, AFP News reported at the time.

China's oil demand has been uneven so far in 2012.

In September, the country's apparent demand climbed 9.1 percent from a year before to record levels after dropping 1.5 percent in August to the lowest point of the year, Platts news agency said.

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