China's Economy Slows Oil Growth

China's oil demand will cool over the coming years, but its investment in foreign resources is unlikely to slow, experts say.

The growth rate of China's appetite for crude oil will be cut nearly in half by 2018, the Paris-based International Energy Agency (IEA) said in a recent report.

Although China accounted for some 40 percent of the world's growth in oil demand in 2012, its own demand growth will decline to an average annual rate of 3.7 percent over a seven-year period, the IEA said.

In last year's edition of the Medium Term Oil Market Report, the agency noted that China's annual demand growth averaged 7 percent over the previous 10 years.

The lower rates are the result of slower economic growth, although demand for motor fuel is expected to keep rising.

Recent economic reports "confirm the idea that China is past its takeoff stage and becoming a middle-income economy," the IEA said.

Demand growth rates will continue to fade in the world's second-largest oil consumer, reaching only 3.3 percent in 2018, according to the forecast.

This year, China's consumption is projected to reach 9.9 million barrels of oil per day, a little over half the amount in the United States.

But U.S. demand is dropping by 0.4 percent per year. By 2018, China's oil consumption will be nearly two-thirds of the U.S. rate, even with slower growth, the study said.

Varying estimates

Other sources suggest that an even steeper falloff in China's demand has already taken place.

According to Platts energy news service, China's apparent demand growth slipped from 11.3 percent in 2010 to 6.1 percent in 2011 and just 3.4 percent last year.

Estimates vary because of incomplete or inconsistent official figures. China's National Bureau of Statistics (NBS) has reported that crude oil consumption rose 6 percent last year.

'Go out' policy

While the consensus is that demand growth is slowing, experts see no sign that China will reduce its oil investment abroad.

Since launching its "go out" policy for foreign oil investment in the 1990s, China has made deals in dozens of countries overseas.

A separate IEA study in 2011 found China's national oil companies were operating in 31 foreign countries. In a more recent report, the agency estimated that China's overseas oil output will reach 3 million barrels per day in 2015.

The companies spent a record U.S. $32 billion buying foreign competitors last year, the Financial Times reported in February.

Energy security concern

Analysts say China's foreign investment will continue even if demand starts to stall.

Kevin Tu, senior associate in the energy and climate program at the Carnegie Endowment for International Peace in Washington, said the investment is driven by increasing import dependence.

Last year, China relied on imports for 58 percent of its consumption. This year, the foreign share may rise to 60 percent, Tu said. Official figures in February put import reliance at 56.4 percent last year.

While the United States has worried about import dependence for decades, the prospect makes China's government nervous.

"This raises a very serious energy security concern in China," Tu said. "They will continue to invest overseas even if demand slows down because of the need to improve the energy security situation."

Philip Andrews-Speed, principal fellow in the East Asia program at the National University of Singapore's Energy Studies Institute, also sees little impact on China's oil investment drive.

"If one argues that the overseas investment by China's national oil companies is driven largely, but not entirely, by corporate objectives which are consistent with government industrial strategy, then there should be little significant change in investment behavior," said Andrews-Speed.

"Any reduction would more likely be triggered by falling oil prices and falling profits or changing attitudes of the state banks or government," he said.

Investment incentives

But even in case of falling oil prices, China's companies are likely to see reasons for investing overseas, Tu argued.

If prices drop sharply, Middle East oil producers may be squeezed by social spending commitments made during the Arab Spring, said Tu. The resulting instability risk will raise the incentive for China to keep oil flowing.

"China will have a very strong interest to keep investing in those countries in order to help themselves secure access to oil and also to help those producers stabilize their political situation," he said.

Slower expansion

So far, the demand forecasts have not suggested a repeat of China's pullback in 1998 during the Asian currency crisis, when the country put project plans on hold, one year after pledging to invest U.S. $9.5 billion in Kazakhstan to launch the "go out" policy.

Economic and energy figures this year have shown signs of slower expansion but not negative growth.

While foreign investment may enhance energy security, some critics in China have complained that state-owned companies have brought very little of their overseas oil home.

A 2011 study by China Oil University found that state oil giants had invested some U.S. $70 billion in 144 foreign projects by the end of 2010 but had shipped back less than one-twelfth of the oil produced, the 21st Century Business Herald and state media reported at the time.

Most of the oil was sold on the international market, but two-thirds of the ventures sustained losses, the paper said.