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Page added on October 8, 2014
China: The Dragon takes an oil breather
We’ve known it for the past decade: The primary factor underpinning strong oil prices was China’s fire breathing demand for more and more energy. Based on today’s updated outlook from the International Monetary Fund (IMF), the Dragon’s economy is pausing to inhale. And oil prices are showing signs of asphyxiating.
But like breathing in and out, oil prices and the economy are cyclical. The question beyond our noses is: Does the Dragon have another exhale cycle coming that heats up prices again? Notionally, the answer is “yes,” if China’s economic indicators like industrial production and gross domestic product (GDP) strengthen again. On the other hand, it is “no” if the carbon-ingesting beast has permanently tamed its oil-consuming habits – in other words, if it can expand its economy without additional oil. So which is it?
Growth in China’s oil consumption has slowed considerably relative to the pre-2008 oil gluttony period. In fact, its rate of growth is half what it used to be. The combination of an economy that has lost some of its GDP mojo (next year’s IMF forecast is for only 7.2-per-cent growth) and a weakening correlation between Chinese GDP and oil demand – otherwise known as “oil intensity” – may challenge the go-forward idea that the Dragon’s appetite for oil will stress the supply side as much as it has in the past. Let’s look at the data.
During the voracious growth years, between 2002 and 2005, China’s oil consumption was ballooning by an average of 500,000 barrels a day (b/d) per year, with high correlation to an economy that was expanding at over 10 per cent a year. At the peak just prior to the financial crisis, for each percentage of growth in annual GDP, oil demand grew by 0.80 per cent. That high level of intensity, which is typical of countries in their early and aggressive stages of industrialization, had been constant since 1990 (see Figure 1).
Since 2009, the downward kink in Figure 1 shows that China’s oil intensity has dropped to less than 0.40, which means its oil growth is now only half as fast as its economic growth.
History shows that every industrializing country eventually goes through such a “break point,” or a transitional period in its economic development. It is a unique and fairly abrupt point in time when a nation starts taming its adolescent energy appetite by diversifying its fuel diet, switching to lower carbs and generally consuming less through better habits.
Subsequent downward kinks in intensity can lead a country to “peak demand” – the condition whereby it can expand its economy without any incremental pull on oil demand (a flat or declining slope in Figure 1). Most Western countries are already at this peak demand state, with notable examples being the United States, the euro zone, Japan and South Korea.
But China’s industrial-driven economy is far from peak demand (the slope in Figure 1 is still quite steep), which means that its oil demand will still vary cyclically with its economy. The Dragon has more fire to exhale. At its current rate of about 10.3 million barrels a day of consumption, every 1-per-cent change in its GDP translates into approximately plus-or-minus 350,000 b/d in oil demand. That’s bearish when its economy slows, but still bullish on recovery.
If China’s rate of oil consumption doesn’t grow again, it won’t be because it has fully tamed its consumption habits, it will be because the economy is stalled or permanently slowed down. In other words, it will be because the Dragon is holding its breath.
Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.
14 Comments on "China: The Dragon takes an oil breather"
Makati1 on Wed, 8th Oct 2014 9:54 am
So many articles, so little fact. I’ve read at least 20 articles from around the world about the same drop in oil consumption. Not any three out of 20+ agree even closely on the reason. You might say that it is election in the US or there is a glut, or the ability to buy has cut consumption, or ___________ (fill in the blank). The only thing I am sure of is, it will not last.
Kenz300 on Wed, 8th Oct 2014 11:55 am
Climate Change is real……. The transition to safer, cleaner and cheaper alternative energy sources is expanding around the world. China is investing huge amounts in wind and solar power as well as electric vehicles. Those investments will help to drive prices down further making alternative energy cheaper than fossil fuels.
Wind, solar, wave energy, geothermal and second generation biofuels made from algae, cellulose and waste are the future.
—————–
Obama Presses Chinese on Global Warming – NYTimes.com
http://www.nytimes.com/2014/09/24/world/asia/obama-at-un-climate-summit-calls-for-vast-international-effort.html?emc=edit_th_20140924&nl=todaysheadlines&nlid=21372621
————————-
US-China Rifts Put Aside for Clean Energy Research
http://www.renewableenergyworld.com/rea/news/article/2014/09/u-s-china-rifts-put-aside-for-clean-energy-research
shortonoil on Wed, 8th Oct 2014 12:17 pm
China’s central bank over the last six year has printed more money than the rest of the world combined. That printed money shows up as increased GDP, even though no additional goods or services are produced. The author seems to have missed that point. China’s growth has not been a factor of greater economic activity per BTU, it has been a factor of greater monetary growth, just like every other major industrialized country in the world. The amount of energy that petroleum can deliver to the non-energy goods producing sector of the economy is declining by about 2.5% per year, and economic activity is following it. No central bank fairy godmother is going to change what is happening. All they can do is move money from one sector of the economy to another, and cast an illusion of prosperity.
http://www.thehillsgroup.org/
Kenz300 on Wed, 8th Oct 2014 12:30 pm
Biofuels continue to grow in use around the world.
DuPont’s $500 Million Biofuel Bet Expected to Pay Off
http://www.renewableenergyworld.com/rea/news/article/2014/10/duponts-500-million-biofuel-bet-expected-to-pay-off
apneaman on Wed, 8th Oct 2014 1:12 pm
Defend this any and all freaky fracking cheerleaders.
Confirmed: California Aquifers Contaminated With Billions Of Gallons of Fracking Wastewater
http://www.desmogblog.com/2014/10/07/central-california-aquifers-contaminated-billions-gallons-fracking-wastewater
Harquebus on Wed, 8th Oct 2014 4:17 pm
At 7% gdp growth, China’s gdp will double in 10 years and in that 10 years, it will consume more than it has done throughout modern history.
http://www.youtube.com/watch?v=e_VpyoAXpA8
Arithmetic, Population and Energy — a talk by Dr. Albert Bartlett on the impossibility of exponential growth on a finite planet.
JuanP on Wed, 8th Oct 2014 4:25 pm
The IMF reports that on a GDP PPP basis China has become the largest economy in the world.
http://www.businessinsider.com/china-ov … my-2014-10
http://www.huffingtonpost.com/2014/10/0 … 51374.html
http://www.newsweek.com/chinas-economy- … est-276104
JuanP on Wed, 8th Oct 2014 4:28 pm
http://www.businessinsider.com/china-overtakes-us-as-worlds-largest-economy-2014-10
http://www.huffingtonpost.com/2014/10/08/china-gdp-tops-us_n_5951374.html
http://www.newsweek.com/chinas-economy-overtakes-us-worlds-largest-276104
Davy on Wed, 8th Oct 2014 4:47 pm
Juan, more hollow statistics when one considers how hollow China is as a nation and economy.
Makati1 on Wed, 8th Oct 2014 9:38 pm
Knew Davy couldn’t resist a China put-down. LMAO
Makati1 on Wed, 8th Oct 2014 10:03 pm
BTW:”…Another worry was the “migration of new market and liquidity risks to the ‘shadows’ of the financial world,” that is, to the less regulated and nonbank sector.
In the US, Lagarde noted, “shadow banking is now considerably larger than the traditional banking system” and China, at 25–35 percent, has the fifth largest shadow banking sector in the world…”
The USSA is Number ONE again!
http://www.globalresearch.ca/growth-estimates-revised-down-ahead-of-imf-world-bank-meetings/5406988
GregT on Thu, 9th Oct 2014 12:29 am
“Defend this any and all freaky fracking cheerleaders.”
I’ve heard that all of those chemicals are supposed to be good for removing road tar and bug splatters from automobiles. Nothing else seems to work.
Car-wash franchise anybody?
Kenz300 on Thu, 9th Oct 2014 9:59 am
Alternative energy continues to grow in use around the world.
——————
China Turns to Geothermal Energy To Tackle Carbon Emissions
http://www.renewableenergyworld.com/rea/news/article/2014/09/china-turns-to-geothermal-energy-to-tackle-carbon-emissions
rockman on Thu, 9th Oct 2014 10:56 am
The article seems to be implying that China has reduced its oil consumption. It might have decreased its rate of increase but not a decrease in consumption. In fact, just the opposite thru last summer according to this report:
Reuters – China’s implied oil demand rose in June to its highest level since January 2013 as crude runs hit a record high, although there were still doubts that the numbers reflected a healthy economy. Analysts remain cautious about the broad economic outlook in the world’s second largest oil consumer, noting that faster-than-expected growth in the second quarter was driven more by government support than by genuine momentum. China consumed roughly 10.2 million bopd oil last month, according to Reuters calculations based on preliminary government data , the highest level in 17 months and up 8.4 percent from May.
So I don’t know where “taking a breather” comes from: China will consume more oil this year then in any other previous year. They aren’t exactly holding their breath.