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China
’s
short and long-term demand for oil.
China’s rapidly growing
appetite for oil has certainly played a role in recent skyrocketing crude
prices, along with the market speculators. What the market should really be
concerned with is not
China
’s short-term thirst for
oil, but its long-term demand!
By
Frank Liu.
Aug 30, 2004
Crude
oil price has been behaving like a roller coaster in recent months. While
many people are trying to look for answers in the supply and demand pictures
around the world,
China
has become the center of a
world-wide debate.
Short-term:
China
’s oil demand growth
will slow down
Those
who blame
China
for the nearly
$50-per-barrel September crude price seen at
New York
certainly have their
reasons: while
China
’s oil consumption represents only 7% of the
world’s total (2003 data), it has the world’s fastest-growing demand for
oil.
China
’s demand has doubled in
the past 10 years, and currently accounts for one third of the world’s 2.5
million-barrel increase in daily oil consumption. Although
China
’s central government has
been trying hard to slow down the country’s economy from overheating since
earlier this year, there is no sign of slowing down in oil imports!
China
’s crude imports in July
increased by 40.7% over the same period last year, reaching 2.27 million
barrels a day. Meanwhile, total crude imports during January thru July rose
by 39.5% compared with last year.
But if
we look at the two driving forces behind the sudden increase of
China
’s oil demand this year,
we will see that this growth rate is hard to sustain for the remainder of
the year. Recent demand has been from the transportation sector, and the
demand for diesel fuel used by smaller electricity generators to backup the
unusually severe power shortage faced by
China
this summer.
Hot
sales of private vehicles earlier this year, plus increased transportation
demand resulted from more active industrial and commercial activities (as
evidenced by the high GDP growth rate, which was averaged at 9.8% for the
first quarter and 9.6% in the second), has been an important factor fueling
China’s growing demand for oil. However, car sales in
China
have been slowing down
since May, so the gasoline demand will not be growing as rapidly as we saw
in the first half of this year. At the same time, lower economic growth rate
in
China
(as a result of tightened
controls by the government) is also expected to slow down transportation
activities.
Power
shortages in the summer are common in
China
, but it has been
particularly severe this year. Facing regular power cuts in manufacturing
plants and air conditioning restrictions in shopping centers, restaurants
and office buildings, Chinese have been pushed to buy their own small,
diesel-burning electricity generators to cover the power shortage, which in
turn has led to unusually high demand for diesel fuels. With the power
shortage reaching its peak this summer and easing out in the remainder of
the year, the abnormaly high demand for diesel fuels will also ease.
To a
certain extent, the market has also been acting on the assumption that
China
will establish its own
strategic oil reserve and buy more crude. My understanding is that’s not
going to happen anytime soon. For one reason, it involves a long law-making
process.
China
has tried several times to
pass a law enforcing the set up of a strategic oil reserve but the proposal
was never approved by the People’s Congress. Even if the law is passed,
the technical difficulties of implementation will also mean long delays.
And
lastly, can you imagine any country would buy oil reserve at oil’s
historical high price range?
Long-term:
China
’s thirst for oil will
change the world’s fundamentals
However,
the short term slowdown of
China
’s oil demand will not
change the long run upward trend.
China
’s growing economy has
made it the second largest oil consuming nation in the world, after only the
US
– which represents about
a quarter of world’s total oil consumption. If
China
follows the
US
’s historical pattern of
industrialization, eventually it will totally change the fundamentals of the
world oil market.
According
to an estimate by
China
’s National Development
and Reform Commission, currently about two-thirds of
China
’s oil demand increase
comes from the transportation sector. By the year 2020,
China
’s transportation sector
will consume up to 260 million metric tons of crude oil, about the
nation’s total crude consumption in 2003.
With
limited oil reserves underground,
China
has to go out and purchase
from the world market.
While
the Chinese government has been advised to follow more energy saving
economic development paths, it simply does not have the motivation and
technology to change its current industrialization pattern.
When
China
has been relying on the
fast economy growth to solve its many problems that may threaten the
stability of the society, it is unrealistic for it to switch to any
different economic development lanes that may result in a slower economy
growth rate.
As
well,
China
does not have the
capability to replace oil with something different.
China
has set a target to
increase the share of renewable energy to 10% of its total power generating
capacity by the year of 2010, and to 12% by 2020. But this move does little
to change the nation’s demand for oil.
With
all these in mind, you will understand the potential impact of a growing
Chinese economy on the world oil market. Given
China
’s rapidly growing
appetite for oil, along with the increasing oil demand from other Asian
countries, as their economies benefit from
China
’s expansion, the
long-term upward trend of the crude oil price seems inevitable.
Mr. Frank Liu - Research Consultant, CFA
Frank Liu is a CFA Charterholder. He also holds a MBA from University of British Columbia in Canada and a
Bachelor of Economics from University of International Business and Economics in China. Having served both
public and private companies in Canada and China, Frank Liu currently works as an independent business
and investment consultant, providing industry research, business assessment and financial advising
services to clients from Asia and North America. Feedback: fliu@investorideas.com
Disclaimer: www.InvestorIdeas.com/About/Disclaimer.asp
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