Will the End of China’s Oil Age Come Sooner Than We Think?

A recent report by oil giant BP found that energy demand in China is growing at the slowest rate since the Asian financial crisis of the 1990s.

The market for energy, dominated by coal and oil, has weakened as the economy slows and the Chinese government acts to both reduce the nation’s reliance on heavy industry and encourage growth in the services sector.

The true picture is often masked by headlines reporting monthly and quarterly figures that tell a different, potentially misleading story – one of continuing growth.  For example, oil demand climbed 5.4% year-on-year in April, while the first four months of this year saw a 4.4% increase in demand compared to the same period last year, representing the fastest pace of year-to-date growth since 2011.  But closer analysis of longer-term trends shows that the pick-up in demand is for light-end products such as gasoline (petrol), buoyed by an uplift in car sales.  Also, data on products in storage are only released irregularly, so demand may appear to outstrip actual consumption (and there is no official data on the country’s actual oil consumption).

A less bullish statistic for April reveals a slump in the fuel oil market.  Consumption tax increases have made it more expensive, hitting China’s independent refiners.

Peak oil

Confirmation of the underlying energy trend came from Fu Chengyu, Chairman of Sinopec, China’s biggest oil refiner, in March this year.  He forecast that the peak in China’s demand for diesel would be reached in just two years’ time, with the high point for gasoline arriving about eight years later.

Sinopec is already envisaging a future in which fuels become a non-core part of its business, which will focus instead on alternative energy and selling consumer goods at its filling stations.

The company is better placed to assess demand than any other, so it is interesting that its predictions run counter to those of the Paris-based International Energy Agency (IEA).  The IEA, whose findings are closely watched by energy traders, has predicted that China’s oil demand will continue expanding beyond 2040.  It does, however, acknowledge that statistics are not effective indicators of market changes as they often involve ‘…extrapolations from recent trends, which naturally tend to assume business as usual’.

Clean energy – the future?

China’s shift towards cleaner sources of energy, such as natural gas, is already having an impact on shipping companies.  As demand for iron ore and coal falls away, many operators are laying off vessels.

As for the fall in global oil prices over the last year, some analysts believe that this trend will not be reversed.  The developed world has become more energy-efficient and alternative energy sources are at last looking competitive – in fact, low prices have driven improvements in drilling technology, which is especially the case for the young shale industry in the USA.  The developing world is likely to follow suit.

But even if the story is no longer one of continued expansion, the oil sector will continue to generate profits for well-managed, efficient companies for many years to come.

Parker Kittiwake continues to provide analysers to monitor refinery emissions.  To find out more contact us on 01903 731470.