The China factor card has been playing heavily in the markets these couple of months. Is China growing or stagnating, seems to be the million dollar question. Will the world’s second biggest economy continue to be a factor in the market?
The remarkable growth of oil demand, and indeed the world economy, since year 2000 can be summed up in a single word: China. A country of nearly 1.4 billion people, the rapid development of China in manufacturing and industry has made it the factory to the world and the fastest growing middle class as well. Flushed with wealth, the Chinese have bought cars and houses, travelled far and wide, underpinning an amazing boom in oil demand that jumped from just over 4 million b/d in 2000, to some 11 million b/d in 2015.
Where do we go from here? Chinese oil demand growth has been attributed as the reason for many things – US$100/b oil, regular smog in Beijing – but to expect it to continue at 10% growth rates indefinitely was always a fallacy. A slowdown was always coming, and has already happened. It doesn’t mean that there isn’t growth anymore, it just means the percentage gains aren’t as impressive numerically anymore, even though the absolute growth in numbers might be large.
China has a habit of wanting to do things itself. Chinese pride means the country will eventually want to be energy self-sufficient. It does not produce enough crude oil to feed its ravenous industrial belly, but instead of relying on imports, it is buying into foreign upstream assets strategically in hostile environments in African and the Middle East. Instead of importing refined oil products, it built its own massive refineries, including private teapot refineries that were allowed to import crude individually last year, becoming a net exporter in the process. It does not want to face crude shortage shocks, so it is filing up its massive strategic petroleum reserves. On this same vein, China is also looking to be a less hydrocarbon intensive in its future energy growth. High pollution problems in major cities have consistently been a political thorn and embarrassment to China’s shinning economic success. It has since embarked on a massive renewable energy initiative like no other country, optimising on its cheap manufacturing capability of solar panels and wind turbines.
So with a maturing, but still growing economy, and a massive build-up of domestic energy infrastructure, China now exerts influence in world oil markets in a different way now. Instead of being an ambitious upstart, it is now a calculating doyenne. The answer to China’s growth is no longer a simple equation of feeding booming demand, it is now a complex solution of strategic policies, acquiring assets and tactical partnerships. All this will need to be baked into the price curves for crude oil and upstream production; Chinese influence isn’t waning, it still carries a very large chunk of world demand. In 2030, Chinese oil demand will have probably risen only to 15-16 million b/d, hardly the tripling of the past 15 years, but within that gain is a huge array of development in quality, efficiency and utility.
Is there any country that can take China’s place, to replace it as a driver of demand? The immediate short answer is No.
However India is an obvious choice. India’s Minister of Petroleum and Natural Gas, Dharmendra Pradhan spoke to a group of investors this July 2016 proclaiming that “If you invest in India’s oil and gas sector, you will find that you have a market right here, and you don’t have to invest in export infrastructure”. Reflecting India’s has a vast domestic appetite for more hydrocarbon growth potential in the coming years. But despite its potential size, the very nature of its politics, government and private enterprise means it still lacks the top-down savvy of China to really drive growth in a sustained and controlled manner. Brazil is floundering in every way possible, and Russia is getting more isolated. None of the so-called ‘Next 11’ countries are big enough to ‘do a China’.
The Chinese oil miracle is a once in a generation event – much like post-WWII Europe and Japan in the 70s – and we are now in the flatter part of the future curve of oil demand. We may not yet have hit peak oil, but the Chinese boom is certainly one of the final basecamps before the summit. We need to accept this new reality.
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Headline crude prices for the week beginning 16 September 2019 – Brent: US$69/b; WTI: US$63/b
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