In this post I revisit the energy production and consumption data for China looking for clues about the future direction of global energy markets. China now consumes 23.2% of all energy consumed on Earth and clearly what happens in China will impact the whole world. Figure 1, lifted from the 2015 BP Statistical Review, shows how dramatically growth has slowed in China. Energy intensive steel and cement are barely growing as the era of industrialization and building infrastructure comes to an end. So may this, in part, explain the 2014 oil price crash?
Figure 1 The dramatic slowdown in energy intensive industries in China must surely impact demand for energy?
Figure 2 The “miraculous” growth of the Chinese economy has of course been underpinned and matched by growth in energy consumption. Looking at the top of the energy stack it can be seen that that growth in energy consumption is slowing. This has happened before and actually follows a surprising pattern (Figure 6). Related: India Becomes 3rd Largest Oil Importer
Figure 3 The energy production chart is y-axis scaled the same as consumption to make it obvious that China now uses more energy than it produces and has growing import dependence (Figure 4). The x-axis is scaled from 1981 since this is the year that the BP coal production series begins. The most notable feature of this chart is the decline in coal production in 2014. Coal consumption continues apace hence it would appear that the production decline is not demand led but rather that China may be approaching peak coal. Only time will tell.
Figure 4 Deducting consumption from production gives the energy balance, a proxy for imports and exports. In the 1980s, China exported both oil and coal. Oil imports began in the 1990s and have grown steadily ever since. Gas imports began in 2000 and in 2011 China became a net importer of coal. This ballooning increase in energy imports seems set to continue and the OECD will find itself increasingly in competition with China for global energy exports. There is no slowdown in China’s appetite for energy imports, hence the slowing of the Chinese economy is not obviously a contributing cause to the collapse of energy prices. Related: The Next Global Resource Shock
Figure 5 China’s coal production as a percent of the global total may have peaked four years ago at 47.9%. Production growth has stalled before in the 1990s, but this time I suspect that a production limit has been reached and it is easier now for China to import surface mined coal from Indonesia and Australia. It is somewhat miraculous that China has managed to mine 48% of global production from underground mines.
Figure 6 This chart plots the year on year (YOY) changes in China’s energy consumption (Figure 2) and reveals this somewhat surprising and interesting pattern. There appears to be a quasi 9 year cycle with growth lows in 1967, 74, 81, 90, 98 and 2008. The recent slowdown in energy growth since 2010 is clear to see. It is tempting to speculate that this pattern is linked to the 5 year central planning cycle although it is not obviously so. If this pattern means anything, and it may not, then it may be 2017 before China’s energy consumption accelerates again.
Figure 7 China’s energy consumption is still dominated by fossil fuels and coal in particular. The last time I visited China’s energy was in 2012 when FF represented 91% of the total (Figure 8). This has fallen by 2% with the substitution being picked up by hydro and renewables. By way of comparison, renewables in Germany was 8% and hydro 2% (2012). Nuclear and gas are both surprisingly low. I find it hard to understand how a vast, coal rich country like China can have so little natural gas production. China has 26 operational reactors with 24 large modern reactors under construction, nuclear output is expected to treble by 2020. Related: Top Three Rebound Stocks In The Permian Shale
Figure 8 China’s energy mix as it stood in 2012.
The scenarios I presented for 2015 – 2016 oil price outlook all included a component of near term weak demand to explain the precipitous fall in the oil price. While the BP data does not yet include 2015, there is little evidence to support the notion that weakening Chinese demand has played a role in the 2014 oil price crash. The slowing of GDP growth and pending collapse of energy intensive industries (Figure 1) are a tempting target to explain some of the fall and this is indeed recorded by a deceleration in China’s energy consumption (Figure 6). But stalled indigenous energy production, especially coal (Figure 3), means that China is dipping deeper into the global energy market and that should support prices and offset the deceleration in consumption. It looks increasingly likely that the oil price crash is to be explained by over-supply alone.
I do believe that third quarter 2014 the global economy experience a cyclical drop in oil demand that triggered the price crash. For years these cyclical events were absorbed by OPEC cutting production and maintaining price stability. It is the lack of OPEC intervention on the supply side that caused the price crash. For 2015, my anticipation was that both demand and supply would fall. In fact the opposite has happened. Low price has evidently stimulated demand but has yet to seriously impact supply.
All of the energy statistics come from the BP: Statistical Review of World Energy 2015
Economic statistics are drawn from the United Nations:
UN: National Accounts Main Aggregates Database
Countries in this series of 2014 posts
Egypt – energy, population and economy
Libya – energy, population and economy
Turkey – on its way to a mature economy
Ukrainian Death Spiral
Does the UK Economy Run on Energy or Hot Air?
Portugal – renewables to the rescue?
Belarus grows while Ukraine withers
Goodluck Nigeria – a failed state?
Germany: energiewende kaput?
America energy independence
China – the coal monster
Brazil – Samba Energy
By Euan Mearns
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