China’s march into alternative transport is starting to producer some significant numbers. A combination of rising electric vehicle (EV) and LNG-fuelled truck sales will, by year’s end, displace about 500,000 b/d of oil product demand.
Chinese oil demand was expected to slow as a result of lower GDP growth brought about by the waning of the country’s demographic dividend and the transition from an economy dominated by heavy industry to more service-sector activity.
The country recorded a year-on-year increase in GDP of 6.5% in the third quarter, the lowest rate since the financial crisis. Few, if any, forecasters expect China to return to the heady double-digit growth rates of the early 2000s.
As a result, there are two overlapping narratives weighing on the prospects for Chinese oil demand and both should concern the market – slowing growth and reduced oil intensity, particularly in transportation.
EVs and LNG
At the end of first-half 2018, China had an estimated 1.65 million passenger car EVs on the road, about 80% of them battery only. Although this represents about half of all EVs globally, it only stacks up to about 36,000 b/d of oil demand displacement.
It is the commercial segment where the numbers really start to build. Commercial vehicles drive many more miles on average than passenger cars and have much lower fuel efficiency than their light-duty counterparts.
At end-2017, China had an estimated 408,000 electric buses and an additional 92,000 light commercial EVs, according to EV-Volumes. Of the buses, some 86% were pure electric. This adds up to about 174,000 b/d of oil demand, primarily diesel.
In all, China’s EVs are accounting for about 210,000 b/d of displaced oil product demand. Sales of commercial EVs were reported at 49,000 in first-half 2018.
On top of this, one has to add LNG-fuelled trucks. According to reports, sales reached over 80,000 in 2017, up from just 19,600 in 2016, with a further 39,000 sold in the first seven months of this year. Estimates vary, but the total number of heavy trucks running on LNG in China is thought to be in the region of 300,000.
Heavy trucks are very intensively used and replace diesel vehicles with a fuel efficiency of just over 5 miles to the gallon. As a result, a fleet of 300,000 LNG trucks would displace about 252,000 b/d of oil demand.
According to EV-Volumes, total sales of passenger EVs in China will reach 1.1 million this year, 4.2% of new sales. The number of new commercial EV sales is expected to reach 275,000, half of them large buses. This would push the level of commercial sector oil displacement up to 289,000 b/d by the end of this year.
Pull in the LNG figure, and China’s dash into alternative road transport is displacing just north of 500,000 b/d of oil.
500,000 b/d is a big number and the growth trajectory for both EV and LNG-fuelled trucks is very strong, but for the moment alternative transport is not the dominant factor governing Chinese oil demand.
There may have been 39,000 LNG truck sales in the first seven months of the year, but there were also 729,000 new trucks running on oil products. If passenger car EV sales hit the projected 1.1 million units in 2018, that still represents only 4.6% of new sales. In other words, there will be an additional 26.4 million new diesel and gasoline passenger cars on Chinese roads as well.
Lessons from coal
The dip in Chinese coal consumption in 2013 astonished the outside world. Further small annual declines gave support to the idea that China was at an environmental turning point – and gave rise to predictions of global peak coal demand -- only for China’s coal consumption to edge up again in 2017.
This was a year when China instituted large-scale coal-to-gas switching in its northern provinces, a scheme which saw the country’s winter LNG imports rocket. It should also have destroyed permanently a commensurate amount of coal demand, yet China’s coal consumption rose. There are two reasons for this conundrum.
First, not all of China’s coal use is recorded in the official figures, so a reduction in use will not always show up. Second, coal demand still depends heavily on industry and power generation. China’s coal-fired plant utilisation in 2016 was only about 50%. China could thus in 2017 simultaneously report the closure of GWs of coal plant and still increase coal-burn to meet rising electricity demand.
There is also a potentially serious feedback effect when it comes to EVs and electricity which affects coal. At end-2017, annual EV electricity demand was about 32 TWh, but based on forecast sales for 2018, this would jump to 48 TWh by end-2018, a rise of 150%, but still only 0.75% of China’s total power generation in 2017.
China’s renewable electricity generation is rising fast and will this year compensate for the increase in EV power demand more than ten-fold, but, overall, electricity demand in the first-half was up 9.4%, according to the National Energy Administration. If this rate of growth is maintained throughout the year, it implies more than 600 TWh of additional power will need to be generated. China cannot avoid more fossil fuel use in power generation and the backstop is higher coal-fired plant utilisation.
Forecasts of peak Chinese coal demand therefore remain premature and in the same way the impact of alternative transport on Chinese oil demand should not be overstated at least in the short to medium term.
Chinese oil demand is governed primarily by traditional factors and will be determined by the outlook for oil-intensive sectors such as agriculture, construction, transport and mining. This will be underpinned by the continuing build in the country’s strategic oil stocks. The goal is 500 million barrels. By end-2017 inventories were estimated at 287 million barrels.
The real threat to Chinese oil demand comes from a tariff-induced slowdown in export orders, further slowing of the domestic economy and the exposure of bad debts in the banking sector, hitting investment. But even if this did occur, as with coal, any peak in oil demand might well prove false.
A return to more robust economic growth would still overwhelm the demand displacement of alternative vehicles. China’s oil intensity has fallen sharply over the last decade, but only to US, rather than European or Japanese levels.
Long term, however, the story is different. High rates of GDP growth are less likely as the economy continues to mature. Alternative transport is on a strong upward curve. China accounted for 43% of new oil demand globally over the past decade, but the oil market cannot look to China to sustain oil demand in perpetuity.