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How China’s Transition Will Increase Oil Demand

Despite concerns about the apparent slowdown in the growth rate of the Chinese economy, China’s crude oil imports rose to a record level in February 2016. The surprising increase countered predictions otherwise in light of China’s decision to delay completing its strategic petroleum reserve to beyond its original 2020 deadline.

Chinese refiners may be selling refined product domestically at a higher profit margin in light of the decision by the Chinese government not to force a reduction in retail fuel prices commensurate with crude oil price reduction. In previous months, as Chinese imported crude oil rose, diesel exports also increased as refiners sought higher margins abroad.

Related: An Output Freeze Is Still The Big Red-Herring For Oil

Free market demand growth has no doubt contributed to more domestic demand for refined fuel products than previously anticipated. Although there has been a pullback in sales since the Lunar New Year, the Chinese people are buying record numbers of vehicles, including heavier Sports Utility Vehicles (SUVs) and therefore record amounts of hydrocarbon fuel.

Beyond China itself, Asia generally is seeing record demand for gasoline. Because demand in India for new vehicles remains high, refined product sales are seeing strong growth while Chinese exports decrease to meet domestic demand. Combined with record U.S. gasoline demand, these market drivers predict high liquids consumption growth in the near future. In addition to rapid incremental growth in Asian vehicle sales, China’s domestic infrastructure spending initiative and its $1 trillion Silk Road investment will lead to rapid demand growth for diesel and other liquid hydrocarbon fuel necessary for the required heavy construction equipment. China has an official no net agriculture land loss policy while also seeking greater densification in urban areas.

Chinese President Xi Jinping is under political and economic pressure to create jobs for workers left unemployed by the shuttering of excess industrial manufacturing plants in steel and other heavy industry. The government incentives for migrant workers to buy unsold homes, the recently proposed domestic fiscal stimulus and unemployment assistance, and the Silk Road investment initiative all point to a more densely populated China with less subsistence farmers and more urban workers creating and feeding domestic demand.

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Finally, the largest Chinese metropolitan areas are seeking substantial reduction in air pollution. These measures will require substitution of natural gas for coal and clean-burning diesel for dirty diesel.

China’s transition from a heavy manufacturing platform that grows primarily by exporting to a mature economy driven by domestic demand for services and high-end manufactured goods mean more per capita consumption of hydrocarbon products.

By Tom Morgan via Drillinginfo.com

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