China isn’t hurting oil prices — it’s as hungry for oil as ever

Posted by: privatefinancetips in BLOG, Money Invested Mar 27, 2016

China’s GDP grew by 6.9 percent last year, its slowest in 25 years. But that has to still be the envy of the rest of the world, which didn’t even do half too on average. And while China’s electricity demand rose by only 0.5 per cent, overall energy consumption fell by 0.5 percent, its first negative development in 30 years.

While both structural and business cycle factors are responsible for China’s stop by energy demand, it’s a mistake to blame China for that dramatic decline of global oil and gas prices.

So, what explains the discrepancy of China adding over US$700 billion in value to its GDP in 2015 – the same as 40 per cent of Canada’s economy – but using less power than the year before?

First, the world’s second-largest economy is becoming more effective, with its energy use per unit of GDP decreasing 5.6 percent last year when compared with 2014. Overall, the quantity of GDP China produced between 2006 and 2010 was generated by 20 percent less energy within the subsequent 5 years, exceeding the government’s 16 percent reduction target.

Second, China’s industrial sector, the biggest energy consumer, has been shrinking; now comprising 40 percent of the economy. However the service sector has grown steadily previously 5 years, representing 50 plus percent of the economy last year and contributing to over 60 per cent of the country’s growth.

China’s oil consumption increased eight percent in 2015, the second-highest annual increase after 2010

Third, many Chinese manufacturers relied on the leftover inventory they produced or purchased in 2014 to continue their output in 2015, with a minimum rise in power consumption. This “de-inventory” process, having a gap between high GDP numbers with low power consumption, also happened both in 1997 during the Asian economic crisis and 2008 during the world economic crisis.

But, with regards to its oil and gas use, data reveal that China’s appetite keeps growing. China’s oil consumption increased eight percent in 2015, the second-highest annual increase after 2010. China imported 7.82 million barrels per day (bpd) of crude last December, and 2015 oil imports averaged 6.71 million bpd, both record highs. The nation’s gas and LNG demands also increased, although without double-digit growth as in previous years.

Here may be the interesting phenomenon of China’s energy-consuming behaviour: While overall energy usage remained flat this past year, the share of coal use dropped by four per cent over 2014 while other causes of energy increased. And this shift was mainly driven by very determined government policies.

For decades, China’s unprecedented industrialization process continues to be fuelled primarily by coal, which makes up nearly 70 per cent of the country’s energy mix. Close to 80 percent of China’s electricity is generated by coal. The country may be the largest producer and importer of coal in the world, and uses 50 plus per cent of total global output annually.

But china leadership is facing intense domestic and international pressure to solve its environmental challenges – chiefly air pollution and CO2 emissions.

So China’s central planners used many regulatory and material incentives to inspire powers apart from coal. The plan is to boost the share of non-fossil energy in the current 11 per cent to fifteen per cent by 2020, and also the portion of gas and LNG, currently at six percent, will a lot more than double in 5 years. To discourage coal use, local governments have been forwarded to offer higher payments for electricity generated by gas instead of coal.

With all of the coal-producing capacity it’s accumulated in the last two decades, halting China’s massive coal industry has not been easy. More than 50 per cent from the added coal output this past year was neither planned nor permitted.

But the authorities are allocating US$4.5 billion in the next 3 years to close some 4,900 coal mines, and re-direct a million coal miners, or 23 per cent of its total coal-mining workforce, with other employment.

This may not be good news for that coal producers in China or coal exporters all over the world. But China’s emerging new energy structure, while less determined by coal, is nice news for gas and oil producers as well as non-fossil energy sources: China is by far still the fastest-growing market for all these energy products.

Wenran Jiang may be the Director of the Canada-China Energy & Environment Forum along with a former special adviser towards the Alberta United states doe.