China slowdown stokes oil demand fears

Bradley Olson

The Wall Street Journal

January 26, 2016 8:03AM

More Chinese are driving cars but the nations transformation may not need as
much fossil fuels as predicted.
A bedrock belief among oil forecasters has been that Chinas voracious
appetite for fossil fuels would stoke global energy demand for decades
to come. That assumption now appears increasingly shaky.
A highly anticipated new energy demand projection from Exxon Mobil revises
down the companys expectations for China. And a slew of data is emerging that
points to the toll a weakened economy has taken on Chinese energy demand,
which is among the most important factors in determining the price of crude oil.
Exxon cut its forecast for annual energy demand growth in China by almost a
tenth to 2.2 per cent a year through 2025. Over a decade, the revision amounts
to more than Brazils current annual oil consumption. Exxon also predicts that
Chinas thirst for energy will peak by 2030.
The company played down the change to its figures based on its previously held
view that Chinas working population is reaching its apex, said Bill Colton, vice
president of corporate strategic planning.

More: Oil prices slump over 5pc

Countries sometimes have to go through transitions, he said. One thing about

economics, its never a straight line.
A study issued last week by consultancy ESAI Energy said that the pace of
Chinese oil demand growth would slow down 60 per cent between now and 2030
when compared with the previous 15-year period.
If demand wont come from China, who will step in to fill Chinas shoes? said
Erica Downs, a senior analyst for the Eurasia Group who focuses on the countrys
energy sector.
Chinese energy consumption rose just 0.9 per cent last year, according to
government estimates, as gross domestic product increased 6.9 per cent, the

worst annual rate in a quarter century. The unexpected short-term drop casts a
shadow over the prospect of an oil price rally this year. US and global benchmark
crude prices fell below $US27 a barrel last week for the first time since 2003.
The oil glut in the market today was initially spurred by technology
breakthroughs that unlocked more fuel reserves from the ground. But the
oversupply is being prolonged and deepened by weaker-than-expected demand.
That confluence of factors has made this oil downturn particularly difficult to
resolve. If tepid Chinese energy consumption continues, it could raise profound
questions about the future stability of oil and gas producers around the world,
analysts say.
Future expectations of robust energy demand have always been about more than
just China. India, Asian tiger countries and other emerging economies with vast
populations eager to move into the middle class were supposed to follow Chinas
lead economically and on the energy demand front. Once-prominent fears that
the world would soon run out of oil have been up-ended by plentiful supplies
unleashed in recent years. Now emerging concerns about peak demand are
starting to percolate.
From 2000 to 2010, Chinas rapid industrialisation created soaring demand for oil
to power an economy tied to manufacturing and exports. Over that decade,
China accounted for more than 40 per cent of the growth in global demand for
crude oil.
The seemingly insatiable need caught the market by surprise, helping push oil
prices to a record $US147 a barrel in 2008. But since 2010, Chinas energy
demand growth has fallen far more precipitously than its increases in GDP. In
2012, for instance, Chinas GDP rose at nearly double the rate of energy
consumption growth. In 2014, it was more than triple. And last year, Chinas GDP
grew six times faster than energy demand growth, according to figures from
China and the World Bank.
Some analysts believe the numbers reflect uncertainty around the accuracy of
data coming out of China. Yet even accounting for the possibility that GDP data is
inflated, the decoupling of economic and energy growth suggests that Chinas
transformation simply may not require as much fossil fuels as many have
predicted.
Just as energy companies underestimated Chinese demand in the first decade of
this century, they may be over-estimating it now, said Anthony Barone, senior
vice president for deals and restructuring at Argo, a Chicago-based consulting
firm.
Their growth has slowed, and the belief that they are going to be the top
country providing stable, long-term demand for energy is looking optimistic, he
said.
BPs 2015 energy outlook forecast 3.9 per cent energy demand growth for China
through 2020, more than four times higher than the actual increase seen in the

countrys consumption. Last years forecast growth for China by the International
Energy Agency was nearly double the actual demand figure.
Predictions of a tremendous wave of energy growth from China, India and other
fast-growing countries are based on a very real trend. As those economies
mature, hundreds of millions of people will enter the middle class and use more
energy, driving cars or using airconditioning. That is why Exxon still believes that
from 2014 to 2040, global energy demand will grow by 25 per cent, according to
the companys Energy Outlook.
No doubt middle-class Chinese are using more gasoline and electricity to power
their homes and cars, but so far it isnt enough to make up for stagnating
industrial activity.
All forecasts that seek to predict the supply and demand of oil or other
commodities decades into the future make use of history and emerging trends,
as well as informed guesswork, said Citigroup commodities analyst Eric Lee.
China isnt going to keep sucking up oil voraciously, he said. No matter what,
China will have its own unique development moving forward.
With Brian Spegele
Wall Street Journal