China’s oil demand is vanishing faster than it looks

By David Fickling

Is China still the best justification for ongoing crude demand, or the worst?

While most of the world remains fixated on the slow-motion car crash in its real estate sector, oil executives seem unruffled. “We are very bullish on China, and their demand picking up, especially with the big stimulus package coming out,” Saudi Arabian Oil Co Chief Executive Officer Amin Nasser told a conference in Singapore in October.

The major international forecasting groups have a similar outlook. Growth last year was well below annual increases that have averaged about 600,000 daily barrels over the past decade — but it was still positive, by their estimates. Consumption rose by about 300,000 barrels a day, according to the Organization of the Petroleum Exporting Countries, while the International Energy Agency saw a more modest 200,000 barrel-a-day gain.

China’s customs and output data paint quite a different picture. Combine domestic refinery processing with net exports of gasoline, diesel and the like, and the consumption of petroleum is about 300,000 daily barrels lower than in 2023. If the country is still sucking up crude, it’s likely because it was adding to a stockpile that’s still relatively lean by the standards of other oil importers. Fuel that’s used to pad out inventories in 2024 is essentially consumption pulled forward from the future, so it’s not the sort of thing you’d want to rely on if you’re investing in a 15-year oil project.

Another sort of pulled-forward consumption will pose a further headache for oil producers. One of the main elements we’ve seen of that stimulus package that Nasser was so happy about emerged this month — an 81 billion yuan ($11 billion) extension of Beijing’s vehicle trade-in policy to get consumers to upgrade old cars and appliances to more energy-efficient variants.

As Morgan Stanley’s former chief economist Stephen Roach has pointed out, that won’t result in a larger sum of consumer spending so much as alter the timing of it, getting people to buy new durable goods sooner than they would have done. But its effect on fuel consumption will be more lasting, because an earlier purchase of an electric car means a faster decline in demand for gasoline.

Some 60 per cent of vehicles bought under the program last year came with a plug, and China’s car market is already at a tipping point: Battery and plug-in hybrid cars, locally termed New Energy Vehicles or NEVs, in December made up 49.4 per cent of car sales, and 46.8 per cent across the full year. Conventional and normal hybrid cars will be a minority of the market this year, and the only way is down: Bloomberg Intelligence estimates that NEVs will hit 68 per cent market share in 2027 and 81 per cent in 2030.

Cars in China have a typical lifetime of about 13 years, so the size of the conventional car fleet has likely been flatlining for a couple of years now, and increasingly dominated by more efficient recent models. There’s no math that can squeeze further demand growth out of a market like that.

To give Nasser credit, his great hope for Chinese demand doesn’t focus on road fuels so much as petrochemicals. But it’s increasingly hard to frame that as part of the country’s growth story. As we’ve written, China has been actively onshoring its petchem industry for several years now with several massive refineries specializing in producing polymers and other organic chemicals. Much of this ends up exported again, whether in raw form or as the dashboard of a BYD Co. electric car, so it’s arguable whether the end-user is Chinese at all.

Take commodity plastics such as bags, utensils, cheap household goods, fabric, and bulk wholesale materials. Exports in this category increased from $80 billion in 2018 to $132 billion in 2023, much of it going to the South and Southeast Asian countries that are increasingly becoming workshops for China’s exports. It’s hard to say exactly how much oil this represents, but if you assume it’s being sold at a 50 per cent mark-up above the prevailing price of polyethylene (the most common plastic feedstock) it still represents about 600,000 barrels a day, about a fifth of the increase in China’s oil consumption over the period.

These products and their fossil raw materials are getting used, whether it’s in China or elsewhere in the world. But oil producers counting on Beijing’s stimulus to stoke demand for their products need to think hard about where their ultimate consumers are living. In a world raising tariff walls against Chinese products, it looks rash to depend too heavily on a new and aggressive export sector as the key customer for your crude.