China to Fuel Rebound in Energy Demand

The McKinsey Global Institute is out with a new report that adds more shape to China’s important role in future energy demand. This is a theme that we frequently discuss.

The report says that China will account for a third of the world’s energy demand growth in the decade beginning in 2010.

The table below, which uses conservative global GDP growth assumptions, shows that energy consumption by Chinese industry will grow by about 28 quadrillion British thermal units (QBTUs) over the 10-year period and that residential use will expand by 11.6 QBTUs.

For perspective, consider that a single QBTU is the equivalent of 172 million barrels of oil.

Overall, the estimated energy demand growth in China between 2010 and 2020 totals 52.4 QBTUs. This would amount to a 70 percent increase from the 75 QBTUs that the country consumed in 2006, according to the U.S. Energy Information Administration.

McKinsey estimates that global energy demand growth will total 158.5 QBTUs during the decade. That would be a 33 percent increase from the 472 QBTUs used by the world in 2006.

The growth forecast for the U.S. over the period is about 6 QBTU. The U.S. consumed about 100 QBTU in 2006, more than 20 percent of the world’s total.

Globally, demand for energy by residences and commercial buildings is expected to grow by 53.5 QBTUs. This lines up with our belief that the strong trends of population growth and urbanization in China, India and many other developing nations will continue.

Japan is expected to experience the lowest energy demand growth at just 0.4 QBTUs (less than 2 percent more than the 2006 consumption level) over the decade. The light-duty vehicle and steel sectors — two pillars of Japan’s once mighty industrial complex — are each predicted to experience negative growth.

McKinsey points out that improved fuel efficiency could alter its energy demand growth forecasts.

The U.S., for example, is working to improving energy efficiency — more than 7 percent of the aid given to states through the American Recovery and Reinvestment Act in 2009 is to be spent on energy and environment. By 2012, that percentage jumps to 17 percent. And the countries in the European Union are seeking to improve their energy efficiency by 20 percent by 2020, and to increase energy from renewable sources to 20 percent of overall consumption.

Energy efficiency is just as relevant in developing countries, many of which currently use subsidies to keep prices artificially low. The bulk of new construction will be in developing regions, and these projects will be able to build in more up-to-date technologies in heating, air conditioning and building materials.

Comments

[Mad Hedge F...:]

China is the big buyer. If you have been aggressively long commodities of every size, shape, color, and flavor, as I have been all year (www.madhedgefundtrader...), then you just had one of the best trading months of your career. The CRB index rocketed by 17% in May, the best move since the early days of the first oil shock in 1974. That year I spent weekends driving my Volkswagen van from Los Angeles down to Mexico, where I filled it with jerry cans of gasoline, because it was still selling for 25 cents a gallon there (an early attempt at arbitrage). I finally sold the vehicle and used the cash to buy a one way ticket to Japan (remember that John E?). My favorites went up the most. Crude leapt 29%, Silver clocked in a 23% return, and gold was up 9%. The producing stocks also did spectacularly well. Coal producer Massey Energy (MEE) soared by 44%, dragged up by oil, while my beloved Freeport McMoran (FCX), with the world’s largest gold and silver reserves, rose by 30%. While these things are all superheated on a short term basis, the ten year agreements are still good. You can find massive Chinese buying behind almost every one of these. Hmmmm. I wonder if those bell bottoms still fit?

May 30 08:59 AM

[mbkelly75:]

Hello Mad, I have been and it has been and I expect it to continue. My producer stocks have moved up quite a bit and paid me back for buying when they were low. The monthly dividends are moving WAY up and I will continue to hold and re-invest in the ones I have and buy some new ones also. I get enough cash coming in from the dividends to pay for the increases at the pump and have money left over. Life is good.

May 30 11:24 AM

[RiskReturnO...:]

Great. XLE looks ready to breakout of recent consolidation pattern. Crude oil is up ~100% from the bottom, while XLE is up ~30%. This disjoint is not going to last forever. Best strategy is to long XLE until $55, or for more conservative investors, consider buying XLE and selling the December $52 calls for $4 premium. The risk-reward tradeoff is great even if crude oil pulls back to $50-$55 range.

May 30 12:58 PM

[Artistes:]

What are your thoughts on natural gas? Do you think it has bottomed and about to break out?

May 30 01:01 PM

[Sovestor:]

The on-going recovery of global economy sooner or later will cause increase in energy demand worldwide. China's demand for energy clearly will grow faster than the rest of the world and account for significant portion of the world’s energy demand growth. However, even without reading McKinsey report, anyone with financial literacy can roughly conclude that China is likely to be the main fuel for any rebound in various sectors, not just energy.
The analysis is good but relies only on one source of data: McKinsey. How about other data sources? How about energy demand per capita in China vs. other countries? Furthermore, how about energy supply growth vs. demand growth? If demand is projected to increase by 5% and supply is projected to increase by 10%, will the demand rebound lead to increase in energy prices? We highly recommend investors to also consider analyzing data on the energy supply side to get a more complete picture.
- Sovestor.com

May 30 09:29 PM