Energy Demand: China vs. the World

Let’s talk a little bit about the role of supply and demand in determining energy prices, in particular the interplay between demand from the U.S. and other western nations and the demand from China and other emerging market economies.

First, here is a graphic from the WSJ depicting the YoY change in gasoline consumption in the U.S.

As you can see, gasoline consumption has decreased by roughly double any of the previous highs in years past and is no doubt a product of decreased SUV use, adoption of more fuel efficient cars, people driving less, etc. Unfortunately, I don’t see this having much impact on energy prices as the increase in demand from emerging market countries, China, etc, will more than offset the decrease in energy demand from the U.S. Furthermore, we’re basically in a recession right now and it’s very likely that our demand will increase once the economy recovers.

In order to better illustrate the above, let’s take a look at a graphic depicting the rise in China’s energy consumption in recent years vs. the general decrease in demand from the traditional industrialized nations over that same time period.

As you can see, China’s rapidly increasing demand for oil is easily offsetting the reduction in demand from Western nations. Perhaps the most telling aspect of the chart is the fact that China’s YoY increase in demand roughly matched that of the traditional industrialized nations until 2005, and after that China’s demand more than doubled the YoY decrease in demand from the industrialized nations.

Overall, it’s a pretty simple story: while high energy prices are causing demand to slow from Western nations, China’s economy is growing so fast that it’s able to easily absorb the price increases without blinking. Even in an instance where an individual consumer of oil (consumer or corporate) cuts back on purchases, the overall pool of consumers is increasing more than fast enough to compensate. This is why I don’t even think that China’s recent decision to raise fuel prices will create a significant slowdown in demand, because the aggregate pool of gasoline consumers is growing more than fast enough to offset any reduction in demand from the existing pool.

While the 18% increase in fuel prices may cause a temporary slowdown in demand, I seriously doubt it will change the overall trend even if China implements several more price increases. Right now, and for the foreseeable future, China will be the nation that drives global trends in energy demand more than any other.

Graphics courtesy of the WSJ

Comments

[nicole davis]

No matter how much China increases its demand, it doesn't justify the doubling of price for crude oil. It's just speculation and the price will fall hard when the time comes.

[seatoshore]

So the culprit is China, again. Why you people keep on blaming China for your own problems? Western economies have been consuming MUCH MUCH more oils for YEARS, and neither China nor India were blaming for the fact. However, once China and India join the rank, everybody is crying foul. Be fair, folks! The world has changed, and you have to accept that.

The way to bring oil price down is not just to blame China or India as culprits for increased oil demand. The way to bring the price down has to come from the joint effort from the entire world community. US has by far been the larget oil consumer, and it has to decrease its consumption aggressively, or open up its land or seashore for oil drill. China has done all the dirty work to manufacture most of the products that the world is consuming, so it deserves to use a bit more oil. But since US and western countries are transitioning to service-heavy industries, the oil consumption has to be reduced dramatically from the points before.

[aquabiker]

I didn't read about any one blaming China. Just someone stating China increasing demandby so much.

[Investor612]

Exactly aquabiker. But when you're dealing with someone who actually thinks there is such a thing as a "world community" capable of concerted action you're wasting your breath

[Fe-y]

Yes, China is clearly the culprit. How dare they use the billions we've spent on their products to buy our oil!

But, forget a joint effort from the entire world community. Nuclear war is the obvious solution.

[Eric Fox]

China uses approximately 7.3 mm BD of Oil - the OECD nations use 48.0 mm BD. You do the math on that one.

[jamie4419]

No one's blaming China (at least, no fairmined person is). They're just saying China has a huge demand for oil.

[Jerry Dill]

I think this is just another excuse why OPEC is decreasing supply and driving up prices in order to blame their wealth on China's increase in fuel consumption. I still think that OPEC is the main driving force behind the increase in our oil problems. Also the large skepticism about future supplies.

[lebur]

On one side is increasing Chinese and other consumption. On the other is the annual DECLINE in the productivity of the major producing oil fields, which appears to be close to 3-4 million bbl/day/year. This requires, to stay EVEN with current production, discovering and producing the equivalent of about one IRAN every year. The COST of new oil is generally FAR ABOVE historical norms. Drilling offshore 100 miles under 6,000 feet of water to a depth of 15,000 feet and even more is a $100 million dollar investment. Not very long ago a million dollar well was a BIG investment. Even new discoveries will NOT lead to yesterday's oil prices. It is a mistake to look for facile single factors to account for the rise in oil prices. Speculators cannot store very much oil. The fact that the US has accumulated 700 million bbls over decades, which is a 35 day supply at today's consumption rate, illustrates the overwhelming influence of CURRENT supply and demand in establishing oil and refined product prices. Producing more liquid hydrocarbons is one way to hope for relief from high prices. Conserving your USE of them is another, not easily done by long-distance commuters in low-density regions that evolved in the cheap energy, automobile era. About half the oil we use in America IS used in cars and trucks. Even if we used NO OIL for these moving users, we would STILL be importing oil for multiple other uses.

[gigem77]

I agree. China is the biggest part of the demand story. Demand is also increasing in OPEC countries and in Russia. They will export less as their internal consumption grows. Also, the Chinese are revaluing the yuan. Since oil is priced in dollars, they are gaining an advantage in the currency exchange.

[AndyMan]

great article.....good job with the graphs on displaying the demand destruction and growth of each country/area.