No country’s fortunes correlate more closely with the fortunes of energy companies than China’s. Focusing on oil issues, the U.S. EIA reports that, at the end of 2013, China surpassed the United States as the world’s largest net importer of petroleum and other liquids and, in 2014, its oil consumption growth accounted for about 43% of global consumption growth. The EIA also projected China would account for more than 25% of the global oil consumption growth in 2015. In other words, when China sneezes the world catches a cold… at least when it comes to energy demand issues.
The people most responsible for keeping China’s economy healthy are the country’s governmental and state company leadership. Though the Chinese government has set cleaning out the “zombie companies” and their titanic overcapacity problems high on the priority list, conflicting and often contradictory goals, like keeping jobs and cutting output, breed doubts about the move towards reform. Unlike competitors abroad, Chinese oil companies are very slow to trim costs to boost profits. Relatively terrible earnings reported by state oil companies have been blamed on the companies’ over-sized workforces which vastly outnumber those at comparable Western firms where payrolls have plummeted with the collapse in oil prices.
Beyond employment numbers, Chinese firms have followed the rest of the industry by scaling back exploration and other investments. To be sure, those oil companies are suffering just as much as others in the industry, if not more so; they just happen to also be under pressure from an overbearing government calling for restructuring and increased profits, while at the same time saying that cutting jobs creates too much labor unrest to serve as a solution. The government’s reluctance to accept layoffs basically ties up one of the few tools left available to heads of struggling companies.
The best example of the problem facing those in charge of meeting the impossible expectation of jobs and profits for all comes from China’s biggest oil field, Daqing, which is owned by PetroChina. The company lost around $800 million in the first two months of 2016, producing oil at $45 per barrel. For reference, even after the recent rebound in prices, international benchmarks have oil hovering below $40 per barrel. Still, officials assure PetroChina workers they aren’t at risk of getting fired. Comparing Exxon and PetroChina, both report ~$260 billion in operating revenue, but Exxon’s net profit in 2015 was roughly triple PetroChina’s, largely the result of Exxon employing fewer than 75,000 compared to more than 500,000 at PetroChina.
Expectations for China’s demand growth for oil were always bordering on fantasy and now Deutsche Bank AG analyst Michael Hsueh is saying even newer projections are too generous.
“We believe that oil demand growth from the passenger vehicle sector, which has made up 66 percent of Chinese total oil demand growth since 2010, may slow in the medium term and then begin to decline by 2024,” he wrote. “This casts doubt over the capacity for continued long-term oil demand growth at current trend rates in China, and by extension, the world.”
Oil demand growth from the world’s second-largest economy could be cut in half from 2016 to 2020, he warned, since growth in oil demand for passenger vehicles is a function of number of existing vehicles, distance traveled, and fuel efficiency. By Deutsche Bank logic, fuel efficiency gain expectations are too conservative, demand growth estimates for other transport are unrealistic, and assumed future wealth of Chinese citizens is too high.
“Versus the historical precedent of Korea, this represents an aggressive rate of ownership growth,” Hsueh noted. “If we consider that China 2035 GDP per capita is expected to reach $10,361 ([in] 2005 dollars), this means that China would achieve the same level of vehicle ownership that Korea achieved in 2003 at a much higher GDP per capita of $17,214 (2005 dollars),” he wrote.
Hsueh’s analysis does not go into detail about what effect the introduction of mass market electric vehicles would have; however, it is sure to push down Chinese oil demand.