The new gas guzzler; China’s status as the top oil importer will push it to become more engaged in global security

October 9, 2013 7:07 pm

The new gas guzzler

By Ed Crooks and Lucy Hornby

China’s status as the top oil importer will push it to become more engaged in global security

The world has just passed a historic milestone: China has overtaken the US as theworld’s largest oil importer. After decades as the world’s biggest market for the international oil trade, America is ceding that position, the US Energy Information Administration said this week. The implications for international relations and global security are profound. The predictable element in the equation is the inexorable growth in Chinese oil demand, as the world’s most populous nation slowly approaches the standard of living of Europe, the US and its more prosperous Asian neighbours.The surprise has been the spectacular revival of US oil production over the past half-decade, thanks to the techniques of hydraulic fracturing and horizontal drilling in shale rocks first used to produce natural gas.

Booming shale oil output in Texas and North Dakota, coupled with lower demand – in part a consequence of the financial crisis – has cut the share of imports in US oil demand to its lowest since 1987.

The trends are expected to continue. By 2020, US crude imports will have fallen to 6.8m barrels per day, while China’s will have risen to 9.2m b/d, according to Wood Mackenzie, the research firm.

It is a perfect example of market forces at work. The rise in Chinese demand has driven up oil prices, making North American shale production economically viable and suppressing US consumption.

In the US, politicians and analysts are asking if a reduced thirst for imported oil will allow Washington to extricate itself from the Middle East. The real question, though, is not whether a more self-sufficient America will get out of the region but whether a more dependent China will be forced in. As David Goldwyn, a former US state department official who is now an energy consultant, puts it: “The Chinese are much more vulnerable to oil prices and oil insecurity than they have ever been.”

The shift in trade flows is being felt. Chinese buyers can already dictate the terms of payment to smaller oil producers. That shift in relative commercial power will accelerate as weaker US demand forces African crude exporters such as Nigeria or Angola to compete for new buyers in Asia. Even Saudi Arabia exported almost as much to China as to the US last year.

“It’s a real psychological change [that] has massive ramifications for physical flows,” says Soozhana Choi, head of energy research at Deutsche Bank. “The pivot was already towards China . . . but it’s entirely there now.”

There are already signs in China of the government trying to curb fuel demand and many analysts expect its oil consumption to stop far short of the US level of 21.5 barrels per person per year. It is just 2.9 barrels per person per year today.

Seth Kleinman of Citi says the sheer weight of traffic in China and other emerging economies is already acting as a deterrent to car use.

Even so, Chinese concerns about securing access to energy are likely to be an increasingly important feature of the global landscape.

Mr Goldwyn says the priority for the US and other countries is to reassure China that it will be able to buy the fuel it needs, tying it to the global oil market.

“That makes the world a more secure place because China is much more linked up with world’s security agenda and with market economics,” he says. “It cannot be a free rider or a lone wolf: it is obliged to participate more. And that’s a good thing.”

China: Road rush leads to highway hell

Under crystal-blue Beijing skies, Adam Meng loaded his wife and cousin into his Buick sedan and set off on a 1,000km drive to Wuxi to celebrate a weeklong national holiday. Some leisure time and the sense of freedom on their own wheels drove the Mengs to venture to the eastern city. “I want to go, because I’ve never been,” he said.

Road trips such as this, a rarity only 10 years ago, are a new privilege for China’s urban middle-class and have contributed to the country becoming the world’s top oil importer.

Having pulled ahead, there is no looking back for China. Its import dependency has climbed to 57 per cent, while the surprising growth of US shale gas means the US pumps more than half of the oil it consumes – and has dropped to second place earlier than expected.

Growing oil imports will probably help China wrest the crown of the world’s largest trading nation from the US this year.

The Chinese government worries about the implications of such dependence on fuel imports. Its national oil companies are building pipelines from central Asia and through Myanmar to secure supply routes that cannot be easily cut off by sea.

The current five-year plan aims to cap foreign oil imports at 61 per cent by 2015, while acknowledging that national crude production will at best remain flat during that period.

Becoming the leading importer, however, does not make China the world’s largest oil consumer. America uses nine times more oil per person than China. That is partly because tens of millions of Chinese still live in farmhouses or shabby rooms lit by a single lightbulb. Hundreds of millions of Chinese move about by bicycle or public transport, while an American family tends to hop in a car.

China’s total demand for oil will hover around 11m barrels per day in 2013, the EIA estimates, less than two-thirds of the 18.7m b/d consumed by Americans.

But that is changing, too. China has about 100m vehicles, less than half of the 250m owned by Americans. But by 2030 the Chinese fleet could exceed 350m. “In my view, China’s auto demand is unstoppable,” says Tim Guinness, chief investment officer of Guinness Atkinson Funds, who took his own road trip from Shenzhen to Beijing in 2004 to check out the state of China’s roads.

The nation’s highway network was built from scratch during the past two decades and encompasses almost 100,000km of roads today, exceeding America’s 75,000km of interstate highways. The new roads sweep through villages where most of the young people have left for the bright lights, running water and better jobs of the city – just like Mr Meng’s cousin Kim, who grew up hauling water in buckets on her parents’ farmstead in Manchuria.

But China’s romance with the car has its drawbacks. Emissions from cars combine with coal smoke to make the choking smog that grips the north China plain.

The new roads already show signs of wear and tear as overladen coal trucks and three-wheeled farm vehicles jostle with inexperienced city drivers. Rail freight capacity has not kept up with economic growth, so even coal – which accounts for nearly 67 per cent of China’s energy use – is transported by inefficient, exhaust-belching trucks, while long queues for diesel can compound power shortages. Logistics costs equalled 10 per cent of China’s gross domestic product in 2010, double that of Japan, while toll road operators enjoyed gross margins of up to 90 per cent.

Following online complaints over road profits, China declared all highways toll-free during the national holidays, resulting in lines of stopped cars that extended for miles. In one national park, 400 tour buses were snarled up in a five-hour traffic jam to the deep displeasure of the thousands of tourists trapped inside them.

The Mengs’ road trip lasted a mere three hours. They barely made it into the next province before they turned round and came back home.

“It was so jammed, we just couldn’t go any further,” the crestfallen driver said.

America: Weaning itself off foreign oil

In 2001, an energy policy task force led by Dick Cheney, then vice-president, warned that by 2020 the US could be importing two-thirds of its oil.

If US oil consumption continued rising and production continued falling, he said, imports would increase from 10m barrels per day to about 17.5m b/d. “Energy security must be a priority of US trade and foreign policy,” the task force concluded.

Its projections were wrong on both counts. US oil production has soared while consumption has fallen. It now looks more likely that the US will have only modest, if any, net oil imports by the end of the decade.

Hydraulic fracturing and horizontal drilling have unlocked new oil reserves and driven US crude oil production up by 50 per cent, from 5m b/d in 2008 to an expected average of 7.5m b/d this year.

While US oil supplies have been grabbing the limelight, however, what has been happening to demand is just as important.

James Llamas, who works for a consultancy advising the city of Houston on its transport system, is part of a surprising trend across the US. Like many US teenagers, he was given his first car – his family’s third – to drive to high school. Since moving to Houston five years ago, though, he has been car-less.

He remains something of an oddity in the world capital of the oil industry, where the urban sprawl is still spreading. But he is happy taking the bus to work every day. “My commute is longer than it would be if I drove but I prefer it,” he says. “It’s my time to read the internet on my phone and do things I wouldn’t otherwise have time to do.”

Waning enthusiasm for cars among younger Americans is one of a number of trends that has eased the country’s thirst for oil. This year US petroleum product consumption is running at about 18.7m b/d, down 10 per cent from the peak in 2005. Even more remarkably, it is lower than in 1978.

Some of the weakness is due to the sluggish pace of the economic recovery. Since the trough of the recession in 2009, employment is up by about 5 per cent but oil demand has fallen.

Industry executives have become used to the idea that the US, like other developed economies, has hit peak demand, meaning that there will never again be a sustained rise in oil use. Some analysts go further, forecasting that US oil use will continue to decline.

The corn ethanol boom of the past decade, in which production more than quadrupled to about 850,000 b/d, has been contentious. But it has made a significant contribution to the US fuel supply.

More important, though, have been the simultaneous changes in car use and in the US vehicle fleet. Fewer young people are learning to drive and there have been declines in vehicle ownership per household and the number of passenger vehicle miles driven.

At the same time, US cars are more fuel-efficient as a result of tighter fuel economy standards and consumer preferences for more economical vehicles. The average mileage per gallon of new cars and light trucks has risen by 19 per cent in five years, according to the University of Michigan Transportation Research Institute.

“Driving SUVs was part of the sacred rights of Americans but it’s like other things with religion: once you stray, you realise it’s not so bad,” says Seth Kleinman of Citi.

Even SUVs are sold on their economy. Ford boasts that its new Escape, which does an estimated 26 miles per US gallon, “sips fuel”.

The trend is set to continue. Fuel economy standards set by the Obama administration last year mandate an increase in notional average miles per gallon, under laboratory conditions, from 27.6 mpg in 2011 to 54.5 mpg by 2025.

In commercial transport the use of compressed or liquefied natural gas instead of oil-based diesel for trucks is only just getting under way. With the energy content of US gas priced at only one-fifth that of crude oil, the economics are compelling.

The predictive failure of the Cheney task force is a reminder of the dangers of overconfident forecasts. On present trends, though, it seems likely that the days when the US dominated the landscape of global oil demand are gone, perhaps for good.