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Will Monster Electric Vehicle Demand In China Impact Oil Demand?

By Robert Rapier

A year ago Bloomberg wrote an article called Here’s How Electric Cars Will Cause the Next Oil Crisis. The gist was that if global electric vehicle (EV) sales continued to grow at 60% annually, by 2023 that could displace two million barrels per day (BPD) of global crude oil demand. Such a decline in oil demand, they speculated, could cause another oil price crash.

As someone who is keenly interested in developments in the energy markets, I took a close look at their analysis.

There were two significant problems with their outlook. The first is that it ignored the underlying annual growth rate in crude oil demand, treating it as a static number. In other words, they assumed that in 2023, EVs would reduce oil demand by two million BPD below today’s level.

In fact, since they wrote that article, global demand has risen by another 1.6 million BPD, and is forecast to rise another 1.3 million BPD this year. So at the end of this year, global crude oil demand will already be nearly two million BPD higher than in their starting assumption. So, at this end of this year, crude oil demand will be four million BPD higher than the assumption they made for 2023.

The second problem is that a 60% annual growth rate would be challenging to sustain for very long. My expectation was that those explosive growth rates would inevitably slow as more EVs hit the market.

Indeed, global sales figures for 2016 were impressive, but they failed to match the blistering pace of 2015. According to InsideEVs.com, the largest independent website devoted to electric vehicle news, global sales numbers of EVs in 2014, 2015, and 2016 were 320,713, 550,297, and 777,497 respectively. This represents a growth rate from 2014 to 2015 of nearly 72%, but that rate of increase fell to 41% from 2015 to 2016.

Global EV sales slowed even more in late 2016 and early 2017. November 2016 sales were only 29% higher year-over-year (YOY), but then December’s YOY number dropped to 19%. January’s came in at less than 13% above January 2016. So I asked Jay Cole, of InsideEVs, if he expects the slowdown to continue. He explained:

There have been a couple of short term drivers that slowed growth late in 2016 and especially in January/early February of 2017.
The first being the wait on the new/longer range Renault ZOE in Europe (huge range gain for basically the same price) which cratered Renault sales, and is just bumping February sales now; a void while waiting on the new Prius Prime, and a lack of follow-through production on some BMW models (people won’t buy the old once they know the “new” is en route); but more specifically China has played a big/the biggest role, as its sales outweigh the global registrations.
China had a lot of cheaters/fraud in 2016…and as a result it said it was going to review and replace its “eligible” plug-in vehicle and OEM list for 2017.
Naturally red tape ensued, and the result was that the “new” list didn’t actually get approved/published approved until mid-February (and if you aren’t on the list…no incentives for you)…so we saw huge declines in China (see story on January Chinese sales here,  BYD specifically had its throat cut in China in January with a 90% percent drop). The list was finally issued mid-February, so the numbers did rebound late (up 55%), but still the list is a work in progress and is only half the size it was previously.
When you are talking global EV sales, the “China effect” is too large. There are China EV sales, and “RoW Sales” (rest of world). And because China basically “tells” the market what it will buy, big gains for 2017 are mostly baked in.
For 2017, China says it is looking for 800k sales overall (passenger & buses), and a 70% gain in passenger EV sales (and even though the yearly target is always 25% or so higher than reality – it is still a lot)…so if you try to make a month-to-month line chart globally, China will shortly be dropping some 50-60k months now it has its house in order, meaning we will see multiple 6 digits months on the global level this year, and almost every month needs a (*) asterisk for ‘what is China up to’.
Depending on the pent-up demand/production arrives after the China incident, we are likely to see a “monster” number from the region shortly, meaning there will suddenly be a ~100% global increase in EV sales in one of the next 2-3 months.

In addition to providing some clarity around the seeming slowdown in sales, I think there are two more takeaways from Jay’s comments. First, EV sales are still being driven by incentives. Take the incentives away, and sales fall. So it’s still not clear what a sustainable EV growth rate may be in the absence of incentives.

Second, the type of EV sales in China is not at all what Bloomberg envisioned in its scenario. Bloomberg estimated the impact of EVs replacing gasoline engines. That is not what is taking place in China. Automobile sales are exploding across the board. Total car sales in China increased by more than three million from 2015 to 2016. Most of those were gasoline-powered. The Bloomberg scenario requires both 60% EV demand growth, while at the same time displacing demand for gasoline engines.

Thus, Bloomberg’s projections look even less likely today than they did a year ago – despite EV sales that are stronger than recent numbers suggest. As a result, there is still little risk that electric vehicles will significantly impact crude oil demand in the foreseeable future.

Follow Robert Rapier on Twitter, LinkedIn, or Facebook.


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Just got back from China and ready to share my thoughts with you.

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Yours truly,
Captain Hoff (a.k.a. Steve Hoffman)

Running Fast in China

China
China
I just returned from a marathon business trip to China, and here are some thoughts…

▪ Chinese food in America sucks!

▪ Traffic in Beijing makes Hwy 101 look like the Autobahn

▪ Smog is out of control, so the government is making cleantech a top priority

▪ Stock market reacts like a yoyo with each new government policy

▪ Big city Chinese need to own real estate to get into the right school districts

▪ Home prices in major cities are sky high, but if you don’t own property, no mother will let her daughter marry you!

▪ Many Chinese own 3 or more condos, and they don’t even rent them out because rental prices are so low

▪ Real estate prices have peaked and are falling, so owners are cashing out and investing in startups

▪ This has precipitated a startup boom

▪ The government is fueling the boom by laying out big subsidies for startups and incubators

▪ If you want free space for your startup, China has plenty of it

▪ Valuations are sky high, as investors compete to get into the hottest startups

▪ Chinese investors prefer startup founders 30+ years old – they don’t trust the kids with their cash

▪ High tech wages now rival those in the US – the days of cheap labor are gone!

▪ Traditional businesses are on the decline

▪ Factories that were once off-shored to China are moving to Southeast Asia in search of cheaper labor

▪ The buzz word in China is “innovation” and the entire country feels they must move up the value chain to compete

▪ Copying has become a dirty word, as China pushes to develop its own intellectual property

▪ Intellectual property rights will be enforced more strictly moving forward because China needs to reward innovation

▪ The Chinese government is focused on bringing the best technologies from around the world to China

▪ Chinese work harder than anyone I know: even government officials come to work on weekends (imagine that!)

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Article from Bloomberg.

China’s reduction in reserve requirements for banks, the first since 2008, may signal government concern that a slowdown in the world’s second-biggest economy is deepening.

Reserve ratios will decline by 50 basis points effective Dec. 5, the central bank said on its website yesterday. The move may add 350 billion yuan ($55 billion) to the financial system, according to UBS AG.

A report due today may show that China’s manufacturing contracted for the first time since February 2009, and the nation’s stocks had their biggest decline in almost four months yesterday. Premier Wen Jiabao aims to sustain the economic expansion as Europe’s debt crisis saps exports, a credit squeeze hits small businesses and a crackdown on real-estate speculation sends home sales sliding.

“The deceleration of growth may have become faster than expected on increased external uncertainty, a sagging property market” and difficulties for smaller companies, said Liu Li- gang, a Hong Kong-based economist with Australia & New Zealand Banking Group Ltd. who previously worked for the World Bank. The manufacturing report may be “worse than expected,” Liu said.

The Purchasing Managers’ Index may dip to 49.8 for November, a level marking a contraction, according to the median estimate in a Bloomberg News survey of 18 economists. That data is due at 9 a.m. local time today. Consumer price gains eased to 5.5 percent in October, compared with a government target of 4 percent, as exports rose the least in almost two years.

Joint Action

The policy move yesterday came two hours before the U.S. Federal Reserve, the European Central Bank and the monetary authorities of the U.K., Canada, Japan and Switzerland said they were cutting the cost of emergency dollar funding to ease strains in financial markets.

Spurring lending in China, the nation that contributes most to global growth, may boost confidence as Europe’s crisis worsens. Stocks and the euro rallied after the moves.

China is at “the beginning of monetary easing,” said Qu Hongbin, a Hong Kong-based economist for HSBC Holdings Plc, adding that “aggressive” action is warranted. While more reserve-ratio cuts may follow, interest rates may remain unchanged until inflation is below 3 percent, he said.

The latest change means that reserve requirements for the biggest lenders will fall to 21 percent from a record 21.5 percent, based on past statements.

‘Liquidity Crunch’

Mizuho Securities Asia Ltd. said that the timing of the Chinese announcement “could be linked” to the move by the Fed and others. In October 2008, China cut interest rates within minutes of reductions by the Fed and five other central banks as the global financial crisis worsened.

“Some form of coordination may have gone into this,” said Ken Peng, a Beijing-based economist at BNP Paribas SA. “But I think China is pretty urgently in need of a reserve ratio requirement cut anyway — otherwise, we’d have a liquidity crunch in the New Year.”

Barclays Capital yesterday forecast at least three more reserve ratio cuts by mid-2012 and said two interest-rate reductions are likely next year.

Yesterday’s move may have been partly a response to inflows of foreign-exchange drying up, according to UBS’s Hong Kong- based economist Wang Tao. Central bank data released this month suggested that capital has been flowing out of China.

Growth is slowing across Asia, the region that led the world recovery, with India today reporting its economy expanded the least in two years and Thailand cutting interest rates. In China, the clampdown on property speculation has added to the threat of a deeper slowdown after a 9.1 percent expansion in the third quarter that was the smallest in two years.

Home Sales

Property risks are “overshadowing” the outlook as falling sales threaten to trigger developer collapses, the Organization for Economic Cooperation and Development said this week. Agile Property Holdings Ltd. (3383), the developer in which JPMorgan Chase & Co. owns a stake, has said it will stop buying land until at least February and is slowing construction at some projects.

October housing transactions declined 25 percent from September and prices fell in 33 of 70 cities, according to government data. The Shanghai Composite Index fell 3.3 percent yesterday after Xia Bin, an academic adviser to the central bank, said credit should remain “relatively tight” and people shouldn’t hope for a reversal of housing market curbs.

China hasn’t raised interest rates since July, the longest pause since increases began in October last year. Benchmark one- year borrowing costs stand at 6.56 percent. The last interest- rate cut was in December 2008, during the global financial crisis.

Premier Wen Jiabao said last month the government will fine-tune economic policies as needed to sustain growth while pledging to maintain curbs on real estate.”

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Here is an interesting article from The Economist.

“BEIJING recently suffered its lowest temperature in 59 years, but the economy is sweltering. Figures published on Thursday January 21st showed that real GDP grew by 10.7% year on year in the fourth quarter. Industrial production jumped by 18.5% in the year to December, while retail sales increased by 17.5%, boosted by government subsidies and tax cuts on purchases of cars and appliances. In real terms, the rise in retail sales last year was the biggest for over two decades.

A year ago many economists were fretting about unemployment and deflation. Now, with indecent haste, they have shifted to worrying that the Chinese economy is overheating and inflation is taking off. The 12-month rate of consumer-price inflation rose to 1.9% in December, an abrupt change from July when prices were 1.8% lower than a year before.

The recent rise in inflation was caused mainly by higher food prices as a result of severe winter weather in northern China. In many cities, fresh-vegetable prices have more than doubled in the past two months. But Helen Qiao and Yu Song at Goldman Sachs argue that it is not just food prices that risk pushing up inflation: the economy is starting to exceed its speed limit. If, as China bears contend, the economy had massive overcapacity, there would be little to worry about: excess supply would hold down prices. But bottlenecks are already appearing. Some provinces report electricity shortages and stocks of coal are low. The labour market is also tightening, forcing firms to pay higher wages.”

Read the full article here.

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