China’s obsession with SUVs is about to have a big effect on the outlook for crude oil

PUBLISHED : Sunday, 23 April, 2017, 7:01pm
UPDATED : Sunday, 23 April, 2017, 10:15pm

China’s demand for crude oil is on track to continue rising for the next decade, amid an expected doubling of registered vehicles on the road and a preference among new car buyers for sport utility vehicles [SUVs] over smaller petrol cars and electric options, according to analysts.

The appeal of beefier, petrol-powered SUVs, perceived as symbols of wealth and status, means that there’s little hope China will be able to cut its reliance on crude oil imports, in spite of efforts to promote greener cars.

“While electric vehicles represent an existential threat to long term oil demand, their impact will be marginal over the next decade,” said senior analyst Neil Beveridge, the lead-author of a recent report by US brokerage Sanford Bernstein.

“We believe demand worries from electric vehicles are overdone while continuing demand for sport utility vehicles (SUVs) in emerging markets will drive oil demand higher over the next decade.”

He forecast that petrol demand growth in China to be the “single most important” factor supporting global crude oil demand growth in the next decade.

After doubling in the past six years, Beveridge projected the nation’s petrol consumption to grow a further 1.1 million barrels per day by 2025, from 2.9 million barrels a day currently.

Meanwhile, China is pushing for electric cars to make up 20 per cent of all new vehicles sales by 2025, lifting its target from 1 per cent last year, in what amounts to the world’s most aggressive goal for electric vehicle penetration.

This means 12 million new electric vehicles will be added to the roadways in China in the decade to 2025, more than any other single global market.

Since overtaking the US, China has ranked as the world’s largest auto market for the past eight years.

Beveridge’s petrol demand forecast was based on assumptions that the nation’s total vehicle fleet will grow to 335 million by 2025, up from 160 million units last year.

This would be partially offset by a 17 per cent improvement in average fuel efficiency on the back of materials technology advancements, and a 14 per cent reduction in vehicle distance travelled due to infrastructure improvements.

In Shenzhen authorities have tried to boost electric vehicle ownership through subsidies while also making it more difficult to obtain new ownership permits for petrol cars.

However, a preference for SUVs among aspiring car buyers remains a stumbling block for electric vehicle acceptance.

Despite being up to 30 per cent less fuel efficient than smaller vehicles, SUVs accounted for 40 per cent of new vehicle sales in China last year, and are forecast make up 60 per cent of all new vehicles sales by 2020, according to Beveridge.

If the forecasts are correct, 122 million SUVs will be sold in China in the next decade, 10 times the number of electric vehicles.

Petrol and jet fuel are the primary drivers for China’s oil demand. Diesel consumption has been flat or falling in the past few years on the back of waning property construction and an economic transformation to less energy-intensive industries, according to oil and chemicals markets research provider ICIS China.

“In large cities, the high income earners are buying more powerful and bigger cars as energy conservation is not yet a concern,” said Li Li, analytics director at ICIS China. “In smaller cities, although people are not yet earning enough to buy SUVs, many are becoming first-time car owners.”

The appeal of driving the right kind of car is hard to underestimate in a culture mass vehicle ownership is a relatively new concept.

Adrian Bruhlmann, a European expatriate who has lived in Shenzhen for close to two decades traded in his Volkswagen Polo sedan for a Tiguan SUV two years ago.

“In China, a mobile phone, car and apartment are the three items where people show their status,” he said. “Here one has to drive the car of one’s status [to be taken seriously] as a business executive.”