Friday, November 30, 2012

Predicting Global and Regional Petroleum Consumption Trends Part 9: China

Some analysts, looking at China’s (CH) stunning economic growth over the past 20 years, expect this trend to simply continue, thereby resulting in China overtaking the USA, to become the country with largest economy in the world.  For instance, the OECD estimates that China's economy will over take the combined economies of the Euro-Zone by 2013, and, then overtake the USA by 2017.  China's economy to overtake US in next four years, says OECD.  Similarly, based upon recent past growth rate, inflation rate and Yuan appreciation rate trends, the Economist predicted that China’s GDP will overtake the USA’s by 2018.  Indeed, the Economist points out that China has already over taken the USA in manufacturing output, patents granted to residents, car sales and total energy consumption, and, that China’s oil consumption would overtake the USA’s in 2021 (The Dating Game).  The EIA notes that China was the world's second-largest consumer of oil and liquids in 2011, and, second-largest oil importer, trailing only the USA in both categories (Economic growth continues to drive China's growing need for energy)

Some economic analysts, however, have a more pessimistic view, seeing signs that China’s export market is weakening, leading to the suggestion that at least the growth rate of China’s economy will be slower in the future if not declining (China Economy Heading for ‘Hard Landing’ as Exports Falter, Shilling Says).   

Still fewer economists, like Jeff Rubin, recognize that China’s continued economic growth will depend upon oil, in particular, oil imports (BP Report Shows Economic Growth Still Depends on Oil), and, that those oil imports will mostly come from sources that used export to the USA (Where Will China Find the Oil to Power its Economy?). 

Rubin’s view is that we are in a “zero-sum world (12 min).”   In the present context, zero-sum means that if exports increase to one region (e.g., China and the remaining Asia Pacific Regions) then exports to another region (e.g., Japan, North America, Europe) must go down.  This is a view that this series supports to some extent, and I will try to point where it does, in this, and the next post.

As you will see, China’s imports have indeed been increasing from several regions, some of which have traditionally been strong exporters to North America.  These increasing import trends should support China’s economic growth for the next five to ten years, albeit at a slower rate than seen in the last decade.  However, if oil consumption and the economy are tightly linked, then, as petroleum exports to China’s start to decline, the prospects for further economic growth also will decline.

China’s production, consumption and net export trends: an ELM analysis
Figure 39 presents the BP review’s reported petroleum production, consumption and calculated net exports rates (dark blue, bright red and dark green open circles respectively) and the corresponding nonlinear least squares analysis (NLLS) logistic equation best-fit curves (solid lines with the same respective colors). 

Production rates in CH were modeled using two logistic equation fits to data in the ranges 1965-1982 and 1983-2011, respectively (solid blue lines).  Similarly, consumption rates were modeled using two logistic equation fits to the data from 1965-82 and 1983-2011, respectively (solid pink and red lines).

The best fit parameters of Qo, Qand the rate constant "a" are summarized in Table 9 below:

Table 9: summary of best fit parameter for production and consumption data for CH

Qo (bbs)
Q (bbs)
a (yr-1)
Production 1965-1982
Production 1983-2011
Consumption 1965-1982
Consumption 1983-2011

As illustrated in Figure 39, after declining to a local minimum in 1982, CH’s production rate has been slowly increasing over the last 3 decades.  In 1992, the production rate of 1.04 bby was 33% greater than the production rate of 0.78 bby in 1983.  By 2002 the production rate of 1.22 bby was up 18% compared to 1992, and, in 2011, the production rate of 1.5 bby was up 22% compared to 2002. 

However, this growth rate in production of 2-3 %/yr was not enough to keep up with the growth rate in consumption, and 1993, CH’s consumption crossed-over its domestic production to make CH a net importer of petroleum.

CH’s growth rate in petroleum consumption has been truly breath-taking.  Consumption was 0.58 bby in 1982.  It took 13 years, 1995, to double.  Then, in less then 9 years, 2004, it doubled again.  If my logistic equation best fit (red line) were to accurately model future consumption, then consumption would double again in 12 years, in 2016, to 4.6 bby and then double again to 9.4 bby in 2030. 

For reference, according to the BP review, the US’s consumption rate was 6.9 bby in 2011.  But, as I pointed out in Part 6 of this series, North America’s (NA) consumption rate is in decline, and that includes declines in US consumption.  So, if the trends in the US CH and were to continue, and the oil export were available, it is not to hard to see how CH could overtake the USA in consumption be the early 2020s.  Indeed CH could overtake all of NA by the mid-2020s, under this scenario.  I think this this type of extrapolation are what causes the QECD and The Economist to make the predictions that I outlined above, that CH would soon overcome the US in oil consumption and economy (e.g., GDP).

I think such scenarios are a fantasy however. 

The problem with this type of scenario is revealed by the size of the solid green line in FIG. 39 going forward—this is the predicted net imports of petroleum that CH would have to have to provide the projected consumption rate, as represented by the solid red line.  In 2006, CH’s imports of about 1.3 bby were about equal to CH’s domestic production rate in that year.  By 2011, imports exceeded 2 bby, while domestic production was 1.5 bby.  By 2020, CH’s imports would have to double to 4 bby and domestic production increase to 1.7 bby, to support the projected consumption rate.  Actually, the imports would have to increase by more than 4 bby, since CH still exports petroleum to other regions, and, the trend is for these exports to increase going forwards. 

Unfortunately, the scale CH’s projected imports and domestic production are not on trend to provide this level of petroleum for domestic consumption.   Production, the blue line is only gradually increasing, and so the bulk of petroleum to support the projected increase in consumption would have to come from increased net imports. 

Let’s look at CH’s predicted exports and imports trends in detail. 

Predicting Petroleum Export Rates from CH to other Regions
Figure 40 shows the relationship between petroleum production rates and export rates for CH, as already worked out in my previous study from a few months ago.   This figure is the same as Figure 8 in Part 2 of “Relationship between Petroleum Exports and Production.”

As illustrated, CH’s total exports (black Xs) are only about 10 percent of CH's total production, but, there is a positive trend (solid regression line, r2=0.44) for an increasing proportion of domestic production to be exported.  Within that overall increasing trend, CH’s exports to NA and JP are going down, and, exports to the remaining Asia-Pacific region (rAP) and South America (SA) are going up.  By far, most of CH’s exports goes to it near neighbors in the rAP, and as discussed in my previous series in Part 2, most of these exports are petroleum products exports.  

Figure 41 shows the predicted absolute regional exports from CH to the other regions, based upon the combination of the production rate trends shown in Figure 39 and the export trend lines shown in Figure 40.

According to this prediction scenario, CH’s exports will steadily increase, going mostly to rAP and SA, and to much lesser extents, EU and AF, while exports to NA and JP are already over.

Predicting Petroleum Import Rates to CH from other Regions
Figure 42 shows the sum (black line), and individual import contributions, predicted for each of the other eight regions, to CH.

As already discussed in the earlier parts of this series, exports to CH from ME, FS, AF, SA, and even NA and JP, are all trending upwards.  These trends are reflected by the rapid increase in CH’s total imports increasing from 0.5 bby in 2000 to about 2 bby in 2010.  This is predicted to continue, until production from CH’s major suppliers, AF, FS, rAP, ME, and SA all eventual peak and decline, and along with it, declining exports to CH.  According to this prediction scenario, total imports to CH peak at about 2.5 bby in 2018 and decline thereafter.  There is a pretty broad plateau from about 2013 to 2024, where imports stay above 2.3 bby, but then starts to decline especially as exports from ME to CH go into decline.

Of course, CH’s net imports (imports minus exports) will by less than these amounts, since as discussed in the context of Figure 41, CH domestic exports are predicted to increase over this period.   

Predicting Consumption Rates for CH based on the PIE analysis
I applied my normalization to CH in the same manner as done for NA, SA, AF, EU and JP.  For CH, the average calculated consumption rate, based on the summation of production plus imports minus exports for the 2001-2011 time range, was 0.038 ± 0.076 bby lower than the reported consumption rate for CH as reported in the BP review (interestingly, this is about the same normalization applied to JP’s data).  Therefore my normalization for CH consisted of adding 0.038 bby to the predicted future consumption rate and adjusting total net exports downwards by this same amount.  And, like the other regions, I did not attempt to distribute this correction proportionally among the individual absolute exports and absolute import to and from each of the other regions.
Figure 43 shows the production, consumption and net export data, and corresponding best fit curves, the later two now shown as dashed lines.  Added is the predicted net export (light green solid line representing total absolute exports minus total absolute imports with the -.038 bby correction) and consumption (blood red solid line) rate prediction curves, based on my PIE analysis (exports minus imports with the 0.038 bby correction). 

The results presented in Figure 43 suggest that, if CH’s production rate follows the trend predicted by the logistic equation best fit (solid blue line), and CH’s export and import rates continue along the trend lines shown in Figures 41 and 42, respectively, then the predicted total net export rate curve (solid light green line) reaches a peak negative value of about -2.2 in 2017, corresponding to peak net imports, after which, net imports start to decline. 

CH’s projected slowly increasing domestic production rate causes CH’s consumption rate to peak a few years after the import peak—at about 3.82 bby in 2020. 

That peak consumption rate of 3.82 bby is only about 7% higher than CH's consumption rate of 3.56 bby in 2011.  This would imply a much milder growth rate in petroleum consumption over the remainder of the decade, about 1%/yr, than seen in the past decades.   

The predicted decline in consumption rate in the first decade after 2020 is comparatively mild—about an -11% decrease to 3.4 bby by 2030.  The decline rate picks up steam after that (as imports from ME go into faster decline), declining to 72% of the peak by 2040 and then to 57% of the peak by 2050.  If these predicted production and consumption rate trends continued, then CH’s consumption rate and production rate would cross-over again in about 2049, making it possible for CH to become a net exporter, or alternatively, maintain its consumption rate for a time at about the same level it was at in the mid 2000s.

Summary & Conclusion
My last three posts, discussing petroleum consumption trends in North America (Part 6), the European Region (Part 7) and Japan (Part 8), all illustrate how, over the last decade, exports from the Middle East and other net-exporter regions to these three regions have been going down. 

In the present “zero-sum world,” as Jeff Rubin coins it, it is mainly the decline in exports to these three regions that has supported increased exports to China, and as you will see in the final post of this series, to the remaining Asia-Pacific regions.   

Zero-sum in this context is fairly accurate in the case of the Middle East and South America, because their net exports have been fairly flat over the past decade (see e.g., Part 2 and Part 5 Figures 1 and 17, respectively, green circles).  For other net exporters, like the former Soviet Union region and Africa, however, this is not the case, as net-exports from these regions actually increased.  But I do not expect this increase to continue.  Rather, I expect that exports from the former Soviet Union and Africa will decline as these region's production rates decline. 

The good news for China is that the trends for continued increases in domestic production and imports, even while slightly increasing their petroleum product exports, will make it possible for China to have continued real economic growth, possibly up to the end of the decade--unlike North America, the European Region and Japan.

After 2020, however, the picture looks less rosy for China, as it’s main suppliers of oil start to go into production and export decline.  This probably means that China’s economy will become stagnant in the 2020s and then decline thereafter.  Even then, the predicted declining consumption rates in China of -1.1 %/yr from 2020 to 2030 or -1.4%/yr from 2020 to 2040, and, the possibility of a flattening consumption rate after that (e.g., due to increased domestic production, perhaps from the East China Sea and Western China), suggest a much milder decline scenario than what the decline trends look like for Japan (-5.2 %/yr), Europe (-3.2 %/yr) or North America (-2.2 %/y) all of which are on-going presently, and, will likely continue for the rest of the decade and beyond.   
Next time, I will cover the final region in my 9-region analysis: the remaining Asia-Pacific region. 

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