Energy Demand: China vs. the World
Let’s talk a little bit about the role of supply and demand in determining energy prices, in particular the interplay between demand from the U.S. and other western nations and the demand from China and other emerging market economies.
First, here is a graphic from the WSJ depicting the YoY change in gasoline consumption in the U.S.
As you can see, gasoline consumption has decreased by roughly double any of the previous highs in years past and is no doubt a product of decreased SUV use, adoption of more fuel efficient cars, people driving less, etc. Unfortunately, I don’t see this having much impact on energy prices as the increase in demand from emerging market countries, China, etc, will more than offset the decrease in energy demand from the U.S. Furthermore, we’re basically in a recession right now and it’s very likely that our demand will increase once the economy recovers.
In order to better illustrate the above, let’s take a look at a graphic depicting the rise in China’s energy consumption in recent years vs. the general decrease in demand from the traditional industrialized nations over that same time period.
As you can see, China’s rapidly increasing demand for oil is easily offsetting the reduction in demand from Western nations. Perhaps the most telling aspect of the chart is the fact that China’s YoY increase in demand roughly matched that of the traditional industrialized nations until 2005, and after that China’s demand more than doubled the YoY decrease in demand from the industrialized nations.
Overall, it’s a pretty simple story: while high energy prices are causing demand to slow from Western nations, China’s economy is growing so fast that it’s able to easily absorb the price increases without blinking. Even in an instance where an individual consumer of oil (consumer or corporate) cuts back on purchases, the overall pool of consumers is increasing more than fast enough to compensate. This is why I don’t even think that China’s recent decision to raise fuel prices will create a significant slowdown in demand, because the aggregate pool of gasoline consumers is growing more than fast enough to offset any reduction in demand from the existing pool.
While the 18% increase in fuel prices may cause a temporary slowdown in demand, I seriously doubt it will change the overall trend even if China implements several more price increases. Right now, and for the foreseeable future, China will be the nation that drives global trends in energy demand more than any other.
Tags: cars, Energy, gasoline, SUV