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China's Oil Demand Tanks

More evidence is emerging that oil demand in China is fizzling - and that China's economy is fizzling too.

The oil analyst Paul Ting emails that China's December oil demand declined by 4 percent. This is the sharpest monthly demand decline in the past decade and the second consecutive monthly demand decline, Ting says. Ting notes that Chinese petroleum inventories have been increasing and that actual demand might have dropped by even more than 4 percent.

This is startling news because China was supposed to be the engine of growth for worldwide oil demand. Less than two years ago, in July 2007, the International Energy Agency was forecasting an increase of half a million barrels a day of oil demand in China every year through 2012. Earlier this month, the IEA predicted that China's oil demand would grow 1.1 percent this year, or about 80,000 barrels a day.

This has important implications for the oil market. OPEC and other oil exporters have long assumed stagnant oil demand in the United States and Europe, but they have been counting on fast growth in emerging markets to fuel demand growth - and high prices.

Now one reason for a slowdown in Chinese oil demand is the elimination of subsidies in June last year. But greater fuel efficiency isn't the only thing happening here.

Sagging Chinese oil demand provides further evidence that China's economy has not just slowed down, but may actually be in reverse. China announced 6.8 percent growth from December 2007 to December 2008. But given how much faster the annual growth rate was early in 2008, simple math would indicate that the economy actually contracted late in the year. New York University economics professor Nouriel Roubini commented on this over the weekend: "Indeed if one were to convert the 6.8 percent y-o-y [year over year] figure in the more standard quarter over quarter annualized figure Chinese growth in Q4 [the fourth quarter] would be close to zero if not negative," he wrote. "Other data confirm that China was in a borderline recession in Q4 and that it may be in an outright recession in Q1: production of electricity plunged 7.9 percent in y-o-y basis."

Paul Ting said much the same thing when he responded to an email I sent him last week. "The GDP growth rate shows an 'accelerating slippery slope,'" he said. "4Q was lower than 3Q, 3Q lower than 2Q, and so on.

Indeed, although China does not release numbers on monthly GDP growth, the industrial value added monthly data would suggest that throughout the fourth quarter, economic activity level fell, with December being the lowest. Thus, the oil demand data showing the sharpest decline in December is consistent with the fact that GDP growth was also the slowest in that month."

Treasury Secretary-to-be Timothy Geithner testified the other day that China has been manipulating its currency to make its exports more attractive. Getting it to do otherwise seems like a tougher task than ever now that the economy is in trouble.

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Comments (8)

Indep_Observer Author Profile Page:

For a little more upbeat opinion on the state of the Chinese economy see:

voter Author Profile Page:

On my last comment, the second line refers to Geithner's statement.

voter Author Profile Page:

Benkee: I like the idea that each worker cut back 5% of working hours and the companies can employ 5% more. This is feasibe if workers are paid on monthly rates, at high enough pay to support their families and enabling them to spend on consumer goods.

It is not that the Chinese Yuan is undervalued, but the Chinese workers are underpaid. Inflation will have to be another discussion.

agapn9 Author Profile Page:

The problem with this article is that you have to take reports of past Chinese economic growth with a grain of salt.

Lester Thurow has repeated pointed out the implausibility of China's high growth given the fact that such a large percentage of Chinese still remain farmers where growth rates are essentially zero.

When China was claiming rates of 10 % in the 90's
and the US 4 % the real rates were China 4.5% and US 4%. China was # 1 but not cleaning our clocks as previously reported.

While China has drained billions of currency from the US since the early 1980's, the actual trade surplus of China has been modest. Why?

Because China has the same Achilles heel that we do - they need to import oil to run their manufacturing and consumer engines.

China has designed a very inefficient system of manufacturing from an energy usage point of view.

See the book named The Elephant and the Dragon or The Dragon and the Elephant - referring to India and China for details.

Benkgee Author Profile Page:

I noticed that many taxies in China had converted to use LNG instead of gasoline in 2008. Has that affect the use of oil?
High rates of growth always associate with high rates of inflation and depletion of natural resourses. China should not rely on high rates of growth to solve its employment problems. If China cut back the number of hours each worker work,say by 5%, China can employ 5% more people. There may be a side benefit, people will have time to spend more money.
If China grow by 7%, China will double its output in 10 years. At the present rate of population growth, China's population will grow by only 15 - 20%. That means the output per capita will go up by 66 - 73% in 10 years. Most countries will kill to have that rate of growth.

vmoore55 Author Profile Page:

Nothing, China is going to pass 2007-8 GDP.

Citizenofthepost-Americanworld Author Profile Page:

Much is happening very quickly in China, these days, that we do not seem to hear much about, for some reason. Policies on pollution and on the environment are now being implemented, in China. One may therefore want to add to this discussion what follows, published in major Chinese media.

"China to subsidize use of energy-efficient vehicles in public sector.

China is to promote the use of energy-efficient and new-energy vehicles in public sector in 13 cities, the Ministry of Finance (MOF) said in Beijing Monday.

According to a joint statement by the MOF and the Ministry of Science and Technology, the central government will offer one-off subsidy for the purchase of mixed-power, electric and fuel-cell vehicles.


The program will be put into trial in public transport, taxi industry, postal and urban sanitary services in 13 cities including Beijing and Shanghai.

The program is aimed at facilitating the technology upgrading and structural optimization of the automobile industry, said the statement.

Local governments should also allocate funds for the building and maintenance of related facilities..." (

Indep_Observer Author Profile Page:

I do believe that Paul Ting and Roubini are correct. People I know who are in the energy fields doing business in China tell me that the oil and power companies China are indeed suffering.
The stimulus package announced by China is hoping to cushion the landing in China. Large infrastructure projects (some new) will provide much needed work as well as future facilities for when the economy picks up. China is also starting to fill their oil reserves at a cheaper price than 6 months ago (opportunity in adversity?). Just announced is a universal health care system which is going to be introduced over the next 3 years which will alleviate one of the key grievances of the population. That last item should free up some spending power of the general population that will fuel larger domestic consumption.
I will stick my neck out and say that I think China will be one of the first countries, if not the first major economy to pull out of this recession.
Now if only the Chinese govt. would allocate more money for rural education, factory pollution control, reforestation, river and lake cleaning, form an export guarantee dept., and establish a deep Bond market in preparation for a fully floating currency.

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