Chasing Cars: What happens when China motorizes?

On 4 April 2011, Steven Kopits, Managing Director of Douglas Westwood, went before the US House of Representatives Subcommittee on Energy & Power to discuss China's oil and gas outlook. During this session, Steven outlined the relative scale of the US and China's economies in terms of their population — China being 4.3 times greater than the US — and also the contrast that exists between their respective stages of development. China's progress has been delayed by nearly a century due to historical events but it is catching up quickly, putting huge pressure on natural resource markets around the world.

China's motoring oil consumption

The thing that struck me was the reference to China "motorizing". During this period oil demand grows rapidly and follows an 'S' curve that eventually stabilizes or perhaps declines at a later point. Steven said that China entered this curve in 2005 and, typically, as a country motorizes it takes about one generation between the first and last household on a given street to purchase a car. In theory, this means high growth in demand from Chinese consumers until a steady state is reached between 2025 and 2030.

The astonishing conclusion of this logic was that, if Chinese demand were to plateau at similar levels to Korea in 1996, the country would be consuming oil at about 60% of US levels per capita — BUT something greater than 50 million barrels per day (mbpd) compared with about the 10 mbpd it uses today and the 19 mbpd consumed by the US!

It's a frightening thought and could mean that the World in 2030 would require 140 to 160 mbpd, compared with an estimated supply of petroleum liquids of just 105 mbpd.

Keeping up with the Joneses

I thought to myself, it can't be! Higher Chinese interest rates, reduction of fuel subsidies and the resulting higher fuel costs are going to dampen demand. However, a day later the BBC announced that China's car sales rose 6.5% in March as the market rebounded, representing a 9.1% increase against the same period a year ago and firmly cementing the country's position as the biggest auto market.

But wait a minute — they can only be buying cars because petrol is cheap. I contacted a friend who lives and works in China via LinkedIn, and asked him in sterling terms what China pays for a litre today. The answer — about 76p, which in my book is not that cheap for a developing nation. However, the Chinese will go on keeping up with the Joneses, meaning that there will be more and more car owners as the country continues to motorize.

Securing an automotive future

So, how does this impact us as investors in oil and gas technologies? The answer: we are chasing cars and the race is on!

We need a lot more oil and petroleum liquids which will have to be extracted from increasingly harsh environments, and challenging conventional and unconventional reservoirs. We will also need a lot more young talented people with new ideas to create better technology. And that's going to take a lot more capital so that this can all come together in a time frame that delivers the new oil as it is needed. Otherwise, we'll all have to get on our bikes!