China's EV Boom Threatens to Dry Up Oil Demand
Sign up for Global Macro Playbook: Stay ahead of the curve on global macro trends.
China's insatiable thirst for oil, which has fueled the global energy market for years, is showing signs of moderation, a trend driven by the rapid rise of electric vehicles, reports the Wall Street Journal. While China remains the world's largest oil consumer, its demand for oil products used in transportation is facing a structural decline, posing challenges for major oil producers.
China's oil consumption reached a record high in 2023 following the easing of strict Covid-19 restrictions. However, the International Energy Agency (IEA) projects a significant slowdown in oil demand growth in the coming years, forecasting a mere 0.8% increase in 2024 and 1.3% in 2025.
The key driver of this shift is the rapid adoption of electric vehicles (EVs) in China. More than half of all passenger cars sold in recent months have been new-energy vehicles, including plug-in hybrids, according to the China Passenger Car Association. This trend is expected to suppress gasoline demand, with the IEA projecting a 6.4% decline in 2025 compared to peak demand in 2021.
The decline in diesel demand is further exacerbated by a slowdown in China's construction sector, reducing demand for diesel-powered machinery. The shift to cleaner, more efficient vehicles is also impacting the demand for diesel, as more heavy-duty trucks are now powered by liquefied natural gas.
While China's petrochemical sector continues to expand, consuming increasing amounts of oil-based feedstocks, this growth may not be sufficient to offset the decline in transportation fuels. This trend is creating a double whammy for major oil companies, which have relied heavily on China's oil demand.
The rapid adoption of EVs in China has created a complex dynamic for major oil producers. Not only is it putting downward pressure on oil prices, but it is also impacting the downstream refining capacity in China, which has seen a significant expansion in recent years. This excess refining capacity could further erode the profitability of oil majors, particularly their downstream refining operations, which typically serve as a financial buffer during periods of low oil prices.
The shift in China's oil consumption presents a significant challenge for oil producers who have benefited from China's economic boom. As EVs continue to gain market share in China, the global oil market is facing a potential turning point, with implications for oil prices and the financial performance of major oil companies.