OUTLOOK: China In the Driver's Seat

Although crude oil closed at a two-month high earlier this week and prices even approached the $50 mark, it may be premature to assert that a bona fide recovery in oil prices is taking place. However, it is hard to dispute that China's burgeoning and increasingly mobile middle class will be a driving force behind any full-fledged rebound.

Over the past decade, the growth in motor vehicle sales in China has ballooned as the country's middle class has grown. "There are many Chinese who are hitting that middle class threshold, and owning a car is a big deal for them," said Steven Kopits, New York-based Managing Director with the energy analyst firm Douglas-Westwood LLC.

Although China has not been immune to slowing auto sales during the current economic downturn, the Chinese government's efforts to stimulate demand for new automobiles are yielding promising results. This, in turn, should bolster demand for oil products. Just this week a trade group for China's auto industry reported that domestic auto sales jumped by 25% in February, marking the first gain in four months. According to Chinese state media reports, the China Association of Automobile Manufacturers attributed the gain to dramatic cuts in sales taxes on car purchases as well as government subsidies to consumers who purchase new vehicles. A top official with the organization also expressed optimism that the uptick will continue through this year.

According to Douglas-Westwood, China is already the world's largest manufacturer of vehicles and will quickly become the world's largest car market. The consulting firm contends that the process of "motorization" in China is beginning to occur and will mimic what happened in the U.S., Western Europe, and Japan from 1950 to 1970 following World War II. During this period, auto sales skyrocketed as a greater percentage of the respective populations in these regions acquired vehicles. Obviously, demand for oil increased as well. In fact, Douglas-Westwood points out that global oil demand increased by nearly 30 million barrels per day in just 12 years (1960 to 1972); this equates to almost four times the current output of Saudi Arabia.

China's motorization process is occurring on a grander scale. The country's 800 million-strong workforce is nearly twice that of the U.S., the EU, and Japan combined. According to a 2007 New York University (NYU) study, the projected average annual growth rate of vehicles per 1,000 population in China is 10.6% through 2030. By that point, there should be 269 vehicles for every 1,000 people; in contrast, there were approximately one-seventeenth the number of vehicles in China in 2002. Based on this study's findings, the projected average annual vehicle ownership growth rate for the entire world is a only 1.6% during the 28-year period in question. As the chart indicates, China also stands out among other fast-growing Asian economies through 2030.

Projected Average Annual Growth Rates In Vehicle
SOURCE: "Vehicle Ownership and Income Growth, Worldwide: 1960-2030," Joyce Dargay, Dermot Gately and Martin Sommer

Kopits pointed out that China's government and citizenry enjoy a favorable position to support long-term demand growth for vehicles and, by extension, oil. "China has three things going for it," Kopits said. "First, the government has lots of cash. Second, the Chinese consumer is not heavily indebted. And third, it's still a poor country with lots of room to grow."

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