China is a net importer, but its status as the second largest petroleum consumer along with its ambiguous production situation makes it the most interesting oil story next to Saudi Arabia.
Its thriving economy and double-digit increases in petroleum consumption are setting it on a path to conflict with other importers as it tries to secure future supplies. For the last few years there have been many forecasts of China's production plateauing and falling. So far that hasn't happened. Yet interestingly, if we look at the oil China has already produced and its known reserves, we can get a good look at the problems involved with forecasting peak oil using Hubbert's methods. China was the first good example that demonstrated this issue, but I will cover more countries in the coming months.
Notes on reserves and 70% URR
The BP Annual Statistical Review starts tracking production in 1965, but that is sufficient in this case. China produced an average 227,000 bpd of oil in 1965, or about 6% of their present production level. This strongly suggests that previous to 1965 China's cumulative production was no greater than 500 millions barrels or a billion barrels. At the end of 2008, China will have produced a total of about 38 billion barrels. In 2008, China will produce 1.38 billion barrels.
BP lists China's proved reserves at the end of 2007 as 15.5 billion barrels, minus the 1.4 used this year leaves them with 14.1, meaning that the current rate, they would run out of oil in 10 years. But we know that oil production does not behave in that manner and they won't simply be out of oil 11 years from now. Production drops and tapers off. I've constructed the following chart to illustrate one possibility based on the available data.
Adding 38 billion barrels to 14.1 billion barrels we get 52.1 billion barrels of what are commonly referred to as URR, or ultimately recoverable reserves. This means that presently we are at 73% of URR. According to Hubbert, production should level off and start dropping around 50% of URR, suggesting China's production should have started dropping in the early 1990s at the latest.
But let's continue. Over the last 20 years, China has discovered and added to its proved reserves an average of about 1 billion barrels per year. If we assume this trend will continue and add 20 billion barrels onto a final analysis, we get a much prettier 53% of URR.
This next chart shows is constructed with a theoretical, additional 10 billion barrels of reserves added. I'll add one soon with the 20 billion barrels.
Here are excerpts from two articles and a report referencing the current situation in China. There may be conflicting forecasts/expectations of what the immediate future holds contained in them but they provide a good look at China's consumption and what is effecting it.
Back to the Future: Revisiting 1982 Auto Sales [4-page PDF]
by Jeff Rubin and Meny Grauman
World Auto Sales to Hit Record High on Soaring Demand from BRIC Countries
Despite the systemic problems facing the US auto market, the world market has seldom been better. This year should mark the seventh consecutive record for annual vehicle sales, led by continued strength in Brazil, Russia, India, China (BRIC) and the rest of the developing world. While vehicle sales in the second quarter fell a combined 7% in the United States, Canada, the European Union and Japan, they were up 20% in BRIC countries. In fact, total annual sales in these countries are expected to overtake the US next year for the first time ever.
Moreover, the very models that American motorists are shunning, motorists overseas are snapping up. SUV sales, which already make up roughly 8% of the red-hot Chinese car market, are up 40% since the beginning of the year, and demand for such vehicles is similarly strong in Russia as well. So great is the demand for SUVs in the Chinese market that General Motors plans to start shipping the Michigan-made Buick Enclave, a seven-passenger vehicle, to China. SUV demand is growing at double the rate of any other class of vehicle in the Chinese market and four times the pace of sales of fuel-efficient subcompact cars. As their own domestic auto market shrinks, American car companies better look overseas if they hope to be able to see sales growth in the future.
Asia's Oil Production Expected to Increase, Ease Stress on Global Supplies
By Patrick Barta
October 7th, 2008
China, India and other big energy users in Asia aren't about to become major oil exporters -- far from it. They still consume much more crude than they produce and that trend won't change.
But several countries, including China, are lifting oil output. The unexpected boost -- some industry analysts had said the region would struggle to maintain production levels in the current decade -- should help Asia meet more of its own demand and reduce stress on supplies for the rest of the world.
The International Energy Agency in Paris expects China, Vietnam, Malaysia and other Asian-Pacific nations to increase production by almost 300,000 barrels of oil a day in 2009, the region's biggest annual increase since at least the 1990s. When contributions from Central Asian nations such as Kazakhstan are added, the total increased production rises to about 500,000 barrels per day, analysts say. Overall, non-OPEC world production is only expected to grow about 760,000 barrels a day in 2009, the IEA says.
Asia's increased crude production is still a drop in the bucket compared to total world consumption, which is now approaching 87 million barrels a day. Moreover, many analysts believe Asian output will start falling in a few years, as big existing fields decline. Although growing at a slower pace in recent months, consumption continues to rise across the region, which means that any easing of supply pressures could be short-lived.
China's Faltering Oil Appetite
October 6th, 2008
A lot of people who forecast the future tend to draw a straight line forward from existing trends. That's why people forecast a continuation of the breakneck increases in Chinese oil consumption.
There are at least two reasons to question that. One is that the current financial crisis could hammer the U.S. economy, and cut deeply into our purchases of all kinds of stuff, including stuff that comes from China. If that happened, it's doubtful that China would keep up its double-digit economic growth in the coming months.
The other reason is more benign: China has drastically raised fuel prices, effectively slashing its subsidies for motor fuel. And we all know that when retail petroleum product prices rise sharply, we tend to use less of them. Will the Chinese be any different?
It's a question that matters to every one of us, whether a car owner or simply a consumer who buys goods that travel in trucks. That's because the challenge of meeting rising Chinese demand is expected to keep oil markets tight and prices high even if Americans buy more efficient cars.
I would think that given the relatively limited means of the average Chinese wage earner, Chinese drivers would be even more sensitive to a sharp increase in fuel prices.
And lo and behold, in August Chinese gasoline demand fell 5.6 percent, or 470,000 barrels a day, below June and 2.7 percent, or 200,000 barrels a day, below July levels.
One month is not enough to reach many conclusions, especially when that month and the months preceding it may have been distorted by stockpiling of fuel in advance of the Olympic games that took place in Beijing in August. (Ting notes that China went on an "inventory building binge" in November 2007 and that its gasoline and diesel inventories grew by 83 percent by August this year.) And the August consumption figure was still up 7.1 percent from August last year.
I would argue that higher prices will put China on a new, more gradual growth trajectory - with consumption still rising, but at a pace that should ease some of the pressure on oil markets, and prices at the pumps throughout the rest of the world.
tags: chart, China, crude oil, graph. Jeff Rubin, oil, oil demand, oil production, oil supply