By John Richardson
WHEN it first became apparent earlier this year that China was aggressively expanding diesel exports, we were told not to worry as this was said to merely reflect the replacement of China’s old economy with its new economy.
“It is simply a case of industrial production and investment slowing down, which has of course hurt diesel demand – hence, the rise in diesel exports. But the fundamentals of the global oil market haven’t changed as strong demand for diesel is being replaced by a surge in demand for gasoline as China’s consumer economy really takes off,” was the consensus view.
The logic behind this was very comforting and so very alluring, very appealing: China’s rapidly growing army of “middle class” consumers were so thirsty for gasoline that was being lost in global diesel markets would more than be replaced by gains in gasoline.
But this view always seemed to me to be too simplistic, too linear. It overlooked the growth of complexity in China, where outcomes have become incredibly uncertain. We simply don’t know, and will not know for several more years, whether the growth in the consumer economy can fully replace the lost momentum from the steep falls in industrial investment and production.
It also overlooked the fact that the rise in diesel exports appeared to fit with a wider approach of boosting exports in general to compensate for the pain of economic restructuring. Why not a rise in gasoline exports as well?
Nobody should therefore be surprised by this article from last Friday’s Wall Street Journal:
In China, the world’s second biggest oil consumer, exports of gasoline hit a near-record high of 1.1 million tons in June, according to data released Thursday by China’s General Administration of Customers. That is more than double the level of last year, as refiners are eager to push their barrels out to other countries to reduce their bloated inventories.
There should be an equal lack of surprise when you read this Bloomberg article, again from last Friday, as it merely provides more data to back up what has been obvious for the past two years about the wider global oil market:
- OPEC, led by Saudi Arabia, is no longer interested in production agreements as it knows that global demand growth is slowing down over the long term. It instead makes sense to pump as much oil as possible over the next 10-20 years rather than risk leaving oil in the ground that will never be extracted.
- The producer’s cartel also knows that if it did lower output all that would happen would be that US shale-oil producers would take advantage, as they are the world’s new “swing” producers.
What is your headline conclusion, then? You need a new framework of thinking to understand both global crude markets and the global economy in general.