China blowing up OPEC, Alberta narrative of oil growth to 2045

OPEC economists get it wrong not once, but twice by seriously underestimating China

A key assumption of the OPEC oil and gas narrative, which is the de facto Alberta narrative, is being blown to smithereens by China. That narrative is supported by economic modelling that in less than a year has already been seriously undermined by the tsunami of clean energy technologies spilling from Chinese factories. 

The OPEC narrative goes something like this. Rich OECD (Organization for Economic Co-operation and Development) countries like the United States and Canada will electrify because their governments can afford to subsidize costly green technologies like electric vehicles and heat pumps. Non-OECD nations, which is most of the world, cannot. Therefore, OECD oil demand will begin falling in the near future, while non-OECD consumption will rise as poorer economies stick with tried and true hydrocarbons. 

As hundreds of millions, maybe billions, are pulled out of energy poverty and aspire to middle class lifestyles, the growth of non-OECD consumption will outstrip the decline in OECD demand. 

Source: World Oil Outlook 2045, OPEC, 2023.

OPEC’s World Oil Outlook to 2045 calls for global demand to rise from the current 102 million barrels to 116 million barrels per day. Rather than an existential crisis for oil companies after peak demand in 2030, as the International Energy Agency forecasts, the next three or four decades will be a Golden Age for hydrocarbons.

How does the OPEC assumption about non-OECD oil demand hold up? Not well, thanks to China.

China’s aggressive clean energy industrial policy

The national government decided 25 years ago that it wanted to dominate clean energy, both making and deploying it. Mission accomplished.
Read this column:
Canadians oblivious to China’s lead in clean energy arms race

China has provided huge subsidies to the EV industry for years. Not just automakers, but battery companies and their supply chains. The national and local governments have provided all manner of indirect support, like special “new energy vehicle” licence plates while restricting gasoline car registrations. 

Now, China’s EV makers are threatening the very existence of the car brands  we all grew up with. China is just now unleashing a blitzkrieg of cheap ($10,000 to $20,000) EVs that are well-built with technology that far exceeds what the legacy manufacturers can offer. My interview with Flavio Volpe, president of the Automotive Parts Manufacturers Association, is a must listen or read (a transcript is available). 

I bring up Chinese EV manufacturers because there has been a great deal of criticism lately about the industry’s “over-capacity.” Simply, China is building more EVs than it can sell, at least to its current customers.

The Europeans accuse China of dumping (selling below the cost of production) EVs in their markets. US Treasury Secretary Janet Yellin was recently in China chiding officials about unfair competition while American climate envoy John Podesta was announcing a task force that will determine penalties for “high embedded carbon” (read, Chinese) goods.
Read this column: 
Rust Belt Alberta? Canada ignores changes to US trade strategy

China’s response is interesting. A recent story in the state organ Xinhua News Agency accused the US and EU of being afraid to compete with lower-cost, more efficient Chinese producers. “Chinese products are widely popular around the world, not because of so-called ‘unfair practices,’” Xinhua crowed, “but because Chinese products have extremely high cost performance, stand out in the fierce market competition, and are technologically innovative.”

The state rag isn’t wrong. Insideevs journalist Kevin Williams recently attended the Beijing auto show. He was blown away by the high quality of Chinese EVs. “Western automakers are cooked,” he concluded, echoing the fears of Stellantis CEO Carlos Tavares, who is quoted in my interview with Volpe.

This gets us back to the issue of over-capacity. Why would China heavily subsidize factories that operate at well below full capacity? In the west, those plants would throttle back production, trying to better match supply with demand. 

In China, however, the government promotes cutthroat competition to force companies to be innovative and efficient, slashing prices to survive in the hyper-competitive domestic market, where as many as 100 EV makers vie for consumer dollars. Unsurprisingly, companies that have been able to scale up while driving down costs are looking to export markets for their surplus output.

With the giant US auto market effectively closed because of political tensions and the EU mulling over trade restrictions to protect its own auto industry, China is turning to the very markets OPEC is counting on for future oil demand.

The non-OECD countries. 

OPEC modellers get it wrong – again

OPEC economists assumed that China’s oil demand would grow by four million barrels per day by 2045. Shortly after WOO 2045 was released last fall, state-owned refiner Sinopec released its annual report that called for China’s peak oil demand arriving as early as 2026, no later than 2030. 

They were wrong because they underestimated the impact of China’s switch to electric transportation. Passenger EV sales, for example, have reached 50 per cent of auto sales. Buses are now almost all electric (600,000 of them in China, versus a few thousand in North America). In China (and India), where they are very popular, two and three-wheelers are rapidly switching to electric.
Read this column: 
2024 Preview: IEA’s right, OPEC’s wrong, Alberta allied with oil cartel

Then OPEC got it wrong again. 

The second mistake was taking the non-OECD economies for granted, ignoring or downplaying the likelihood that China would pursue those coveted markets.

“In many developing countries, not only do Chinese products benefit consumers, but Chinese companies also contribute to the transformation of local industries,” Xinhua argues, noting the example of Thailand. Chinese EVs have “allowed Thai people to drive electric vehicles at affordable prices…which has promoted the development and transformation of Thailand’s automobile industry, stimulated investment and employment, and promoted Thailand’s economic development.”

If trade disputes block access to big Western markets, then China’s EV makers are happy to pivot to southeast Asia; growing exports to Vietnam, for example. Or Latin America, where BYD is building a factory in Brazil. There are many other examples of China’s EV manufacturers boosting exports or setting up shop in developing countries.

“Western trade protectionism undermines the principle of fair market competition, hinders free market trade,” says Xinhua, seeing no irony in a communist government’s news agency sounding like a Milton Friedman lecture.

Where does that leave Alberta?

BloombergNEF’s modelling predicts that oil demand from road transport, just under half of global oil consumption, plunges after the end of this decade. The IEA’s Announced Policy Scenario, the most likely, in my opinion, shows a rapid decline in global oil demand after 2030.

Alberta oil’s ability to compete in a scenario of falling demand and low oil prices is grist for another column. But Albertans remember well what happened in late 2014 when Saudi Arabia opened the taps to drive American shale producers out of the market. Two-plus years of economic carnage was the result. 

Predicting the future is tricky and one is guaranteed to be wrong. That said, as of this moment in time, the evidence supports the IEA’s 2030 peak oil demand call, largely because of China. 

What is the likelihood that Alberta oil and gas bosses will pay attention? Not great.

Veteran Alberta oil and gas journalist Bill Whitelaw recently said to me, “If peak oil demand happens by 2030, I’ll eat my hat.” 

Will that be plain or with some of that rugged, Alberta free enterprise barbecue sauce, sir?

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