China is Destroying Russia’s Economy
In its 2020 Energy Outlook, BP declared that the world reached Peak Oil demand in 2019. BP’s 2022 report revised that forecast, with oil demand expected to surpass the 2019 level by the mid-2020s before beginning to fall. The 2022 BP outlook was prepared before the Russian invasion of Ukraine. (OilPrice.com, 2022).
Recent data suggest that the 2020 forecast could be proven right about Peak Oil in 2019.
“Now, … the International Energy Agency (IEA) has cut its forecast for average 2022 global oil consumption to 99.4 million barrels per day … below its 2019 top-demand-to-date figure of 99.7 million b/d. …
Meanwhile, EV sales continue to outpace projections … EV sales were up by over 100% last year and nearly 200% on 2019 …
[EV sales] growth shows every sign of continuing at similar or even higher rates, with the US expected to join China and Europe in the EV boom camp as electric pickups and SUVs become readily available this year and next.
If so, the impact of EVs will soon be perceptible on gasoline use — if it isn’t already. Growth in overall oil demand will become less likely with every passing year.” (Energy Intelligence, April, 2022)
Global EV sales have consistently exceeded the most optimistic forecasts over recent years. The latest data show that trend continuing through June 2022, especially in China.
“Electric cars in China are … riding on apparently unstoppable momentum to reach new sales peaks. …
Market penetration of EVs as a percentage of new automobile sales has already sailed past the government’s goal of 20% — doing so some three years ahead of the target timeline of 2025. Starting at around 17% at the beginning of 2022, year-to-date EV penetration breached the 20% mark at the end of April, and has risen further to a six-month average of 22% …
In the month of June alone, over 27% of all passenger cars sold were EVs … As of end-June, the entire Chinese automobile fleet stood at 406 million units — of which 10.01 million, or about 2.5%, are EVs.” (Energy Intelligence, July, 2022)
The near-term oil demand impact of EVs is much greater than implied by the current EV share of vehicles in use because new vehicles log more vehicle miles travelled (VMT). Average annual VMT in the U.S. is almost 14,000 miles for new cars and 16,000 for new light trucks. For U.S. vehicles that are 11 years old, average annual VMT is just over 10,000 miles for cars and 11,000 for light trucks.
Survival rates also decline with age as older vehicles are scrapped. In the U.S., 99% of cars and 97% of light trucks are still in use after 3 years, but that drops to 51% of cars and 55% of light trucks after 15 years.
A global surge in the EV share of new vehicles will create “unstoppable momentum” in the EV share of VMT, and an associated decline in global oil demand.
A new Bloomberg analysis shows that a global surge in the EV share of new vehicles is happening now. National EV market share of 5% appears to be the tipping point that signals the start of surging EV adoption.
“Most successful new technologies — electricity, televisions, mobile phones, the internet, even LED lightbulbs — follow an S-shaped adoption curve. Sales move at a crawl in the early-adopter phase, then surprisingly quickly once things go mainstream. (The top of the S curve represents the last holdouts who refuse to give up their old flip phones.)
In the case of electric vehicles, 5% seems to be the point when early adopters are overtaken by mainstream demand. Before then, sales tend to be slow and unpredictable. Afterward, rapidly accelerating demand ensues.” (Bloomberg, 2022)
The EV share in Norway passed 5% in Q3 2013 and reached 83.5% in Q1 2022. The EV share in Iceland passed 5% in Q3 2017 and reached 51.7% in Q1 2022. The EV share in China passed 5% in Q4 2018 and China is now well into the accelerating demand phase.
At the end of Q1 2022, Tesla reported that its production capacity at Gigafactory Shanghai was 450,000 EVs per year. By the end of Q2 2022, Giga-Shanghai capacity had jumped to 750,000 EVs per year, up 67% in three months (Electrek, 2022). Tesla competitors in China are also engaged in massive EV capacity expansions (Nikkei Asia, 2022).
In addition to accelerating demand for passenger EVs, China also accounts for the vast majority of global sales of electric two/three-wheelers, light commercial vehicles, and heavy-duty buses and trucks. The EV share of the two/three-wheeler market in China rose from less than 20% in 2017 to almost 50% in 2021 (IEA, 2022).
China is the world’s largest oil importer, but China oil imports fell 5.4% in 2021, the first decline since 2001. That decline has been attributed to Beijing clamping down on excess domestic refinery production as refiners drew down massive inventories (Reuters, 2022). In June of 2022, China oil imports fell to a five-year low, and imports through the first half of 2022 were down 3.1% compared to 2021 (S&P Global, 2022).
This is all very bad news for Russia.
“Putin has not taken advantage of the long years of the oil boom and huge state budget revenues from oil exports to reform the economy. Instead of diversifying and strengthening other industrial sectors, it turns out that in the years 2010-2018 Russia has become even more dependent on hydrocarbons.
… the share of oil and gas production in the Russian economy increased from 34.3% [in 2010] to 38.9% [in 2018]. (Warsaw Institute, 2020)
Russia’s dependence on oil exports has clearly increased since its invasion of Ukraine. The war has caused a massive exodus of Russian tech workers (Wired, 2022). Car production has fallen by 97% (Reuters, 2022). Still, economists now expect a less severe contraction in Russian economic output this year, largely due to resilient oil exports (Bloomberg, 2022).
China has been happy to buy Russian oil at a steep price discount (Fortune, 2022), but for how long? The surging market share of EVs in China has already enabled a 2021 decline in China’s oil imports, and a continuing decline through the first six months of 2022. Isn’t it inevitable that the surging EV share of vehicle sales will cause a surge in the EV share of VMT and an accelerating decline in China oil imports?
Hold on Ukraine – China is coming to your rescue.