The Fuse

China’s SUV Sales Rise Sharply, Underpin Gasoline Demand

by Matt Piotrowski | February 02, 2018

U.S. consumers are not the only ones who have a deep affection for SUVs.

Sales of sports utility vehicles (SUVs) are continuing to rise sharply in China. This trend has been occurring due to the country shifting from an industrial-based economy to a consumer-based one. A growing middle class is aspiring to obtain more comfortable lives, and driving larger vehicles has become a part of their lifestyle. There has been a lot of discussion about China’s oil demand slowing as a result of changes in the economy and Beijing taking strict measures to curb pollution. However, high SUV sales suggest that gasoline consumption will underpin the country’s oil demand growth in the coming decade, or even longer. Depending on fleet turnover, the emergence of high SUV demand in China could have large implications for the global oil market.

Last year, Chinese consumers purchased 10 million SUVs, a 25 percent year-over-year increase and double levels last seen in 2015.

Last year, Chinese consumers purchased 10 million SUVs, a 25 percent year-over-year increase and double levels last seen in 2015. Trends in China are similar to those in the U.S., where SUVs dominate the market, benefiting from lower gasoline prices, rising incomes, and cultural preferences. In China, SUV demand has risen steadily throughout this decade—along with total passenger vehicle sales—and has contributed to a massive increase in gasoline demand. Since 2009, gasoline consumption has jumped by an eye-opening 81 percent and now makes up almost a quarter of the country’s total oil demand.

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To put into context the importance of China in the global oil markets, in 2017, the Asia-Pacific nation saw its demand rise by 655,000 barrels per day (b/d), making up 40 percent of the world’s growth. And in the last four years alone, oil demand has climbed by more than 2.1 million barrels per day. The International Energy Agency (IEA) expects demand growth to slow considerably this year, averaging 360,000 b/d, but China will still account for 28 percent of the world’s increase.

SUVs now account for 40 percent of the country’s passenger vehicle market, up from 17 percent in 2013.

Expect China’s SUV sales to continue to rise in part because car manufacturers are poised to introduce new models. SUVs now account for 40 percent of the country’s passenger vehicle market, up from 17 percent in 2013. Moreover, the country’s middle class boom will support sales. Since the beginning of the millennium, a greater portion of the country’s population has moved into this group. From 2001-11, more than 200 million Chinese entered the middle class, and consultancy McKinsey & Company estimates that in 2022, about three-quarters of China’s urban population will be in this socio-economic group, versus just 4 percent in 2000. The Economist Intelligence Unit says consumer spending in China will rival that of the EU by 2030. Against this backdrop, China’s consumption of liquid fuels in its transportation sector should rise by 36 percent from now through 2040, the Energy Information Administration says.

EV sales break records

In 2017, EV sales surpassed 581,000 units, more than five times the previous year.

China is breaking world records in electric vehicle (EV) sales, but EVs remain a small portion of the total vehicle market. As a result, oil demand has continued to rise. Although increased electrification will not cap oil demand anytime soon, it will keep demand from growing at an even faster pace. Over the past few years, China has defied expectations. In 2017, sales surpassed 581,000 units, more than five times the previous year. And in December, EVs reached 4 percent of total vehicle sales, the highest market share all year. Foreign automakers make up approximately half of total vehicle sales, but more than 95 percent of the EV market, which is dominated by Tesla.

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Similar to the U.S., there is large upside for EVs in China. Beijing has set ambitious targets for sales by requiring EVs to make up 8 percent of new purchases 2020. Consultancy EV-Volumes sees EV market share rising to 3.6 percent in 2018, up from 2.4 percent in 2017. Whether the country can meet the 8 percent in 2020 is up in the air, but China is committed to achieving it. For instance, in General Secretary Xi Jinping’s speech before the five-year Party Congress last October, Xi mentioned the word “environment” 89 times, a 20 percent increase from his predecessor’s address in 2012. Bernstein says that the mandate will spur the manufacturing of 2.4-2.7 million new passenger EVs in 2020, four times what was sold in 2017.

Despite the aggressive EV sales, long-term trends of a rising population and a growing middle class will increase the country’s appetite for petroleum—and likely support prices. China is now the world’s largest crude oil importer, and its position in the global oil market will continue to strengthen over time as demand rises. Growth in alternative vehicles and fuel efficiency gains will continue and receive a lot of attention, but it’s important to keep the numbers in perspective. China’s love affair with SUVs will slow down efforts to diversify the vehicle fleet and reduce oil consumption.

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