China's gasoil demand drops amid construction slowdown

As the global oil market continues to grapple with unexpected fluctuations, the anticipated surge in demand from China remains elusive. Despite optimistic projections, the reality on the ground tells a different story: the construction sector, a major consumer of diesel fuel, has significantly slowed down, contributing to a broader decline in gasoil demand.

To understand why the oil industry has yet to experience the expected demand surge from China this year, consider this: the area of new buildings that broke ground in the first half of 2023 was the lowest since 2009, Caliber.Az reports citing the local media.

This significant slowdown poses a problem for the cement industry, as previously reported, but it also impacts the oil market in ways that remain underappreciated. China's building sector is one of the world's largest consumers of diesel fuel, also known as gasoil. Emissions from trucks, excavators, and site generators, which have operated at full throttle in recent years, will decrease as these machines increasingly stand idle. While this is good news for the climate, it spells trouble for those who relied on China's insatiable demand for crude oil to continue as it did in the 2010s.

China’s millions of diesel engines consume just under 4 per cent of the world’s oil. Consequently, they contribute to over 1 per cent of global carbon dioxide emissions, comparable to the combined emissions of France and Scandinavia. By various metrics, however, this industry now appears to be facing serious challenges.

Gasoil demand in June fell by 11 per cent compared to the previous year. In Shandong, the teapot refineries—privately owned processing plants that focus on converting crude into diesel—are operating at barely half their capacity. Except for brief declines in 2020 and 2022 due to stringent Covid-19 lockdowns, this is the worst performance in nearly a decade.

Diesel’s primary advantage over other petroleum products is its diverse range of uses. While its noise, complexity, and dirtiness make it uncommon in passenger cars or motorbikes, diesel is far more efficient than gasoline in both financial and climate terms for converting chemical energy into work. This efficiency makes it the preferred choice for those concerned with cost-effectiveness.

However, across various metrics, the vehicles and engines that consume diesel are struggling. With the easing of construction activity and the coal production boom of 2021 and 2022, last year's first-half production of excavators fell to its lowest level since 2017. Although there has been a slight increase this year, production remains below the levels of any of the past seven years. The overall power capacity of engines, encompassing all uses of diesel, gasoline, and marine fuel oil, is similarly running at rates last seen in the mid-2010s.

The situation may be even more dire than suggested by vehicle and engine counts alone. Natural gas and batteries are significantly encroaching on gasoil’s traditional dominance of heavy-duty drivetrains. As recently as 2021, nearly all semi-trailer trucks were powered by diesel. This year, diesel's share is barely holding above 50 per cent, with electric and gas drivetrains gaining market share. The total number of diesel semi-cabs produced through June was the lowest first-half total since 2015.

The energy think tank operated by PetroChina Co. estimates that 10 per cent to 12 per cent of China’s gasoline and diesel demand has already been replaced by natural gas and battery vehicles. An official from PetroChina recently stated, according to S&P Global Commodity Insights, that the country’s gasoil consumption peaked last year and is expected to decline by 5 per cent in 2024.

Even more optimistic analysts foresee a challenging future. Bloomberg Intelligence’s Henik Fung and Chia Chen predict that diesel consumption will grow until 2027 but will then plummet as the energy transition reduces more than half of China’s oil demand by 2050, potentially making the country almost self-sufficient in crude.

While China’s leadership grapples with shifting from a carbon-intensive, investment-heavy growth model to one focusing on less polluting consumption activities, investors are missing the broader implications. The weak demand from Asia, which has puzzled oil markets over the past year, is not a temporary anomaly but a sign of an economic model reaching its limits. This slowdown will have cascading effects as the construction downturn impacts all the industries that once fueled China's rapid growth.

Despite forecasts of continued demand from the oil industry, crude production last year was still about a million barrels per day below its peak level in 2018. Similar trends are expected to continue. China, which accounted for about half of the world’s increase in oil consumption this century and a significant share of global emissions, is now experiencing an economic engine sputtering to a halt, a development the world needs to heed.