Analysis: 'Chindia’s' Oil Consumption Could Sorely Disappoint In Longer Term

China and India are expected to continue to drive global oil consumption higher in the longer term, according to major oil forecasting organizations such as the International Energy Agency (IEA), U.S. Energy Information Administration (EIA) and OPEC. But for a number of critical reasons, national governments in both countries have indicated a strong desire to shift their light-duty vehicle (LDV) fleets from gasoline and diesel-powered internal combustion engines (ICE) to electric powered-engines in coming years. Although China is presently far better placed than India to push this transportation transition forward, oil consumption is likely to disappoint in both countries through 2040.

In International Energy Outlook 2017, for example, the EIA’s base case is projecting global oil demand to increase 8.8 million bbls/d to 104.1 million bbls/d between 2015 and 2030, and to rise the same amount again the following decade. China and India are expected to account for almost three-quarters of the increase through 2030 and over a third of  the gain the following decade. China is forecast to be the dominant driver of oil consumption growth over 2015-30, much as it has dominated growth since joining the World Trade Organization in 2001, with India taking the growth baton thereafter. Chinese oil demand is projected to increase 4.9 million bbls/d to 17.0 million bbls/d over 2015-40, and Indian oil consumption to more than double to 8.3 million bbls/d.

But, in April, India’s then power minister, Piyush Goyal, announced the bold goal of electric vehicles (EV) accounting for all LDV sales in the country by 2030, while a Chinese official told an audience at an auto forum in Tianjin in September that the government will soon be releasing a time table to end production and sales of ‘traditional energy’ LDV. It has since been reported that the Chinese government is considering a 2040 cut-off date, with a formal announcement in the near future. China is the largest LDV market in the world, with sales of roughly 28 million vehicles in 2016, representing 30 per cent of the global total. India is currently the fifth largest LDV market, with the expectation of it reaching number three — after China and the U.S. — by 2020.

There are several reasons that China and India are desperate to wean their countries off of gasoline and diesel-powered vehicles. As their economies expand, and more and more people join the middle-class, the demand for personal mobility in general, and automobiles in particular, has skyrocketed in these countries, and with it choking air pollution in their major cities. Air quality in New Delhi, India’s capital, was rated the worst in the world in 2014. Breathing its air is equivalent to smoking ten cigarettes a day. Numerous other cities in India and China have similarly poor air quality, with Beijing and Shanghai nearly as infamous as New Delhi. At the same time, both countries have ratified the Paris Climate Agreement that include carbon curtailment targets for each.

In addition, both India and China have to import a significant proportion of the oil they consume due to a lack of domestic production and resource. This places a financial burden on India, given that it tends to run a current account deficit. The government would prefer Indians to spend its foreign exchange on more productive imports, such as plant and equipment for business.

China is less concerned about the financial drain of its oil imports, given its favourable trade position and massive foreign exchange reserves, and more concerned about its dependency on foreign oil for geopolitical reasons — especially now that President Xi Jinping openly declared his country’s ideological battle with the U.S. and the West at the 19th Congress of the Chinese Communist Party in October. The U.S. Navy continues to dominate the sea lanes, despite a substantial naval buildup by China in recent years, making the Chinese economy susceptible to an oil squeeze in case of conflict with the West —  much as Japan was susceptible to the U.S. oil embargo both before and during the Second World War.

A more positive reason for China and India wanting an EV shift in their countries is because of the potential business opportunity it provides their automotive industries. Both these countries have substantial automotive industries serving their domestic markets, but each have failed to grab significant share of the international market. In the case of China, the failure to find success in the international automotive market to date has been one of the few failures of its industrial policies since economic reform began in the second half of the 1970s.

But unbeknownst to most people in the West, China has already become the global leader of the EV revolution — albeit currently a big fish in a small pond —  and not just in LDV, but in segments of heavy-duty vehicles (HDV) such as buses as well. In 2016, roughly 350,000 electric-powered LDV were sold in China, pushing the country’s stock to 650,000 vehicles, ahead of the U.S., the former leader, for the first time. On the supply side, Chinese manufacturers built around 375,000 electric-powered LDV last year, for 43 per cent of the global total.

To date, China’s domestic EV sales have been driven by a combination of financial incentives, mandates and regulations, with direct and indirect subsidies accounting for 23 per cent of the average sales price for electric-powered LDV in 2016. Looking forward, China is planning to cut back subsidies for EVs, just as it did for the solar industry as it became more established, forcing greater innovation, efficiencies and consolidation in the domestic industry to drive down costs.

But at the same time, the Ministry of Industry and Information Technology has mandated carmakers that import or manufacture 30,000 traditional vehicles per year for the Chinese market to sell at least 10 per cent zero and/or low-emission vehicles in 2019 —  and 12 per cent in 2020 — and if they fail to do so, buy credits within a cap and trade system that will benefit domestic EV manufacturers.

Despite the hoopla associated with Tesla, BYD, China's leading EV manufacturer, probably has the most advanced lithium battery technology available on the market today —  lithium iron-phosphate (LFP) technology. Although Tesla’s lithium nickel cobalt aluminum-oxide battery technology has higher energy density than LFP batteries, greater stability allows the latter to charge faster with greater durability. BYD’s electric-powered LDV sales are larger than Tesla’s, it has already commercialized e-buses and e-trucks which Tesla hopes to achieve by 2020, and BYD currently has twice the battery production capacity of its Western rival.

In contrast, the Indian EV industry is in its infancy. In 2016, a mere 25,000 EVs were sold in the country, only 2,000 of which were four-wheel LDVs. Mahindra Electric Mobility is currently the sole manufacturer of EVs in India, with three LDV models on offer. But the largest auto manufacturer in India, Maruti Suzuki India, announced in late October that it is planning to begin manufacturing and selling EVs in the future, in response to the government’s announcement that all new LDV vehicles sold in the country must be electric-powered by 2030.

There are also only 222 public EV charging stations in all of India at the present time. But it is believed the lack of charging infrastructure could easily be overcome by a change in law to allow private companies into the business, and by creating the right incentives for fuel station owners. Some of the world's largest charging station providers, ABB and Fortum, for example, have already expressed an interest in setting up shop in the country once the necessary laws are passed.

A draft of India’s new auto policy is expected before the end of the year, as well as additional financial incentives to encourage Indians to purchase EVs in greater quantities. In 2015, the financially strapped Indian government offered roughly US$100,000 per electric bus and about $2,000 per electric LDV under the Faster Adoption and Manufacturing of Electric Vehicle scheme. The government’s National Electric Mobility Mission Plan had previously set an annual sales goal of 6 to 7 million electric and hybrid LDVs by 2020.

To conclude, China’s potential EV goal for 2040 looks far more plausible than India’s target for 2030 given the resources each government commands, the state of financial incentives, mandates and regulations in each country, and the current position of their respective EV industries. But both countries are equally serious about switching over from gasoline and diesel-powered vehicles to electric-powered ones for a number of critical reasons, and as a result, EVs should still gain significant market share in India in coming decades.

Since the transportation sector accounts for roughly half of oil consumption in these two countries, and road transportation over 90 per cent of that, it is hard to see significant oil demand growth in each once their EV transitions take off in earnest, likely in the first half of next decade for China and the second half for India.

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