Crude oil crash set to boost China's economy in 2015-but not enough to reverse price slide

The ongoing drop on oil prices will boost China's economy only moderately this year, and will not be enough to spur a demand renaissance that by itself would allow the country to bring global crude supply and demand back into balance.

In the latest of a series of webcasts entitled "Oil: The Great Deflation," a team of IHS experts this week delivered a presentation called "The China Chill: China's Economic Slowdown and Oil and Gas Market Implications." Brian St. Sauveur, senior analyst for IHS Energy, described why the oil price drop will have only a limited impact on Chinese economic activity.

The increase in global crude oil demand during the last few years had been driven by skyrocketing demand in China, which came in response to the government's aggressive stimulus efforts following the global financial crisis of 2009. The primary products that drove demand during the years after the stimulus were fuels used in the industrial sector, for infrastructure and for real estate construction and freight transport. The fuels and fuel-related products most in demand were diesel, asphalt, fuel oil, petroleum coke and naphtha.

However, after China's fuel demand boomed in 2009 and 2010, there was a slowdown that culminated in the historically weak year of growth in 2014. As a result, these sectors of the economy mentioned above have now built up excess capacity that will need to be worked through. This process will take time, limiting the impact of lower oil prices in 2015.

Another major reason why oil demand will not elicit a strong, immediate economic response in China is that lower global oil prices are not being fully passed through to the country's consumers. While the price of Brent crude oil has dropped by about 60 percent since June 2014, retail diesel and diesel and gasoline prices in China have fallen only by about 30 percent. This is due to a combination of tax increases, changes in fuel-quality specifications and government price metrics.

As for the market for gasoline, prices are not the main constraint on Chinese driving habits. Instead, government policies actually play a larger role, as congested and polluted cities have led to a growing array of licensing and driving restrictions. This resulted in a deceleration in growth in car purchasing in 2014, which will cut gasoline demand increases in 2015.

Because of this, lower gasoline prices are not expected to spur an increase in demand that would help boost prices this year. As noted in previous webcasts, IHS predicts the eventual end to the oil price decline will be spurred by a decline in capital spending on U.S. oil drilling, rather than by an increase in demand from China or elsewhere.

Much of the content for this webinar was derived from IHS China Oil & Gas and China Gas, Power, & Coal Services.

The next presentation in The Great Deflation Framework Series will be entitled "Changing Costs: Creating the Lower-Cost Environment."

By IHS Energy Staff Writer

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.