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Gasoline replaces gasoil as China's driver of oil demand growth

By Song Yen Ling

February 13, 2014 - China's ongoing macroeconomic reforms are heralding a structural change in its oil product consumption mix with sluggish gasoil demand compensated by gasoline, which has become the main driver of overall oil demand growth in the country.

Over the last two years, gasoil demand in China has flatlined, at times declining in apparent demand estimates.

China does not release oil consumption data. Platts calculates apparent demand by adding domestic output to net imports.

While gasoil apparent demand has risen over 20% since 2008, its share in China's overall apparent oil demand has steadily fallen every year.

Analysis continues below...

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In 2008, gasoil accounted for 38.5% of total apparent oil products demand, according to Platts calculations. But this fell to just 34.8% in 2013, when apparent demand for gasoil contracted by 0.6% year on year to 170.22 million mt.

On the other hand, apparent demand for gasoline has surged nearly 59% over the same five-year period, and the transport fuel's share in overall demand rose from 16.2% in 2008 to 19.1% last year.

Similarly jet fuel/kerosene apparent demand also expanded by 58.4% over the 2008-2013 period, while its share of overall demand rose from 3.7% in 2008 to 4.3% last year.

Economic Rebalancing

The current shift in fuel mix is driven mostly by a rebalancing in China's economy.

Government policy to move away from an export-oriented economy and the closure of large production capacity in energy-intensive sectors such as mining have led to demand destruction for gasoil, while gasoline growth has soared on the back of surging vehicle ownership.

"There has been a significant decline in diesel usage in the industrial sector in China over the course of the last few years, and this definitely accelerated over the last two and a bit years," Amrita Sen, chief oil analyst at London-based Energy Aspects consultancy, told Platts Friday.

In 2002, industrial consumption made up about 20% of gasoil demand in China but this halved to around 10% a decade later, according to the consultancy.

According to estimates by state-owned China National Petroleum Corp.'s research arm -- the Economics and Technology Research Institute – the transport sector currently accounts for 61% of total gasoil consumption in China, the industrial sector 12% and the agricultural and fishing industries 8%. The remainder is consumed by the construction sector and other commercial consumers.

In the industrial and public transport sectors, the pace of gasoil substitution by natural gas is also accelerating, the ETRI said in its annual report published last month.

Over 2008-2011, roughly 28 million mt of gasoil was displaced because of the adoption of natural gas in the industrial sector, the institute said.

Following the global financial crisis in 2008, the ratio of gasoil apparent demand to that of gasoline in China fell from 2.26 in 2008 to 1.82 last year, the lowest level in the 21st century, according to ETRI.

"From the perspective of oil product demand growth, the main driver has now shifted from gasoil to gasoline ... In 2013, gasoil accounted for 5.4% of overall oil product demand growth while gasoline accounted for 74.4%," ETRI said.

"Diesel used to grow at twice the pace of gasoline for most of the last decade and now gasoline is clearly in the driving seat," Sen said.

She expects annual gasoil demand growth in China to be steady at around 2% from now until 2020, compared with 9% annually in the last decade.

Gasoline demand growth is expected to average 8% yearly until 2020.

ETRI expects gasoil demand to expand at 3% between now and 2020 and gasoline demand to rise 6% annually, spurred by a 10-15% yearly increase in gasoline vehicle ownership.

Boom in gasoline demand to continue

A move towards a consumption-led economy has raised vehicle ownership in China in the last few years and this will continue in the longer term, Victor Shum, head of IHS Consulting's downstream energy practice, said Monday.

"Gasoline demand going forward will be driven by increasing penetration of motor vehicles, particularly in central and western China," he said, adding that this could sustain growth rates for the fuel at 8% annually in the current decade.

While pollution has clearly plagued the country and become a priority for the government, there have been no significant measures aimed at curbing car ownership or gasoline consumption.

The focus has instead been on producing cleaner transport fuels with lower sulfur levels. A nationwide implementation of the National Phase 4 standard for gasoline was effected last month while a similar standard for gasoil is targeted to be fully introduced by the end of this year.

The government will take this further by implementing National Phase 5 gasoline and gasoil standards in 2017.

Changing dynamics to have implications on future product balances

The changing dynamics between gasoline and gasoil will have implications on future product balances.

China has embarked on significant refining capacity additions in the last five years and many of these facilities have been skewed toward producing gasoil.

But with gasoil demand slackening, China has been exporting more of the fuel since mid-2012, compared with largely being balanced previously in terms of demand and supply of the fuel.

China does not import gasoline and is currently a significant exporter, with outflows totaling 4.69 million mt last year, but supplies could start tightening if gasoline demand maintains current growth rates.

"Gasoline exports from China will be declining and the market domestically will basically be more balanced," Shum said.

Energy Aspects' Sen is even bolder in her projection and expects China to be net short in terms of gasoline in the near term.

"It could be a situation where by end 2015-2016, China will become a small net importer of gasoline, just because of the way the refineries have been set up," Sen said.

Related chart:China's apparent demand for gasoline, gasoil (mil mt): 2008 - 2013

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