Past the peak: how is China kicking its petrol habit?
There have been a lot of headlines about how Chinese electric car sales are booming. While this is good news for the planet, there is a growing expectation that China has passed another, more important tipping point: peak petrol consumption.
Electric cars made up 26% of Chinese car sales in September 2023, with 620,000 sold - a new record.* That’s a strategic decision by the Chinese government, backed up by supportive and co-ordinated policy. A Zero Emissions Vehicle mandate, support for the development of new battery manufacturing, subsidies and incentives - often driven by local government - have all contributed to a huge rise in sales of electric cars in China.
One of the driving forces behind China’s focus on electric vehicles has been to reduce China’s oil dependence. Getting past peak oil offers an array of benefits to China. First, China is largely reliant on OPEC for its oil consumption, meaning the economy is exposed to an increasingly unstable region. Second, China’s cities suffer from air pollution which carries public health costs and has also led to social unrest. Finally, China has commitments to reduce emissions, and is certainly not invulnerable to the global impacts of climate change.
For Chinese petrol demand to peak, it seems logical that the number of cars that run on petrol should peak. However, the number of cars on the road in China is growing very rapidly - petrol cars too.
Something strange appears to be happening: either China has not reached peak petrol, or China has managed to peak its petrol consumption before it has peaked its population of petrol cars. In other words, either Sinopec (China’s largest fuel supplier) is wrong, or somehow petrol demand is falling despite millions of extra petrol powered cars on the road.
Let’s explore the latter option. One explanation could be improvements to car fuel efficiency in China. While efficiency improvements in new cars is leading to fuel demand reduction in the west, the situation is different in China where cars are young. In the UK, one new petrol car more or less replaces one old petrol (or diesel) car, and there is likely to be a net reduction in fuel demand as a result of the new car being more efficient than the old car. In China the parc is growing, and new vehicles often represent brand new sources of energy demand.
Another possible explanation could be found in one of the key reasons for China’s desire to reduce oil consumption: air pollution. Cities across the world have realised that taxis play a key role in air quality management. Taxis the world over are among the most intensively used vehicles - they are on the road for most of the working day, whereas privately owned cars spend as much as 94% of the day parked, not producing any emissions.
A favourite anecdote of mine comes from a conversation I had with a taxi driver in outer London a while ago. He was driving a 1 year old electric car. He told me that he much preferred the car, and that his fuel cost savings were enormous - in the region of £9,000 per year. I was astonished. He explained that in the first 12 months of owning the vehicle, he had driven 58,000 miles. In fact, that sort of mileage is not unusual for taxis. And it’s not just taxis there are a collection of use cases where vehicles are used very intensively and contribute hugely to fuel demand. Our analysis of MOT testing data in the UK suggests that 10% of fossil fuel powered cars account for 25% of fuel demand.
Back to China, where cities such as Beijing and Shenzen have driven up the adoption of electric vehicles into their taxi fleet. Beijing has targeted the complete electrification of its 70,000 taxis in two years. To do that, it has installed EV charging 5-10 kilometers apart on the cities ring road, promoted battery swapping-enabled vehicles, allowing cars to get a newly charged battery in a matter of minutes. Add to this the fact that electricity, even that sold through rapid charge points, is much cheaper per mile than petrol, and the combination of policy and market forces appear to be combining to produce dramatic results.
P.S. What’s still to come…
Looking ahead, there is reason to be very optimistic that Chinese petrol demand will continue to fall. The growth of BYD’s mass market electric cars is accelerating at an astonishing rate, driven largely by growing sales by BYD. Their new EV, the seagull, launched in April 2023 and now selling 40,000 a month, costs between 73,000 and 90,000 yuan (£8,000-10,000). They are coming to dominate a price bracket that has been the last refuge of the ICE car in China. And as battery production scales, these sales are only going to go one way and turn the screw even further on Chinese demand for fuel.
* Measuring retail sales of China-made passenger cars.