Impact of High Priced Oil on China’s Auto Industry
One of my recent presentations, I was asked what impact $130 a barrel crude oil is having on the growth of China’s auto industry. It was a good question, one that deserved a much better answer than I could give. With the price of crude increasing so quickly–a 17 percent increase in May alone when oil hit its peak–it’s very difficult to tell. I replied the only way I could by saying, “I don’t know.”
On the surface, the industry continues to motor along, with passenger cars increasing by 20 percent year over year through May, and trucks increasing by an even faster pace at about 25 percent. Those figures can be a bit misleading, though, given that the Chinese government is controlling fuel prices and insulating consumers from the most recent price shocks.
Gasoline math and comparing prices around the world is a bit tricky. In continental Europe, for example, where consumers are paying the equivalent of $8 per gallon at the pump, analysts estimate that the various governments are taking up to 70 percent of the retail price in taxes. The United States, where the government’s tax take is only 11 percent of the retail price, is probably a better reflection of true market prices. At $4 per gallon near my farm in New Jersey, the true cost of a gallon of gasoline is about $3.56, net of taxes. Even at that discounted number, however, the price of a gallon of either gasoline or diesel is still quite a bit lower in China. A recent survey of prices in Beijing showed that both gasoline and diesel are selling at the equivalent of just over $3 per gallon. The last time the Chinese government raised the price of fuel was at the beginning of November, 2007 when crude oil was about $95 per barrel.
As far as the appetite for passenger cars in China is concerned, it’s very difficult to tell what effect today’s high prices for oil are having on demand. The Chinese consumer is still living in the world of November, 2007, which as the rest of the world has found, is ancient history in terms of oil economics. It’s difficult to believe, but oil was only $65 per barrel, less than one-half the May peak, at about this time last year.
The situation in trucks is even more complicated. In addition to controlled pricing for diesel, demand for trucks is being impacted considerably in the first half of 2008 by the expected implementation of Euro III emission standards for heavy duty trucks on July 1. Because a Euro III compliant truck will cost from 15 percent to 25 percent more than one that meets only Euro II standards, truck buyers are ordering all the Euro II trucks they can, while they can.
What happens after July 1 is anyone’s guess. While the secular demand for trucks continues to increase, pre-buying in the first half, combined with diesel shortages across China, are bound to have an impact. Because refiners have not been allowed to pass along higher raw crude costs, they lose money on any diesel they sell and have been limiting production. Moreover, the recent earthquake in Sichuan Province has caused diesel to be diverted to Sichuan and other provinces impacted by the quake. Diesel is the fuel used to power the large numbers of trucks and construction equipment used in the rescue and rebuilding efforts, as well as the generators that are providing temporary sources of electricity to the millions of homeless.
At 11:30 pm the other day, one of my colleagues saw a long line of trucks at one gas station on the Fifth Ring Road in Beijing, the drivers asleep in their cabs, waiting to fill up. In areas like Hunan Province, truck drivers, after waiting for more than one hour, are being told that they can only refill 700 yuan worth of diesel, which at today’s prices represents only 25 to 30 percent of what a typical tank can hold.
With no relief from diesel shortages in sight, and the normal questions looming as to how rigorously China will enforce the new emissions regulations come July 1, the outlook for truck sales in the second half of the year is unclear.
Unfortunately, I don’t think anyone can answer the question posed at the beginning of this article with any degree of certainty. We will all just have to wait and see.
