China's liquid fuels future

How are the 1.3 billion Chinese going to cope with their growing needs for energy?

Can the increase in Chinese liquid fuel consumption be maintained? Even in the face of a nearby world oil production peak? Or will China have to cope with a liquid fuel crisis in the near term future? This post focuses on whether China will or will not be able to meet their increasing demand for liquid fuels until 2015.

The underestimation of exponential growth

The increase in Chinese oil consumption in the past years is mostly seen as a recent development, supposedly driven by the industrial development of China. In reality, the growth in Chinese oil consumption has been the same in the past two decades. Between 1990 and 1999 annual oil consumption growth in China was 6% on average. Between 2000 and 2006 the average annual oil consumption growth in China was 7%. Also the 2004 anomaly of 13% growth in a single year is nothing new. In 1993 Chinese oil consumption growth happened to be 10%.

Figure 1 - Chinese oil consumption and production, source: EIA

This misconception of Chinese oil consumption growth is a typical example of underestimating the power of exponential growth. Between 1990 and 1999, absolute growth was around 2 million barrels per day (mb/d), from 2.3 mb/d in 1990 to 4.4 mb/d in 1999. In the past seven years, absolute growth has been 3 mb/d per day according to preliminary figures, from 4.4 mb/d in 1999 to 7.36mb/d in 2006.

If this present trend continues, the demand for oil (and other liquid fuels) in China will grow to 9.2 mb/d in 2010 and 12.4 mb/d in 2015.

Figure 2 - Exponential growth trend in Chinese oil consumption

The influence of the Chinese Peak in oil Production

Currently China produces around half of their own oil needs domestically while the rest is imported. This situation will not last for very long. China is a very mature oil producer, most of the largest Chinese oil fields have peaked. This means that peak oil for China is not very far away. Colin Campbell, one of the main geologists of ASPO international, expects the Chinese peak to happen in the coming years. Professor Pang Xiongqi of ASPO China holds a slightly more optimistic view, foreseeing the peak in China in 2012 as shown in figure 3 below.

Figure 3 - Chinese oil production forecast in million tonnes, Source: ASPO China

As a reaction to the lack of domestic energy resources in relation to growing energy demand, the Chinese government has embarked on a very aggressive oil exploration program. In the first years of the 21st century this has led to a substantial increase in discoveries. That now seems to have halted. In 2005 proven reserves did not increase and in 2006 they declined with 12% to 16 billion barrels. Such a sharp drop in reserves is not a good sign with respect to Chinese oil production. Making it more likely that production will peak sooner then later.

This is bound to aggravate the already tight situation in China. To meet the needs of the many, China will have to obtain other fuel sources besides crude oil at a massive scale, and soon.

A short summary of alternatives

If we assume that Chinese oil production will peak in the coming years, around 9 mb/d of liquid fuels or alternatives need to be supplied from other sources than domestic oil production by 2015, such as oil imports, bio-fuels, coal-to-liquids, gas-to-liquids, energy savings, electric transport and so forth.

The largest source of these will in the short term remain to be oil imports, which currently amount to 3.5 mb/d. With sufficient aggressive foreign policy, China could very well be in the position of increasing that rate significantly, to maybe 6 mb/d by 2015. However, if the world production of oil peaks by 2010 or 2012, it is more likely that imports will not increase significantly and remain at the present level.

The second best option would be to shave of as much of the increasing fuel usage as possible by implementing efficient technology in all sectors that use oil. It is not impossible to obtain an annual reduction in present oil usage of 1% on top of which demand growth occurs. By doing so, the increase in oil consumption would be reduced with 800.000 b/d by 2015.

The third best option that China has in the short run is to continue with massive development of coal-to-liquid technologies. The research program in this field is focused on direct liquefaction without the creation of syngas, as is done with the Fischer-Tropsch process. Direct liquefaction is possible by pulverizing and blending the coal with synthetic oil, then treating it with hydrogen while heating the coal to 450°C in the presence of an iron catalyst. In doing so, shorter chains of hydrocarbon are obtained which are suitable for refinement into liquid fuels.

By the end of this year, the Chinese company Shenhua hopes to have a factory that will produce 20.000 barrels per day of synthetic fuel by using the process described above. However, there are many doubts that the process will work, since it has not been tested at such a large scale. If it does work, China has a technology that can produce synthetic fuels from coal in a very efficient manner at a cost between 30 to 45 dollars per barrel. The Chinese synthetic fuel program has the potential to produce about 1 million barrels of synthetic fuels per day by 2015.

The fourth best option that China is aggressively pursuing is the development of bio-fuels. The focus in this field has shifted from the domestic production of bio-ethanol to bio-diesel as the fuel of choice. Recently, the Chinese government announced that it intends to plant an area the size of England, 13 million hectares, with Jatropha curcas trees of which the nut can be turned into a fuel. The new governmental five year plan foresees a production of 120.000 barrels per day from bio-fuels by 2010 of which 60% from bio-ethanol and 40% from bio-diesel. Next to that, addition bio-fuels might be imported, but the amount is very uncertain. More interesting then imports would be ethanol production from cellulose. This technology is on the brink of commercial application in various factories in Japan, Spain and the United States. By 2015 domestic production of bio-fuels could very well be doubled to 240.000 barrels per day or maybe even tripled.

Gas-to-liquids does not seem to have much potential. Domestic gas in China is intended for electricity generation. Imports of liquids produced by gas are also unlikely in the given time period, since most of the gas-to-liquids plants under construction will not start up much earlier then 2010. The potential for electric transport replacing liquid demand in the short term is not very large, unless there is a large shift in governmental policy towards huge systems for public transport.

Scenario conclusion - soft or hard landing?

If the assumptions above are taken including the possibility that China will be able to keep increasing their imports of crude oil, the following scenario is the result:

Figure 4 - Chinese liquid fuel scenario with increasing imports in case of later world oil production peak

In this case the resulting gap between sustained liquid demand and supply is quite small and will not result in any problems for China. Demand in this case will be dampened slightly by market factors without great economic loss. However, if oil production peaks around 2010, making it virtually impossibly to increase the amount of imported oil, the situation would severely dampen economic growth. Supply in that case would fall short with 3 mb/d by 2015, and consumption can only increase with around 2% annually. While this would cause hardship for the industrialising of China and the end of "business as usual", it does entail the continuation of Chinese development at a far slower pace.

Figure 5 - Chinese liquid fuel scenario with restricted imports due to early world oil production peak

From the look of things, it seems that China is in pretty good shape thanks to their aggressive coal to liquids program and foreign policy which has led to an increasing supply of imported oil. While this will come with an environmental pricetag to future generations, the need for liquid fuels in the short term is vastly higher than the environmetal damage caused by the usage of fossil fuels.

Rembrandt, interesting post on a vital issue. A few months back I began looking at Chinese oil consumption, inspired by the work of others, and never finnished the post.

So here's a thought provoking chart. During industrialisation, per capita oil consumption rises. With China, we are still at the very tip of the ice berg. I don't think it will be possible for China's oil consumption to rise to 15 bbls per capita per annum - but I'd be interested in other views on that.

Also, can you add some translation to Figure 3? And I note this darned date of 2012 keeps cropping up time and again.

I also think that China won’t make it there. Oil is just the tip of another big iceberg – China’s imports of raw materials and other commodities like grain and meat.

Chinese industry is mainly a transformation one, they buy raw materials to produce goods they send overseas. Either from lack of raw materials to import or costumers for the goods they produce China will fell every economic impact of Peak Oil. But the food balance is probably the most concerning.

Thanks, I had been expecting TOD to post an entry on China's increasing oil consumption for a while. The failure of the political class in the US to address such a key issue, yet again, demonstrates what a joke they are. Hope this post gets placed on The Oil Drum to increase discussion.

One of the reasons fuel usage is rising so fast is because the number of automobiles is rising. Cities are being built at a scale that no longer permits commuting by bicycle as in the past. The big cities are also undertaking a huge highway construction effort to counter the traffic jams that are already common.

Rather than learning from the mistakes of the west (say Los Angeles) they seem to be intent on repeating them at an even bigger scale.

Any country that can limit the number of children can find a way to limit automobile ownership and usage. They just haven't made this a national policy. If they have any sense they will change this as quickly as possible.

Absolutely. We want them to continue shipping us goods, but it is critically important that they reduce their own consumption, not increase it... bicycles are ok if absolutely necessary, why can't they just walk? Think of the health benefits.
I think the problem comes from insufficient censorship. Why is china allowing pictures of the west, everybody riding cars etc, to be shown in china? Simply leads to unhealthy desires that we all know can never be met.

Certainly, some see a huge expansion in the number of Chinese automobile owners in the next few years:

According to Chinese policy researcher Zheng Xinli, by 2020 China could well topple the United States as the world’s biggest auto market with annual output of 15 million units. By then, experts predict, China’s total car ownership could even begin to exceed that of the U.S.

...General Motors is pouring in $3 billion over three years to expand capacity, on the calculation that some 74 million Chinese families can now afford to buy cars.

I can't help but wonder if this isn't just another huge miscalculation on GM's part.

This is a critical point. I expect the rapidly emerging Chinese middle class will seek to emulate the West's desire for personal transportation. If this is factored in to the growth rate in China's demand for oil or liquid fuels in general, I would expect to see an increase in their rate of consumption on a per capita basis. Without doing any math on this, I wouldn't be surprised if Chinese demand growth drives crude prices to the $100/bbl level even if we see worldwide production not peaking.

Asian demand for resources (commodities and energy) has already had a significant impact on prices and has seen some downward adjustment but I expect we have only seen the tip of the iceberg. I am bullish on energy prices based more on growing Asian demand than on a decline of world production.

On the other hand if GM is expecting this I could well be wrong! What does Toyota say?

On the other hand if GM is expecting this I could well be wrong! What does Toyota say?

Toyota in China: Full Speed Ahead

Just as the auto maker has grown rapidly in the U.S. over the last decade, it's now gearing up for rapid expansion in China. In December, Toyota President Katsuaki Watanabe outlined plans to ramp up sales 60% during 2006, to 290,000. And ominously for rivals, by 2010, the company aims to triple its current share in China to 10% of the fast-growing market

Thanks! Toyota's brains more than offsets GM's stupidity. 2020 China could well topple the United States as the world’s biggest auto market with annual output of 15 million units

Perhaps so, but I suspect that China will only need 7 million units to be #1 in 2020.


A large part of the rise in Chinese liquid fuel consumption is 22 million of these things:-

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They are advertised here

New Scientist had a story about them in May 2005. They are single cylinder diesel agricultural vehicles. There are as many of them as all China's trucks and cars. Because they are so dirty and inefficient, they use a quarter of China's diesel and produce half of the polution from vehicles. They weren't noticed because they were classified as agricultural machinery rather than vehicles. Back in 2002 they were producing 3 of these things for every car.

Remember that consumption is increasing rapidly in most oil exporting countries. From 2004 to 2005, Total Liquids consumption by the top 10 net oil exporters went up by 9%, which would, at that rate, mean a doubling in consumption in 8 years.

The real clincher for 2006 was Russia, which reported rising oil production, but a 2.4% drop in net oil exports, because of rapidly rising consumption.

I had to make a lot of assumptions, but I estimate that net oil exports (C+C) by the top 10 net oil exporters fell by about 7% from 11/05 to 11/06, and the Cantarell crash has only just begun to kick in.

BTW, I believe that someone pointed out that China, based on the HL model, is right at the 50% of Qt mark, and of course their largest field is in terminal decline with a 90% water cut.

Based on the HL model, the US used about 5% of remaining conventional crude oil reserves last year, while our total petroleum imports have been going up at about 5% per year since 1990.

The US and China are the world's two largest importers. What we want to import--the difference between our rising consumption and (probably) falling production in both cases--is going up.

Saudi Arabia and Russia are the world's two largest exporters. IMO, Saudi Arabia is in terminal decline, with Russia probably about to join Saudi Arabia, but in any case both countries are showing rapidly rising consumption and lower oil exports.

The conventional wisdom is that we are going to see an exponential increase in net oil exports. IMO, the reality--today, as I type this--is that we are seeing an exponential decline in net oil exports.

Remember that consumption is increasing rapidly in most oil exporting countries.

This is a vital point. To an importer (like the OECD) "peak oil" isn't half as important as "peak exports". It's the exports that we rely on not the production.

Exactly. I made this point at the Boston University ASPO meeting in October, but it did not seem to resonate. (see my blog:

For thoseof you who where were there, you may remember a great deal of discussion on the period 2005 to 2012, with a several outside this range. In 2007, does that really matter to an importer? If world peaks in 2012, by necessity peak will hit the importers at some point before then.

The exact date of world peak is not nearly as important for the world economy is "world exports peak". That is the stuff we trade.

WT -- as Chris Vernon alluded to "Peak Imports" (or is it Peak Exports"?) I do think we need a serious article posted on TOD that summarizes the likely scenarios and impacts of various models.

"Peak Import/Export: the implications for importing countries"

Are you up for it, WT? Or maybe a collaboration?

WT, your comments thus far could be collected and edited to flow as a short piece, and maybe another TOD contributor would be able and willing to do a few graphs of various scenarios.

This article on China and liquid fuels was superb. Thanks Rembrandt.

I suggested a Net Oil Export symposium for the ASPO USA meeting in Houston, and it looks like I need to start working on a paper on net exports for that meeting. I plan to dial up Khebab and see if he wants to do a collaboration.

I did express the opinion that exports are falling so fast that it may be obvious what the problem is by this fall, but CERA would probably still be calling it a "temporary" problem in any case, so I guess it's definitely worth talking about.

In the mean time, Luis might consider updating his excellent article on Net Oil Exports.

Very cool. Any chance you will post the paper online at TOD, or will you wait until after ASPO USA in Houston?

I don't know what their rules are. We'll see. But in any case, it won't be anything ground breaking--we will just have another year of data.

The primary point I would hope to get across is that declining oil export capacity is a permanent situation, not a "temporary inconvenience," but if the situation weren't so damn serious, it would be comical as Americans (and others) confront the reality of the impossibility of an infinite growth rate against a finite resource base.

"Peak Import/Export: the implications for importing countries"

Here’s one we (Luís de Sousa) prepared earlier:

World Oil Exports: A Comprehensive Projection

This article is a first simplistic (but comprehensive) assessment of World Oil Exports, here defined has the total amount of liquid hydrocarbons that are surpluses in producing countries. This assessment is made by projecting in to the future fixed change rates that reflect current trends in liquids production and consumption in countries where presently the difference between the two is positive. The outcome of this assessment is worrisome.

If you do a Google search for Net Oil Exports, Luis and I are consistently in the top four, behind two EIA listings.

BTW, note that my current estimate of the 7% decline in net crude oil exports by the top 10 exporters (11/05 to 11/06) matches the estimate in my August, 2006 EB article.

Edit: I should read my stuff more thoroughly. The production decline rate was 7% per annum in the August article. The decline in exports would be higher.

Exporting countries are increasing consumption only because oil prices have increased faster than inflation, and fast enough to allow total revenues to climb even with declining export volumes. Declining prices since last aug have reduced revenues, and the reduction is accelerated by the declining volume. So, at least at the moment, lower prices are likely to be reducing export land consumption, including energy.
For your export land model to work prices must resume their climb to a rate higher than inflation... and, at the moment, it must be acknowledged that price is where it is only because the exporters are reducing volume to less than their capacity, further reducing revenue. I see the model in stall at the moment, and will not be back into operation until prices resume the upward treck.
BTW, looking at 3q06, sa yoy production is down only 4%. Using 8% was imo not justified at that time, and 4q, too, will be influenced by the cuts, at least part of which imo was voluntary... OTOH, SA cuts in 1q07 are reportedly more than they agreed, so i agree there is some evidence that their current production is all they can do... if so, official 1q07 will be informative, and comparisons with 1q06 may indicate their true decline rate.

This situation will differ per continent.

Rising African exports are for a large degree going to China. As to Saudi Arabia in terminal decline that's your opinion. Secondly the price effects are not considered in your analysis. In that sense I am not so pessimistic as you are Westtexas with respect to "exponential" increases. The market will do a lot of the work, as always.

I suspect that the people that make the decisions know this. They cannot be so out of touch not have advice from real analysts and not the MSM BS factory. I think that Russia will decline much faster in export capacity than Saudi Arabia since Russia's domestic market is much larger and Saudi Arabia sits on a bigger remaining reservoir of oil.

Is China's SPR of any significance in this discussion of Chinese demand?

Have they begun filling the SPR, or is it still conceptual or just beginning construction?

I imagine that china wants to have a substantial reserve, although I do not recall the number of barrels they aim to hold.

Are the barrels imported to fill China's SPR counted with the barrels consumed, or is that counted in addition to barrels consumed?

They have been filling it faster than they had originally said they would.

Thanks Rembrandt, good article.

Having been involved in the Chinese oil industry for 25 years, I'd like to go on record to say that China's peak production year was 2006. This is based mainly on two developments: one is an HL plot of China that points to a URR of 72 GB, China having passed the 50% mark sometime in 2006 or early 2007. Second is CNPC's announcement that their production (nearly 60% of the total) would drop 100,000 b/d in 2007 ( Part of this is due to the acknowledgment that the slow decline of Daqing can't be maintained, and CNPC is now going to focus on natural gas production there (and tellingly, have started quoted production targets in toe). Neither Sinopec nor CNOOC have projects in the near term that could make up for this drop. Underlying depletion is running at 320,000 b/d, which puts China on par with a producer like Iran, but with only a fraction of Iran's reserves.

I think the potential for CTL by 2015 is quite overstated. Although nearly 100 million tonnes of projects have been announced, and Shenhua itself targets 60 million tonnes of capacity by 2020, the obstacles--even beyond complex engineering and chemistry--is daunting. Water will be a problem. China's coal centers in Inner Mongolia and Shanxi have few available water resources (one reason coal-by-wire hasn't been an option), and CTL production requires 3-6 tonnes of water input for each tonne of output, depending on the method. Cost is an issue as well. Shenhua's own estimate is that it will cost $6.25 billion per 100,000 b/d of CTL capacity (which I think is understated) putting it on par with tar sands, where costs have risen from $3 billion/100,000 b/d cap to over $12 billion). Finally, there is the issue of the coal resource base. CTL results in an enormous increase in primary energy consumption. In the case of 1 mmb/d production in 2015, this would require an increase in production of 180 million tonnes of Chinese raw coal per year--this on top of the 60-80 million per year needed for new coal fired plants constructed each year, and addition amounts of 50-80 million tonnes for iron & steel, cement, and other industry. A growth path of Chinese coal consumption to the IEA estimate of 3.5 billion tonnes in 2025 (which is very moderate and excludes CTL) would result in China's consumption of half of its total remaining recoverable coal reserves by 2019. Since China's coal reserves are only 45% bituminous (the balance being subbituminous and lignite), gross production will have to rise even further to deliver the same amount of energy. Moreover, China recently announced a national fuel standard for methanol from CTL (a result of the coal producers angling for subsidy money that went to the ethanol producers), but since methanol has only 48% of the energy content of gasoline, CTL output has to be discounted by such factors depending on what is produced.

China has sanely put a moratorium on food-chain grains being used in grain ethanol production, having seen prices on its own corn market in Dalian soar to new highs last year. I'm also skeptical of the speed at which jatropha plantings can offset oil as well. China doesn't have large tracts of empty land to plant, so density of planting will be fairly low, and this has a strong impact on the energy return of any biomass-based project.

It's also important to consider how oil is used in China. Adjusting the Soviet-style official energy consumption numbers to account for nature of use, and not sector of use, oil for transport (road, rail, air, water) now accounts for about 39% of the total, compared to 65% in the US. Although the growth of the vehicle industry is high, it is not the discretionary private user that is driving transport oil demand. In large part, the biggest growth is coming from road freight transport. China's rail system, the largest in the world, is completely overwhelmed moving coal, and coal now accounts for 49% of all freight moved on the rail system, but this in turn accounts for only 55% of coal production, down from 80% of production moved by rail in 2001. What this means is that the road system (they now have pretty much the equivalent of a US interstate system in place and still expanding) has had to take up a lot of the slack, and story after story appears of overload coal trucks (30 tonne size) creating severe damage to highways which were not built to this weight specification. Similarly, the rail system has to refuse 60% or more of new freight transport requests, and this means that a manufacturer trying to move his freight to the coast to deliver to just-in-time export markets have had to shift to road transport as well. In China, the shift of one tonne-km of freight from rail to road increases energy use 8 times.

China uses very little oil for power generation, and that is mainly oil-fired plants in Guangdong province. The conditions leading to the jump in consumption to 14% in 2004 when thousands of diesel-powered generators were brought on line to deal with the electricity crisis have pretty much passed. In 2006 alone, China added 102 GW of new power capacity, or the equivalent of the UK and Italy grids in one year (which by the way, will emit 500 MT CO2 each year--the EU Kyoto reduction to 2012 in total was just 300 MT).

Oil is a vital fuel in the agricultural sector, where 60% of irrigation is run by diesel pumps. Another 15% is used in the petrochemical industry, vital to both domestic and export manufacturing. Construction account for another 10%--this is the diesel used to run the machines that have turned China into one huge construction zone over the last 20 years. Finally, industry uses about 20%, and possible savings can be had in this sector.

I often wonder who will be hurt more by liquids shortages...China or the US? The US has a lot of wiggle room in its consumption, given the domination of autonomous personal transport in total oil use. China has much less--oil is already being put to its highest value-added uses, and there is little room for fuel switching in the short term. The easiest efficiency gains have been had, after 25 years of concerted efforts in this regard, so even 1% per year would be difficult from efficiency alone--it may well mean absolute conservation, or going without.

Excellent post.

Thank-you Sparaxis and Rembrandt.

Sparaxis, you make an excellent point in your final paragraph (one of many throughout your post) in reference to the relative significance of liquids shortages to the US and China. You suggest that because China is putting oil to (on average) higher value-added uses than is the US (at least on the margin), it will suffer more from anticipated liquids shortages.

It seems to me that if China has more opportunities for the use of oil in higher value-added uses than does the US, then oil will flow from the US to China until an equilibrium in opportunity cost (for oil use) between the two economies is attained. Do you have a view on this?

The oil will go to those who provide more value to the seller of the oil. A wealthy buyer will be able to provide the seller with more value in exchange than a poor buyer.

The "value" of the use to which the oil is put by the wealthy or poor buyer will probably not factor in significantly, at least in the short run.

I disagree. There are great oil paintings, but oil is not a painting.
Its value is tied to its potential for work. Those who will be able to provide more value to the provider of oil are those who can extract the most marketable work from the oil on offer. I expect the oil to flow to China so long as China is able to provide a greater marginal returns for the work potential in each barrel of oil than its competitor.

Within countries, the flow of oil to more productive users is already occurring. A case in point is a shift in the US from road based long haul transport to rail based transport. It is a shift expedited (yuk, juk) by the container. This is an historic shift following, with a short lagtime, the trend in fuel prices. Thus far this shift is mostly being reported by transport industry organizations, but eventually official data will be available (BTS), and when it is I will post it.

The movement in fuel prices, of course, reflects the fact that a liquids shortage is not in the future, but in the present: we're short of the oil needed by the economy when oil is at $30 per barrel.

Sorry, I have to disgree in return.

"Value" is in the eye of the beholder, and in this case the beholder is the seller of the oil.

If I am wealthy and am willing to pay a high price to buy the oil to pour it down the drain (or use it to keep from walking to the corner store), I can easily outbid the poor person who who may have a very "productive" or "high-value" use for it.
This is happening on an international scale at present, and will probably continue in the forseeable future.

Yes, in the U.S. the truckers and the rail lines (both relatively wealthy compared to the remainder of the world) may battle it out based on relative economic "value" to see who gets to transport S. American strawberries to U.S. cities, but regardless of the intrinsic value of getting those strawberries to the American plate, that doesn't say that a poor Chinese factory producing something "really useful" will be able to outbid them if Americans really like those strawberries.

"If I'm wealthy..."

But where does your wealth come from? How many Americans, in our example, even among those earning $1000 per week or more, are one or two paycheques away from insolvency? How much credit is left on the card? As the current price of oil erodes the 'wealth' of those who thrived at $20/bbl, or as rising oil prices drives your employer from the market because he/she can't cut labour and other costs sufficiently to compensate, what shipper will send you strawberries?

It is not some measure of usefulness of the product of the Chinese factory which is the relevant issue. Is the Chinese factory able to pay a higher price and remain profitable is what matters. If scarcity drives the price to $65 per barrel, for example, are there more opportunities for the profitable use of oil in China than there are in the United States? Put another way, how many millions of workers in the US are ready to line up for jobs at $5 per hour? And when millions are ready to accept that wage level, how many will be travelling one person per car?

If you are Toyota, will $65 oil drive your investment to China, or to the US? I will think it will go to the US only in part and only if Toyota concludes that they can replace existing US production facilities with their own. Toyota's investment will not provide net new demand in the American economy. It only substitutes for the reinvestment that depreciation normally demanded for now abandoned GM/Ford/Chrysler plants. The net consumption of oil will not rise in the US from Toyota's investment. It will likely fall with a new, lower, level of wages and salaries, as Toyota will feel less threat of unionization than ever.

On the other hand, China's demand for cars is comfortably exploding in the presence of $50/bbl oil. It is only indirectly and marginally relevant that Chinese consumers are protected from the full cost of fuel. The economy is absorbing the cost with barely a hiccup.

I have no doubt that new industries will thrive in the US and will compete at any price for oil. But I fully expect US oil consumption to drop and Chinese consumption to rise, even as production worldwide declines.

I think the concept of "comparative advantage" or the Heckscher-Ohlin theory of trade focuses on tradable goods. Many energy services that oil provides, such as transport or construction, are not tradable goods, so the value-added created accrues to the consumer of oil. I think the question I posed just highlights the degree to which China will value continued access to oil, setting the stage for continued and intensified competition with the US. It makes a mockery of recent testimony before the US Congress in which China was vilified for its "distortion of markets" approach to securing oil deals, and proposals to try to convince China that "energy security" is a matter of having free functioning global markets. Since China's National Energy Leading Group not only feels that the US is manipulating oil prices to attack China's economy, and that peak oil will affect China "by 2010", what possible reason would they have to rely on "free markets" to secure their oil?

In one way or another all energy services the economy. Transport is about labour mobility as well as the movement of goods. Construction is about plant and other infrastructure as well as housing for workers. If an additional barrel of oil does more for China's economy than it does for the US economy, the Chinese will pay more for the barrel than the Americans.

I note that the Chinese are building enormous trade surpluses even as oil prices have risen markedly and even as the intensity of oil use in China (consumption per unit of economic output) lags that in the US. The potential for efficiencies in Chinese industrial use of energy are enormous, and the National Energy Leading Group has made it clear that finding efficiencies is a priority. As they are found, or introduced by such experts in the game as the Japanese, industry located in China becomes even more competitive, and Chinese workers more likely to become beneficiaries of higher incomes. Both tendencies will boost effective oil demand.

The trend in the US on the other hand is towards stagnating or declining real income and declining competitiveness in a widening swath of industries.

I would be surprised to learn that the Chinese expect the US to play by free trade rules. I would not be surprised to learn that Canadian experience dealing with the Americans on softwood lumber, among other gaps between US proselytization and practise on free markets, is known to the Chinese. So, aside from thinking that they have the most to gain from a free market in oil, I agree with your implication that they will take another road to energy security.

I spent some time trying to follow up on your reference to the sentiment that the US is manipulating oil prices to attack China's economy, but could not find anything. Do you have a link? Much appreciated if you do.

Yes, it was a fascinating analysis by the economist at Sinopec and the Chief Economist of the Bank of China that, simply put, asserted that the run up in prices was due to hedge fund manipulation, and EIA and Fed statements. This hurt a number of China's economic sectors (textiles, chemicals...) and led them to invest overseas in resources at high prices. Then Goldman-Sach's index juggling led to the collapse in oil prices, leaving China with stranded investments and overcapacity, much like Japan faced in the late 1980s when they fell into a decade-long recession. The goal was to "attack China". No matter what you think about the analysis, the fact that it was posted on the website of China's National Energy Leading Group makes it more than just a crank piece (as I like to say, if we are going to have conspiracy theories, let's not be ethnocentric about it). The link is, but it is in Chinese only.

Thank-you. I'll ask a friend to translate. It seems to me that the Chinese sent a very clear message when they took out that old satellite: the US will not write the rules.

Very good post!

one is an HL plot of China that points to a URR of 72 GB

The HL is no that straightforward, Roberto has classified China as a country that does not behave well with respect to the logistic model:

Dependent on the time interval chosen for the fit (1995-2006 or 2000-2006), you get two logistic curves:

The low logistic (URR= 67.9 Gb) suggests that China is at 50.4% of its URR in 2006. The high logistic seems to correspond to Professor Pang Xiongqi's forecast. Production in 2007 will be important to watch in order to confirm a rapid decline. Also, it seems that China does not produce NGPL.

My simple brain can only interpret a limited number of graphs. Could you show the standard P/Q versus Q plot for China?

For the low logistic:


Qt= 34.2 Gb ( 50.4 %)
Qtmid= 33.992 Gb 50.087
Qinf= 67.865
k= 0.076
thalf= 2006.667

I would have to go with the 2006 peak and Qt estimate of 68 Gb. I suspect that the recent slight change in deflection is the same thing we saw just before the Lower 48 and Texas declines. A key factor is probably Daqing, where the water cut is about 90%.

It looks like their 2006 peak, so far, was 3.7 mbpd in July. So, Daqing--with a 90% water cut and in terminal decline--accounts for about one-fourth of their current production.

It's interesting that Mexico and China both just crossed the 50% of Qt mark, with their respective super giant fields in decline or crashing.

BTW, when did Mexico cross the 50% of Qt mark on your HL plot?

A HL look at the top two exporters and top two importers:

Saudi Arabia: about 60% depleted

Russia: about 90% depleted (at least mature basins)

US: about 85% depleted

China: about 50% depleted

My Conclusions (Based on analysis of Khebab's data):

All four countries are, or soon will be, showing year over year declines in production, while consumption in all four countries is growing, in aggregate very rapidly.

Russia: about 90% depleted (at least mature basins)

I see you already have your lame excuse prepared.

IMO, the frontier basins won't be able to reverse the upcoming decline in Russian production.

when did Mexico cross the 50% of Qt mark on your HL plot?

In 2006, for C+C (

A growing list of large (60 Gb plus URR) producing regions all with definite peaks in close proximity to 50% of Qt--Lower 48; North Sea; Mexico--and based on the Daqing situation, probably China.

And then the complex case, Russia, which had a plateau at 50%, followed by the post-Soviet collapse and rebound.

And the cumulative shortfall, between what the world would have produced (at the 5/05 rate), from 5/05 to 11/06 and what it actually produced is on the order of 320 million barrels of oil (crude + condensate, EIA).

I don't see a shortfall, just as I don't see a surplus (as freddy does.) The world remains on the bumpy plateau reached in q404 - no higher and no lower - certainly for all liquids.

Thanks and well done Rembrant, your usual quite superior information Sparaxis appreciate the China color and perspective you both provide.

Hello Sparaxis and other TODers,

Great keypost Rembrandt, and thread--excellent info!

What all this points to is: increasing pressure to go to extreme measures to keep the Chinese infinite growth chugging along. I posted some time ago that I think the Chinese PTB will get so desperate for clean drinking water that it is only a matter of time before they start mining Himalayan glaciers, then sending the meltwater to the cities. This is actually cheaper and more cost effective than spending billions, trillions? on industrial pollution controls and widespread sewage treatment infrastructure. Consider that they are already rerouting rivers, but it won't be enough. Yikes!

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Hello TODers,
The Himalayas contain the world’s third largest ice mass after Antarctica and Greenland. Most Himalayan glaciers have been thinning and retreating over the past 30 years, with losses accelerating to alarming levels in the past decade. On Mount Everest, the glacier that ended at the historic base camp of Edmund Hillary and Tenzing Norgay, the first humans to reach the summit, has retreated 3 miles since their 1953 ascent. Glaciers in Bhutan are retreating at an average rate of 98 – 131 feet a year. A similar situation is found in Nepal.

As the glaciers melt they are rapidly filling glacial lakes, creating a flood risk. An international team of scientists has warned that with current melt rates, at least 44 glacial lakes in the Himalayas could burst their banks in as little as five years.

Glaciers themselves store vast quantities of water. More than half of the world’s population relies on water that originates in mountains, coming from rainfall runoff or ice melt. In some areas glaciers help sustain a constant water supply; in others, melt water from glaciers is a primary water source during the dry season. In the short term, accelerated melting means that more water feeds rivers. Yet as glaciers disappear, dry season river flow declines.

The Himalayan glaciers feed the seven major rivers of Asia — the Ganges, Indus, Brahmaputra, Salween, Mekong, Yangtze, and Huang He (Yellow) — and thus contribute to the year-round water supply of a vast population. In India alone, some 500 million people, including those in New Delhi and Calcutta, depend on glacier meltwater that feeds into the Ganges River system. Glaciers in Central Asia’s Tien Shan Mountains have shrunk by nearly 30 percent between 1955 and 1990. In arid western China, shrinking glaciers account for at least 10 percent of freshwater supplies.

IMO, these Himalayan countries should not wait for these glacial lakes to burst their banks causing huge downstream flooding. The water will essentially be wasted as it enters the polluted waterways. Far better to tap some of this high elevation water now to lower the lake levels before they burst. Feel free to disagree.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

Rembrandt, great article.

Sparaxis, very good response.

WSJ published an article on ethanol on Jan 27, 2007. With regard to available land in China, the article said "In China, the government has put a halt to ethanol-plant construction for the threat it poses to the country's food security"

I agree that China's oil production (C&C) has peaked in July 2006 at 3.7 million barrels/day (EIA). By 2010, heavy oil peaking at 190,000 bopd from Peng Lai phase 2 (15-22 API) should slow their production decline (C&C). However with no new significant projects their production will continue to decline.

Interesting figures Sparaxis, I have been looking for detailed data on China but it is very difficult to obtain. As to China having passed their peak, could very well be. What kind of declines do you expect?

Note that the post-50% of Qt Lower 48 cumulative production was 99% of what the HL model predicted, using only data through the 50% of Qt mark to generate the predicted production profile (all Khebab's work).

This has obvious implications for China and the world, both past their respective 50% of Qt marks (Khebab and Deffeyes, respectively). (low case for Khebab, which IMO, is the more accurate)

Westexas writes:

Note that the post-50% of Qt Lower 48 cumulative production was 99% of what the HL model predicted

A CERA press release says:

... As a result, in the US Lower 48 where Hubbert came closest to accurately forecasting a peak, oil production in 2005 was some 66 percent higher than projected by Hubbert, and cumulative production between 1970 and 2005 was some 15 billion barrels higher, a variance equal to more than eight years of US production at present rates

Can Westexas and or Khebab explain the discrepancy?

In 1956, when Hubbert made his prediction, he was 14 years away from the actual peak. He used a range of 150 to 200 Gb for the Lower 48 URR, resulting in his predicted time frame of 1966 to 1971. Note that a one-third increase in URR only delayed the predicted peak by five years.

I think that CERA is using the low end estimate of 150 Gb, versus the actual cumulative production.

Khebab took the actual Lower 48 production data, through 1970, and generated a model that predicted the post-1970 cumulative production.

Note that we are not 14 years away from the world peak. In fact, based on Deffeyes' model, we are into the second year of crude + condensate decline.

If we compare apples to apples (high quality HL data at and past the 50% of Qt marks), the HL model predicts that the remaining recoverable conventional crude + condensate reserves for the world, as of 1/1/07 are about 975 Gb and for Saudi Arabia about 75 Gb. BTW, as I have previously noted, post-1984 cumulative Russian production through 2004 was 95% of what Khebab's model predicted, using only production data through 1984 to construct the model.

Rough estimate of China C&C decline rate:

Jul 2006 - 3.7 mb/d C&C
Jul 2010 - 3.2-3.4 mb/d C&C

Decline rate estimate: 2.0-3.5%/year C&C

The decline rate could be higher if Daqing declines faster. The decline rate above also assumes a contribution of at least 0.15 mb/d from Peng Lai phase 2 by 2010.

Rembrandt, I don't think I'm qualified to project aggregate decline rates since I don't have comprehensive information. Looking at the three top fields, Daqing, since peak in 1998 has declined at an average 2.7% per year, accelerating to 3.5% in the last few years. The second largest field, Shengli, peaked in 1991 and has declined at an average 1.6% since then (though a fairly rapid initial decline has been moderated by enhanced recovery projects in recent years). The third largest, Liaohe, peaked in 1995 and has been declining at 2.1% on average, though this has accelerated in the last few years. Given continued growth in the western fields of Xinjiang and some offshore growth yet expected, I would suspect that initial decline rates nationally will be fairly modest. However, all the mature eastern fields (65% of total output) have been extensively reworked, so could quickly experience much faster rates of decline.

With respect to the coal-to-liquids target, it is very very ambitious and will probably not be made. However one can do some speculation. If the oil markets become very dire then China will have the ability to do a technology push which the west would be ashamed off. Many of the factors you mention can be avoided such as producing the liquids were the coal is mined, improving the water efficiency of the process and so on. Coal-to-liquids will probably have higher priorities then coal for electricity, which makes the production issue smaller.

Many factors involved, more importantly is the direction which is being taken (heavy push of coal-to-liquids)

Excellent Post!

I often wonder who will be hurt more by liquids shortages...China or the US? The US has a lot of wiggle room in its consumption, given the domination of autonomous personal transport in total oil use. China has much less--oil is already being put to its highest value-added uses, and there is little room for fuel switching in the short term. The easiest efficiency gains have been had, after 25 years of concerted efforts in this regard, so even 1% per year would be difficult from efficiency alone--it may well mean absolute conservation, or going without.

This is an interesting point. I guess the same would apply to the Japanese and European economies -- which are already quite energy efficient compared to the U.S. I wonder what a good metric would be for measuring a country's discretionary oil use as a percentage of total consumption.

I am NOT an expert on Chinese railroads, although I have picked up a bit of knowledge "along the way".

The Chinese invested relatively little in their railroads in the 1990s and although substantial investments have been made in recent years, rail is still a second tier priority for new infrastructure investments.

Using guestimate #s, what one sees today is the result of growing rail capacity by 4%/year whilst growing the economy at 10%/year.

Higher speeds along main lines for pax traffic continues to increase (~160 kph late last year AFAIK). I am unsure of the state of signaling (the cheapest way to increase rail volume is to improve signals).

The US uses (outside isolated Australian ore RR) the heaviest axle loadings in the world on the heaviest rail on heavy concrete ties. Past the cold deformation of steel limit. Just three tracks (jointly owned by BNSF & UP) handle the coal exports from the Powder River Basin with at least 10% spare capacity at last report. However, all bridges were uprated to handle the heavier loads.

IMVHO, the Chinese should devote more of their resources to improving their rail system. Improved signaling, heavier rails, stronger bridges, larger rail cars to increase tonnage/train. Add tracks (single > double, double track > triple, triple > quadruple) and all new lines. Along some routes create dual mode rail; 2 tracks for pax and medium density, high value express freight at higher speeds and 2 or 3 tracks for coal, concrete, grain and other bulk freight. And electrify it all (+20% capacity due to faster acceleration & braking) plus a 60% or so energy savings over diesel-electric locos.

Happy Mardi Gras :-)


Some simple arithmatic to illustrate the size of the shortfall if China hopes to emulate the economic success and oil consumption of their hated cousins in Taiwan, using 15 barrels of oil per person per year (Euan's graph). 15 barrels x 1.2 billion = 18 billion barrels/year. Compare to current world total liquids of just over 30 billion/year. That's equivalent to about 130 Mb/day. Not even CERA are predicting that in the foreseeable future. It is not on, not going to happen, even with CTL and whatever else. The model of "prosperity" seen in these developed eastern - and western - countries, is simply not open to China, or India, let alone the rest of the "developing" world. Yet no one will tell them that, that is the tragedy.

There are plenty of people who will tell them that; the problem is, just like there are plenty of people trying to tell those in the US that suv's have become a bad choice, nobody wants to listen. If they did listen, they would phrase the debate differently - everybody else should cut back so that they can come a bit closer to an equitable share... say 10b/y for everybody in the west, and this much, or a bit more, for them... consider that they must have more energy if they are to continue producing the world's goods. (3B can each have 10b/y, leaving nothing at all for the other 3B... seems a little unfair So, maybe the 'fair' answer is 7.5 and 2.5b/y.)

Hello Doctorbob,

Thxs for this calculation. This math + China rolling postPeak shows that the potential conflict for any oil in the Sea of Japan, and the East & South China Sea could get ugly real fast. I believe China, Japan, and several others are all contending for undersea exploration rights, but there are unresolved and overlapping territorial open waters. Now Cambodia may have oil too. A Chinese overland military march would be unstoppable if they decided they wanted the FFs and other resources of SouthEast Asia. Taking over Myanmar also makes sense for bypassing the critical military seaborne chokepoint of the Strait of Malacca.

Bob Shaw in Phx,Az Are Humans Smarter than Yeast?

I still have what may be an odd question. Here it is.

Does China's SPR figure in to the consumption numbers we are talking about?

Or is China's SPR in addition to these numbers?

(Did I miss this above?)


What if China tries to store more in SPR?


Does USA's (or other) SPR get figured in to total USA figures, or is that somehow tracked seperately?

Is the military consumption tracked seperately?

Do tracking some of these -- SPRs and military consumption -- affect the total numbers we see very much, or are they relatively insignificant right now?

The consumption increase of fast SPR filling is not included in the figures since they will probably start filling this year (or maybe started last year, i'm not sure). The effect of the Strategic Petroleum Reserves on consumption depends entirely on the rate that the SPR will be filled. If it is done very slowly (over the space of 15 years) then it will not have a small effect which is not noticable on consumption. If it is done in the course of say 6 years, it will increase consumption by if I remember correctly (I did these calculations more then a year ago) about 0.5% annually for that period.

Does USA's (or other) SPR get figured in to total USA figures, or is that somehow tracked seperately?

You mean stocks? That is tracked seperately.'

Is the military consumption tracked seperately?

No it is included in United States consumption figures.

Do tracking some of these -- SPRs and military consumption -- affect the total numbers we see very much, or are they relatively insignificant right now?

Not insignificant but also not that important with respect to consumption. What is important is that they give a cushion that will ease the markets.

Thank you, Rembrandt!

That gives me a better understanding of these numbers.

So there's maybe a limited cushion in there, able to accomodate some disruptions by changing SPR filling rates and such.

Thanks again!

China does not report stock figures, nor does it report true consumption figures in the sense that we do of shipments. Their consumption figures are based on "apparent consumption", which is domestic crude production + crude and product imports - crude and product exports. Thus, monthly and seasonal stock build and draw are completely lost in the figures. An annual aggregate stock change figure is released two years after the fact. The only way to track SPR imports is to track a growing mismatch between crude import numbers (if Customs reports SPR imports) and apparent demand calculated on the basis of refinery runs + net product imports. It's quite remarkable that such a big country of such importance in the energy world has such a poor statistical system.

I did a status report on the Chinese SPR back in November . I need to revisit the numbers, but I suspect they have continued to get as much as they can at current prices.

A few months ago, I posted the following letter on the Financial Times:

LETTERS TO THE EDITOR: What use will China be making of its intellectual capital?

By Alfred Nassim, Financial Times
Published: Dec 06, 2006

From Mr Alfred Nassim.

Sir, John LLoyd and Alex Turkeltaub make the case that Russia will eventually suffer grievously - because of its dependence on oil export revenues and the expected decline in its oil production. However, China and India will continue to shine because of their investment in "intellectual capital". This argument presupposes that Russia and the rest of the world are not sharing the same planet. Russia, and other oil producers, always favour domestic consumers and as a result the share of oil being exported is in decline in Russia, Saudi Arabia, Iran, Kuwait and United Arab Emirates, among others. Once it is generally understood that the volume of conventional oil being internationally traded reached its peak in 2005, oil will cease to be subject to the "commodity cycle".

The question now arises as to what the graduates from China's "100 world-class universities" will be doing. Designing better bicycles?

Here is the response by another reader:

LETTERS TO THE EDITOR: Chinese science citations go beyond bicycles

By Jonathan Fenby, Financial Times
Published: Dec 08, 2006

From Mr Jonathan Fenby.

Sir, Alfred Nassim asks what the growing ranks of Chinese graduates will be doing and wonders if it will be "designing better bicycles" (Letters, December 6).

The 77,395 Chinese scientific papers cited in patent applications in China in the last available figures, and the way the mainland has advanced to anywhere from sixth to second place in the citations rankings, provides an indication of how widely their work is spread. I doubt if many of them were for bicycles.

Jonathan Fenby,


Trusted Sources,

London W1T 2NS

As you can see, they really do believe that if you get enough patents, you do not need so much oil.

May I suggest an alternative "First Best Option" for China.

1) Add more subway cars to existing Urban Rail (China is noted for not building enough rolling stock for their new lines; it is an easy line item to economize on)

2) Accelerate and expand existing plans for new Urban Rail. Shanghai went from 15 to 17 planned subway lines and extended a couple as their response to rising oil prices a few years ago. Not nearly enough. Every city of 1 million should have 2 or 3 Urban rail lines and major cities like Shanghai, Canton and Beijing should have 4 track subways (like NYC) that will allow for express service and high capacity instead of only 2 track subways as currently planned.

3) Seriously investigate using new Urban Rail lines (outside peak hours) for trolley freight. Standard 20' & 40' containers can fit in most subway tunnels. Perhaps a new Chinese standard group of containers ?

4) Produce better quality/more comfortable bicycles and reverse the trend to give the roads to the cars & trucks.

Elsewhere in this thread I posted:

The Chinese should devote more of their resources to improving their rail system. Improved signaling, heavier rails, stronger bridges, larger rail cars to increase tonnage/train. Add tracks (single > double, double track > triple, triple > quadruple) and all new lines. Along some routes create dual mode rail; 2 tracks for pax and medium density, high value express freight at higher speeds and 2 or 3 tracks for coal, concrete, grain and other bulk freight. And electrify it all (+20% capacity due to faster acceleration & braking) plus a 60% or so energy savings.

Happy Mardi Gras :-)


China is screwed. They are already leaning very, very hard on coal, and their oil usage would be much, much higher already were it not for coal. Their coal exports have crashed. And they are driving the price of thermal coal right back up again with their demand. Australia is digging and shipping coal furiously to keep up with Chinese demand.

How will China manage the loss of future coal production, if an increasing amount of it goes to CTL? This is the same daisy chain we see in corn, biofuels, coal, oil, tar sands oil, etc, everywhere else. There is no miracle solution because oil is the miracle. Once you start trying to "solve for less oil" with unconventional, you immediately get bogged down. You immediately relocate the pressure to someplace else. It's like arbitrage, but without the profit.

That said I advise investors to have continuing, overweight exposure to coal, and CTL. I have no doubt China will push ahead on CTL and increase CTL capacity.

AAUK, BTU, SSL, ACI, and many of the smaller Australian Coal companies are good picks.


If memory serves, in order to produce 10 mbpd of liquid fuel from coal in the US would require a five fold increase in US coal production.

By moving to the "endpoints," natural gas and coal, to obtain liquid transportation fuels (LTF's), note that we are just increasing our rate of depletion of fossil fuels. Also, to get LTF's, we would see new users of natural gas and coal competing with the current users of natural gas and coal. This is somewhat analogous to the food versus fuel debate for biofuels. The common theme here is a desperate effort to get any kind of liquid transportation fuel that will allow the automobile economy to continue expanding.

That's right. And BTW, WT, you must be pleased to see the recent burst of quality print coverage of the Declining Oil Exports story, first last week in the NYT, and then today in the WSJ. Both stories used Iran, as the example.


All we can do is try warn people, and IMO push Alan Drake's ideas for electrification of transportation as hard as possible. I plan to speak in favor of just that at a community meeting tonight regarding Dallas Area Rapid Transit.

I'm beginning to get really bad vibes about net oil export capacity worldwide. The math is just relentless.

China is fucked, how about that other big oil importer. I think smart cars are cute.

Please, one of the points Leanan made some time ago is that using old angle-saxon expressions keeps TOD out of schools, especially in the US. I believe your post allows you to edit it, so why don't you do so.

One can only edit your own posting until someone replies to it. Once a reply is posted, the original post is fixed.