Beijing grabbed BBC headlines last year when it bought out all canisters of fresh air from Vitality, a Canadian company with operations in the Rocky Mountains, originally set up to sell bottled fresh air to combat altitude sickness for mountain climbers. This happened at around the same time that the city issued its first “red alert” for pollution levels.

With a population growing increasingly impatient with high levels of pollution, Chinese officials grappled with how to solve the problem of pollution without devastating the industry-heavy economy. This impetus to both citizens and officials alike has the potential to affect China’s vehicle industry through efficiency and higher sales of electric and natural gas vehicles, which as Bloomberg noted in a widely-circulated projection, could permanently disrupt oil markets.

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China’s market-augmenting policy toolbox is larger than western counterparts

In a more centrally driven economy such as China, public authorities have tools to influence consumer behaviour that aren’t on the table for lawmakers in western-style democracies. Western economies can affect consumer behaviour through subsidizing electric cars—though green car subsidies are available in China as well at a rate of up to $8,475 per vehicle. Western cities such as London can use fees requiring a daily charge for vehicles that don’t meet emissions standards.

Beijing on the other hand, can go farther. The city runs a lottery for individuals looking to get licence plates for ICE engine vehicles in the city. In 2016, it’s estimated that just over one in 700 applicants will obtain a license plate. On top of ICE cars, the city also has a quota of 60,000 alternative energy vehicles that individuals can apply to buy.









Mixed results from booming plug-in vehicle sales

The incentives towards electric vehicles are causing change, though not all consequences are intended. China is set to become the world’s largest plug-in vehicle market this year at over 600,000—double that of 2015.

In the first half of 2016, 126,000 EVs and 44,000 plug-in hybrids were sold, for a total of over 170,000 electric vehicles. China’s EV growth rates alone were the cause of the lithium price spike earlier this year. If sales continue at the same pace, China’s plug-in fleet will come in at over one million by the end of the year, while authorities have a goal of 5 million electric vehicles on the road by 2020, with electricity reaching 2.8 percent of all fuel consumed for vehicle transportation. Related: Is Oil Going Back Under $40?

This translates to an almost five-fold increase in lithium requirements for China from 2015 numbers. The quota system, however, is only shifting pollution production to electric power producers. Each electric vehicle in China produces similar amounts of CO2 and increased sulphur and heavy metals compared with gasoline cars, as most of the countries’ power is still produced using coal.

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Natural gas vehicles (NGVs) on the rise

While large cities in China such as Beijing and Shanghai more resemble developed western cities and have incentives in place to move towards electric cars, China's NGV fleet is being developed where there is access to natural gas. Compared to gasoline, NGVs have 24 percent lower CO2, 70 percent lower CO, SO2, 80 percent lower NOx, and 83 percent lower particulate matter emissions.

With this cleaner fuel, the development of NGVs in China started with provinces rich in natural gas, and later moved to coastal provinces with LNG access. Now, 32 out of 34 provinces in China have some penetration of NGVs. As noted previously on Oilprice, developing economies are opting for natural gas vehicles over electric, and large portions of China outside of these cities more resemble the developing world. Regardless of current dwindling sales numbers, officials plan to have over 11.5 percent of vehicle sales from NGVs in 2020.

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New technologies to lower fuel consumption in ICEs

On top of electric, hybrid, and natural gas vehicles, to meet its stringent 47 mpg goals by 2020, China’s auto manufacturers are adopting numerous new technologies that will impact oil consumption in ICEs. Turbochargers can increase fuel economy by 25 percent while emitting 20 percent less CO2 for the same horsepower. Related: Big Oil Begins To Worry About Trump’s Wall

Currently, one in four cars in China use turbochargers; this number is expected to grow to one in two by 2020. 48 Volt “mild hybrids,” allow for a 15 percent gain in fuel economy at 30 percent the cost of a full hybrid system by giving an initial acceleration boost and controlling auxiliary systems such as air conditioning. Although these technologies will not see significant inroads in 2016, it is forecast that mild hybrid and turbocharger technology could decrease incremental fuel use by 15-20 percent for every vehicle purchased in China in 2020.

Effects on China’s oil demand already felt





China is the world's largest market for new vehicles, and is increasing annually at 6 percent versus flat sales numbers for the U.S. The middle kingdom is set to beat out the U.S. for the world's largest vehicle fleet in 2020. However, the vehicle market composition will be much different from today, and will include large numbers of natural gas vehicles and significant numbers of electric vehicles in cities.

China’s oil demand has already been affected by these vehicle market trends, a drop in economic activity, and a re-focusing on the consumer over industrial production. Both Standard Chartered and the International Energy Agency are forecasting a drop in demand growth of 420,000 bpd for 2016, down from estimates of 600,000 bpd last year. In 2015, China’s oil demand growth was 256,000 bpd, and consumed 10.32 million bpd.

Without the context of vehicle trends in the Chinese car market, a forecasted 4 percent rise in fuel consumption is hard to rectify against a 9 percent increase in car sales for the first half of 2016. With the current market trends, China’s oil consumption could peak within the next decade. In the country’s drive to improve air quality, there is no doubt that a return to prior oil demand growth is off the table.

By Matt Slowikowski for Oilprice.com

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