There are increasing signs that something is going to break in the energy market:
- The Strait of Hormuz is still closed with no fix/end in sight.
- Global oil reserves have been drawn down and are hitting record lows.
So 20% of the world’s oil supply is offline and has no timetable for returning. And now, the buffer the world put in place post-1973 energy crisis, for exactly a moment like this – the national strategic oil reserves – are also being drawn down.
If oil is the lifeblood of the economy, this combination should be spelling global economic disaster.
But so far, the number one importer of Iranian oil, China, seems to be doing… just fine?
A report from the front lines
Three JPMorgan oil strategists spent the last week in China with energy market participants to figure out if China really is okay. Here’s an excerpt of their findings:
- “The most striking takeaway from our meetings was not simply that oil demand has fallen. It was that it may have dropped by as much as 9% or 1.5 [million barrels per day] — abruptly, unexpectedly, and with remarkably little visible disruption.”
Read that final sentence again.
Three months ago, China was actively using almost 10% more oil than it is today.
Basically, every energy economist would predict that the only way to cut domestic oil demand by 10% would be to reduce economic activity proportionally. People have to drive less. Factories need to use less electricity. Etc.
But that’s not what’s happening. People aren’t driving less. Economic activity in China is not slowing.
No, the dream of every climate nerd like us may be coming true in China.
If you give people a fossil-fuel-free alternative that is as good (or ideally better), they will use it:
- “The decline [in demand] does not appear to be the product of a formal government conservation campaign. There were no conspicuous appeals to save energy, no major limits on mobility, and no sense of crisis in daily life,” the JPMorgan strategists wrote.
“Instead, it looks like consumers have made a quiet economic choice. Faced with higher gasoline, diesel and airfare, many seem to have shifted away from oil-based transportation toward cheaper, lower-carbon alternatives: electric buses, gas-powered trucks, subways, electrified high-speed rail, and electric taxis.”
In writing over the past months, we’ve highlighted the “glimmers” of promise for how the closure of the Strait of Hormuz could accelerate the global energy transition away from fossil fuels, particularly in the fast-growing economies of East and SE Asia.
We highlighted the new effort in Korea to increase its renewables portfolio and how the Philippines was subsidizing electric cars.
Such actions are far more akin to nations setting up strategic oil reserves after the 1973 oil crisis. It was a political response to shield a country from future pain, without doing much to ease today’s.
But China is actively showing in this energy crisis the benefits of reduced oil dependence. An economy with abundant electricity and abundant electrified transportation alternatives simply has more ability to decouple its economic fate from that of global oil markets.
The geopolitical benefits of electrification were tested. And it delivered.
How big of a deal is this?
If this trend holds — if China really is able to continue operating with “remarkably little visible disruption” while consuming 9% less oil, this could be a significant turning point.
Up until now, we have seen evidence that countries can grow their economies and their GDP while reducing overall emissions.
But a part of this pattern has been the Western World de-industrializing and sending its heavy-emitting activities to East Asian countries, primarily China.
Now, we have the first example where it’s not a de-industrializing Western country decoupling economic growth and fossil fuel demand, but the most industrialized country in the world doing it. And not just a little bit, but in a dramatic fashion.
China vs. India
China and India, the two most populous countries in the world, are in an economic arms race. China is well established, but India is on the rise, and Indian Prime Minister Narendra Modi has made economic growth the backbone of his political argument.
This is the tradeoff that strongmen like Modi and China’s Xi offer: If I deliver economic gain for you, you will keep me in power.
And unlike China, India is being hit hard by the energy crisis.
- State-owned oil refineries are losing $63 million/day, subsidizing petroleum and diesel prices.
- And yet, analysts estimate that 15-20% of India’s ground transportation fleet is sitting idle because of high fuel prices.
That is the economic response most economists would have predicted. Fossil fuel supply drops, so economic activity slows to meet it.
So, how will Modi react? The Business Standard predicts that oil demand will continue to rise in India, but at a much slower pace.
Will those trucks sit idle until the Strait is opened and prices drop again?
Or will some combination of political will and opportunistic entrepreneurialism bring forward India’s electrification timeline?
Trump and Iran are actively reminding the world of the economic and political perils of fossil fuel reliance.
China is now demonstrating to the world the benefits of electrification.
So what will the world do next?
Zach Stein is a co-founder of Carbon Collective. ImpactAlpha has partnered with Carbon Collective to provide a monthly analysis on how individuals, companies, and organizations can incorporate the realities of our changing climate and energy systems into their investments. The analysis originally appears in Carbon Collective’s newsletter. All content is solely for informational purposes and should not be used as the basis for investment decisions.
Guest posts on ImpactAlpha represent the opinions of their authors and do not necessarily reflect the views of ImpactAlpha.
