China is approaching its own peak oil

• Country’s energy companies are starting to look ahead to demand topping out around mid-decade

China in September committed to a carbon-neutral economy by 2060. The race for electric-vehicle supremacy is now on in earnest, with everyone from General Motors to Apple Inc. circling the market and President Biden’s election adding to investors’ appetite. At the same time, U.S.-China relations remain extremely tense, meaning Beijing’s discomfort with its dependence on large-scale oil imports and a vulnerability to disruption in a geopolitical crisis, is rapidly rising. China is far and away the world’s largest importer of crude oil, bringing in more than 10 million barrels a day in 2020.

Nonetheless, there are some significant roadblocks to achieving a peak in the next five years. China’s oil consumption rose 5% in 2019 before Covid-19 hit, according to data from BP—slightly faster than the average of the previous five years. Chinese electric-vehicle penetration is rising quickly but still relatively low at around 5% of new cars sold, and even current official targets only call for 20% market penetration by 2025.

That means that to hit peak oil demand by 2025, China needs to significantly boost the efficiency of traditional transportation options. A peak oil scenario for mid-decade published in December by the Chinese research institute Catarc and the U.S.’s Natural Resources Defense Council finds that over the next five years the bulk of potential oil savings in the transportation sector will come from better mileage per gallon and a more efficient road transportation structure, rather than electric vehicles. Higher automotive fuel efficiency is the single most important source of potential savings, accounting for about 35% of the total.

One significant headwind is Chinese consumers’ rising preference for bigger, heavier vehicles—a trend that has been reinforced by rising incomes and cheap oil over the past half-decade. Forty-four percent of light-duty-vehicle sales in China were sport-utility vehicles in 2019, according to the International Energy Agency, up from 14% in 2010.

Meanwhile, a more efficient transportation structure presents its own challenges. In theory, China has lots of room to cut oil consumption by shifting more shipments from road to rail, investing in better urban public transportation and improving city planning. Only around one-fifth of freight transportation in China was by rail in 2017, according to the NRDC, compared with about 50% by road. In the U.S. and Russia, rail accounted for 33% and 43% respectively. But as monetary and fiscal policy becomes more cautious as the economy recovers, overall investment in the transportation sector might slow. Rail investment in China for all of 2020 was down 2.2%, compared with a 4.5% year-over-year rise in the first three quarters.

While China’s peak oil year might not be 2025, it may not be much further out than that, especially since electric-vehicle penetration does seem likely to gain momentum later in the decade. Investors in fossil-fuel companies should take that into account now.

mint