How China's hybrid cars could change the world

Unless you follow blogs such as The Wall Street Journal's excellent China Realtime Report, you probably missed the biggest global energy news in recent weeks (and no, I'm not forgetting about BP): Last week, China announced considerable subsidies for consumers who buy electric or plug-in hybrid vehicles. Beijing will pay the first $7,800 to $8,800 of the sticker price for the first 50,000 such vehicles bought in five designated Chinese cities, or roughly 31 percent, for instance, of BYD's $25,000 F3DM.

The subsidies put hard action behind China's stated intentions to become the largest consumer market on the planet for electric and plug-in hybrid vehicles (you can see a nice slideshow about that by Roland Berger Strategy Consultants here). Other pieces need to fall into place, such as a cleanup of China's smoke-belching semi-trucks and the well-on-its-way expansion of its cargo railroad network. But China appears to be trying on the coat and liking the notion of a wholesale shift of its energy portfolio.

Why should we care? Because of the chain reaction that will follow. How future Chinese motorists drive -- whether in gasoline-powered cars, or plug-in hybrids -- will have a consequential impact on global oil demand. China's appetite for oil is going to grow whatever the case, but if Chinese motorists largely buy hybrids, the rise in the country's oil demand will not be as steep. That could suppress world oil prices, and by extension the crude oil income of current mischief-making and influential global actors. Since oil income and political mischief tend to correlate directly, lower oil income could lower the mischief quotient. We are not only talking about a possibly tamer Iran, Venezuela, and Russia -- a broad energy shakeup under way has already had visible impact in Moscow -- but a much easier answer to climate change.

A report by Deutsche Bank takes an interesting dive into the issue. Titled "China Autos and Global Oil," the bank's May 6 note to clients forecasts that plug-in hybrid sales will surge in China, and represent a full half of the country's passenger fleet by 2030. That isn't an outlandish projection -- last year, Philip Gott, director of automotive science and technology at IHS Global Insight, forecast that electric cars will capture almost 20 percent of the world market by the same year.

But since China has by far the world's fastest-growing car fleet, the impact there will be greater -- as suggested above, it will lower the expected growth in China's oil demand. This is a crucial shift: The International Energy Agency and just about every other big analytical house and oil company project that global oil demand will be about 105 million barrels a day by 2030, or 25 percent higher than now; Chinese demand represents a little more than half of that growth.

These projections by extension are woven into the fabric of the geostrategy of major countries going forward. But if that Chinese growth never materializes -- or does so at a lower rate -- it will throw those projections out of whack. That is precisely what the Deutsche Bank note suggests. The bank forecasts that oil demand will peak at just 8 percent higher than the 86 million barrels a day the world uses at the moment -- or 93 million barrels a day in about 2022, then begin a slow decline.

To the degree any forecast is accurate, Deutsche Bank's research note adds meat to the notion that oil prices -- while they very well may spike up a few times along the way -- may be relatively low in the long-term. As suggested above, the oil income on which today's petro-states rely would be lower. The cartel potency of the Organization of Petroleum Exporting Countries, or OPEC, would fall. Simply put, we would see a lessening of the global economic and political influence that these countries and organizations have held since the 1970s oil embargoes.

Why is China on this path? One reason is that Beijing itself sees the country's auto-growth numbers, and realizes that there simply isn't sufficient oil supply on the planet to run all of them -- they must find another source of fuel. Which raises the second reason, which is that the Chinese, while they may be too much of a late-comer to dominate the world gasoline-driven vehicle market, are early to the plug-in hybrid market, and can become the world's largest producer of such vehicles if they work at it. The third reason, says Erica Downs at Brookings, is air pollution -- "protests over pollution scared them," Downs told me in her office.

That said, there is much debate about the numbers. As blogger William Maley suggests, the state subsidies alone probably won't trigger the same burst in demand the Chinese have shown for conventional cars since subsidies on gasoline-powered vehicles were introduced in 2008, and China became the largest car market in the world. Even with the subsidy, the F3DM (pictured above), produced by Warren Buffett-backed BYD, would still cost about $17,200, or 31 percent higher than BYD's wildly popular gasoline-driven F3 Sedan, which retails at $13,100. (Unlike Americans, Chinese consumers by and large haven't gone for pure prestige or conscience brands when it comes to cars; they just want wheels, and it's price that counts.) Hence, China will have to continue and significantly increase the subsidies, probably to about $10,000, to achieve the consumer impact it seeks, according to experts I've queried.

David Fridley, a super-smart expert on Chinese energy at Lawrence Berkeley National Laboratory who was making the rounds in Washington this week, flatly disputes the potential impact of hybrids. He thinks that, while in fact plug-in hybrids and electric vehicles may take off in China, they will have "next to no impact on crude-oil demand." His calculus: The Chinese burn much more diesel than gasoline -- in the U.S., gasoline represents more than 40 percent of oil-product consumption, while in China diesel is the most prevalent fuel, comprising 40 percent of oil consumption; gasoline is just 22 percent of China's oil use, Fridley said. Thus, it would be far more consequential for China to clean up its diesel-smoke-spewing semi-trucks and shift its rail system from diesel.

Friedel's view can't be ignored -- but neither can the countervailing projections. The moving parts are many. But the direction of events is an energy -- and geopolitical -- shakeup. Trevor Houser, a serious China economic analyst and partner at the New York-based Rhodium Group consultant firm, says that in fact China is spending much stimulus money on restructuring its rail system, "so we'll see a shrinking of the growth of diesel demand." In his view, the key is whether China accelerates and expands the rebalancing of its economy away from exports and more toward domestic consumption. "A consumer-led economy is less oil intensive," says Houser.

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