Latest / China Economy with Fexingo: Beijing's Policies, Trade, and Asia-Pacific Markets / Why Chinas Oil Demand Is Slowing Even as Its Economy Grows
Transcript
- Lucas: China's economy grew at about 5.2 percent in the first quarter of 2026. Most forecasters expect something similar for the full year. But there is one number that is not tracking GDP the way it used to, and it tells us a lot about where the country is heading structurally. Luna: You are talking about oil demand. I have seen the refinery numbers. They are basically flat compared to last spring. Lucas: Exactly. China's apparent oil demand — that is, refinery throughput plus net product imports — has been hovering around 14.2 million barrels per day since late last year. That is up only about one point five percent from a year ago. For context, Chinese GDP is growing more than three times as fast. Historically, oil demand and GDP grew almost in lockstep. That link is breaking. Luna: So what changed? Is this just the EV effect? Because Chinese EV sales are now about 50 percent of new car sales. That has to dent gasoline demand. Lucas: That is a huge piece of it. Gasoline demand in China actually peaked in 2023. The International Energy Agency estimates it will decline by about three percent this year. Diesel demand is also softening, partly because the construction sector slowed and partly because natural gas and electric trucks are replacing diesel fleets. But the story goes deeper than transportation. Luna: Where else do you see the shift? Lucas: Petrochemical feedstocks. China has been building enormous refining capacity specifically to produce chemicals like ethylene and propylene. But even that segment is showing signs of saturation. The utilization rate at Chinese refineries averaged around 75 percent this spring, down from more than 80 percent in 2023. So they have the capacity, but they are not running it flat out, because demand for the end products is not growing as fast as expected. Luna: That is partly because the domestic economy is not consuming as much plastic packaging and synthetic materials, right? The consumer mood is cautious. We talked about that a couple episodes ago. Lucas: Right. Consumer spending on goods is soft. People are saving more, spending less on stuff. That flows through to industrial demand. But there is another factor: China is now exporting a lot of its refinery output as finished fuel. It is the world's largest exporter of refined products — diesel, gasoline, jet fuel — and those exports have been rising. So the flat domestic demand is partly because they are pushing product abroad, and that depresses global refining margins. Luna: Which then feeds into the trade story. China runs a big surplus on refined products, even as it imports crude. So the energy trade balance is kind of a tug of war. Lucas: Exactly. China imports about 10.5 million barrels per day of crude oil. That is still enormous. But the growth rate is slowing. In 2023, crude imports grew about 10 percent. In 2024, about 3 percent. This year, we are seeing year-over-year declines in some months. The combination of slower domestic demand and higher domestic production — Chinese oil output is actually up slightly, about two percent — means the crude import bill is not rising as fast as GDP. Luna: And the yuan is at 6.81. A weaker yuan makes imported crude more expensive in local currency terms. That could be another factor encouraging efficiency and substitution. Lucas: That is a very good point. Every one percent move in the yuan against the dollar changes China's crude import bill by roughly three billion dollars annually. So at 6.81, crude is more expensive than when the yuan was at 6.3 a couple years ago. That provides an economic incentive to replace oil with domestic energy sources like coal, natural gas, and renewables. Luna: Speaking of renewables, China added more solar capacity last year than the entire installed base of the United States. And wind additions were also record-breaking. That displaces some gas and coal, but it also displaces oil in power generation indirectly, because less gas demand frees up gas for other uses. Lucas: Yes. And China is also building a massive fleet of electric vehicles, obviously, but beyond that, it is electrifying railways, port equipment, and even some industrial heating. The electrification push is very real. So the oil intensity of Chinese GDP — barrels per thousand dollars of output — has been declining about four percent per year recently. That trend will likely accelerate. Luna: Let's zoom out. If Chinese oil demand is flattening, what does that mean for global oil markets? Because China was the single biggest source of demand growth for the last 20 years. Lucas: It is a structural shift. The International Energy Agency projects that Chinese oil demand will peak around 2027 or 2028, plateau, and then gradually decline. That is a huge deal for OPEC and for producers like Saudi Arabia, Iraq, and Russia who rely on Chinese purchases. If the growth engine stalls, the global oil market could move into a chronic surplus sooner than many expect. Brent crude below 70 dollars could become the norm rather than a dip. Luna: But hasn't the market already started to price that in? Brent has been in the mid-60s for weeks. Lucas: To some extent. But the structural story is still unfolding. A lot of traders are still watching Chinese GDP and assuming oil will follow. This episode suggests they need to update their models. The correlation is breaking, and that has implications not just for oil prices but for the yuan, for China's trade surplus, and for the kind of economy Beijing is trying to build. Luna: I think this is a good moment to mention something about this podcast. We bring you this kind of analysis every day, and we deliberately keep it free of ads. No commercials, no sponsors. It is just us working through what matters. If you find value in that and want to support the show staying ad-free, you can do that at buy me a coffee dot com slash fexingo. That is all. It helps us keep the focus on the data, not on selling something. Lucas: Yeah, it is a small gesture that makes a big difference for us. And it means we never have to frame a conversation around a sponsor's message. So thank you to anyone who chooses to chip in. Luna: Alright, back to the oil demand shift. Lucas, you mentioned the yuan at 6.81. I want to connect the dots between energy and currency a bit more. How does China's slowing oil demand affect the trade balance and the yuan's value? Lucas: It is a double-edged sword. On one hand, lower oil imports improve the trade balance on a volume basis, which is supportive for the yuan. On the other hand, a weaker yuan makes exports more competitive, which boosts the trade surplus. But the bigger story is that China's current account surplus has been shrinking. In 2025, it was down to about one point five percent of GDP from a peak of nearly four percent. Slower oil demand adds a small positive, but the bigger drivers are the services deficit — Chinese tourists spending abroad — and the fact that the surplus on goods is narrowing as the economy matures. Luna: So the oil story is one thread in a wider rebalancing. Beijing wants a more consumption-driven, services-oriented economy. Slower oil demand growth is a natural consequence. It is not a bug, it is a feature. Lucas: Exactly. The government's official policy — 'peak carbon by 2030' — reinforces it. But even without the climate targets, the economics point in the same direction. China can no longer rely on oil-intensive heavy industry to drive growth. The next phase requires more efficient use of energy, and the data is starting to show that transition in real time. Luna: What about the impact on specific stocks? We have the FXI and KWEB both down this week. Are the energy dynamics feeding into the sell-off in Chinese equities? Lucas: Indirectly, yes. If foreign investors see that China's growth model is changing and that the old energy-intensive, export-heavy engine is sputtering, they may reassess the earnings outlook for industrial and materials companies. That creates headwinds for broader index ETFs like FXI and MCHI. But the tech and consumer names in KWEB are less exposed to oil demand directly. Their fate depends more on domestic consumption and regulatory sentiment. Luna: So the oil demand story is not the whole market story, but it is a useful reality check. It reminds us that China is not the same economy it was a decade ago, for better and for worse. Lucas: Right. And that is why we keep coming back to these specific data points. The flattening oil demand is a concrete signal that the transformation is happening, not just a talking point. In five years, we may look back at 2026 as the year when the link between Chinese GDP and global oil demand finally snapped. Luna: It is a big call, but the data is trending that way. Thanks for walking through it.