Summary
- Consumers in China and Europe are rapidly switching to electric vehicles and public transportation in response to high gas prices.
- Experts say some of these behavioral changes could prove permanent, potentially marking the beginning of peak oil.
- The world lost more than 5 million barrels of oil demand per day in May, approaching pandemic-era declines.
AI-generated summary was reviewed by a CNN editor.
Something weird is happening in China.
Chinese demand for oil has tumbled 9% from before the Iran war, according to JPMorgan. That’s the stuff of economic nightmares. For context, global oil demand fell 2% during the 2008 Great Recession.
But China isn’t close to economic collapse.
Despite the largest energy supply shock the world has ever seen … despite the fact that China imports 70% of its oil … despite China’s status as Iran’s No. 1 oil customer … the oil situation in China seems, well, fine.
China accomplished that drop in demand not through some government-mandated effort to conserve fuel, but through rapid changes in consumer behavior. Chinese consumers have traded in gas-guzzling cars for electric vehicles and public transportation and switched international travel for nearby destinations.
It’s happening elsewhere in the world, too. Some of those choices have already led to permanent changes in oil demand – even when the Strait of Hormuz reopens.
In other words: We may have already hit peak oil – the point at which the world starts to wean itself off crude, never to return to its previous highs.
China insulated itself from the oil shortfalls and rationing of neighboring countries in large part because of its mammoth crude stockpiles – prescient fuel warehousing that the government built up well before the war broke out.
But that’s just a temporary fix. The more significant shift is permanent: Chinese consumers took a hard look at rising gas prices, said nuts to this and went electric.
For the beginning of the five-day May Day holiday, EV charging on China’s highways surged 55.6% over the previous year, according to China’s Ministry of Transport. Over the course of the holiday, just under a quarter of cars traveling on China’s highways were EVs – up 33% from a year earlier.
Meanwhile consumer air travel for May Day fell 5.7%. But that decline in flights was largely because of a big drop in international trips. Regional flights were up 3.5%. Rail trips rose 4.6% for the holiday.
A similar situation is unfolding in Europe: New car registrations are at a seven-year high, led by hybrid vehicle sales, according to JPMorgan. EVs have become even more affordable because European electricity prices are falling – thanks to massive investments in wind and solar over the past decade.
That’s certainly not the case everywhere. EV sales have not meaningfully risen in the United States after congressional Republicans, supported by President Donald Trump, stripped away government-backed incentives to buy EVs.
But permanent declines in oil usage, even just from some sectors across two major economies, could dent demand enough that it never fully recovers, according to Natasha Kaneva, head of commodities strategy at JPMorgan.
“History suggests that past oil shocks often left lasting declines in gasoline demand, and this episode may prove no different,” she said.
The world adapted to the last Iranian oil crisis – the 1973 oil embargo – in remarkable and permanent ways.
Countries banded together to form the International Energy Agency, which coordinated and held member countries accountable for reducing their reliance on oil. The number of nuclear power plants rose sharply over the course of the decade, as did public transit options and new efficiency standards for vehicles and home insulation.
The United States and other nations built strategic petroleum reserves. The US Congress established the Department of Energy and reduced the national speed limit to 55 miles per hour.
The 1970s marked the largest reduction in fossil fuel demand in US history.
“It was a sort of collective shock to the American system that did drive policymakers to push oil out,” said Jason Bordoff, founding director of the Center on Global Energy Policy at Columbia University.
Other crises also led to permanent changes . The pandemic, for example, made telecommuting normal, permanently reducing the number of commuters – and the need for physical office space.
Similarly, following Russia’s 2022 invasion of Ukraine, the European Union created regulations that sharply reduced its dependence on natural gas in favor of renewable sources.
What demand destruction could look like
The Iran war has significantly reduced global demand for oil: In March, demand fell by 2.8 million barrels per day. In April it was 4.3 million barrels per day. In May, 5.6 million.
We’re not quite at the pandemic’s 10 million barrel-per-day demand loss . But we’re getting closer.
Much of that will come back. Not all of it.
The IEA expects demand will average 418,000 fewer barrels of oil and refined products and refined products each day by year-end. Of the 180,000 barrels per day of gasoline demand that evaporated from the Chinese market, 70% won’t come back – ever, JPMorgan predicted.
“Once consumers switch to EVs, the change tends to be sticky,” Kaneva said.
It’s not clear when the strait will reopen. The longer the closure lasts, the more permanent many of the changes will be.
“Past supply shocks and wars have taught households and businesses lessons that they won’t soon forget,” said Joe Brusuelas, chief economist at RSM US. “We’re in the midst of adjusting to this in real time.”
Still, the world’s thirst for oil can’t be overstated. Factories, electric plants, plastics manufacturers… they all need crude. Oil’s not going anywhere.
That’s why oil demand is inelastic in the short term, noted Alan Gelder, head of refining, chemicals and oil markets research at Wood Mackenzie. Whenever the strait reopens, the equipment that depended on oil largely won’t have changed and will need to be fueled again – with fossil fuels.
And part of the permanent demand destruction will be negated over the next couple years by countries that want to refill their strategic petroleum reserves once the strait opens – adding more than 1 million barrels per day in demand through 2028, according to Dan Pickering, founder and chief investment officer at Pickering Energy Partners.
It may not be until afterward – perhaps not until the next decade – that those consumer changes will appear in the oil market data.
But permanent means forever. If people make those changes, they’ll show up in the economy – eventually.
