An under-the-radar way to measure economic growth in China is painting a bleak picture
This is a curious example of how journalists and even economists can misunderstand the impact of vehicle electrification on the economy. China reports GDP growth at 6.4% in Q1 this, but this is called into question as diesel demand has be plummeting, down 14% and 19% in March and April. The journalist congratulates himself on finding the dark underbelly of the Chinese economy.
But wait a minute, what else could be impacting specific diesel demand in China and growth in the economy. The journalist overlooks the fact that China has be growing a massive fleet of electric buses and is also building out electric trucks too. BNEF has estimated that electric buses displace about 270 kb/d of diesel. This displacement should be taken with a grain of salt, however, because there are microeconomic factors that can greatly amplify the displacement effect. Electric buses operate within fleets that also include diesel buses, but the electric have a much lower operating cost. Both the fuel cost per mile and maintenance per mile are lower, and this is a strong enough opex advantage as to offset the higher capex requirement for electric buses. But low cost per mile is what drives utilization throughout the year. To minimize fleet opex, an operators will seek to get the most mileage out of vehicles with the least running cost. This means an electric bus could have twice the displacement of fuel if it is utilized twice as much as the average diesel bus. So BNEF’s nominal estimate of displacement 270 kb/d could be off by a factor of 2 over the course of a year.
This ratio also depends on what fraction of the fleet electrics comprise. Suppose it is some fraction P. If P/(1-P) is small, then diesel utilization must be close to the average for the fleet because there are just not enough electric buses to relieve diesels from duty when demand is low. But as P/(1-P) increases, then diesel service can be relegated to being backup vehicles used only when demand really high. So here the utilization of diesel buses can fall off a cliff. Maybe they used to be operated 80% of the time, but that falls to less than 20%. Meanwhile, the electrics are used near 90%. So when P was small, one electric maybe did the work of 1.125 diesels, but as P increases, one electric does the work of 5 marginal diesels. So the point here is that in fleet service fuel displacement is not constant, but an increasing function of P.
Furthermore, let’s consider how demand for transit bus service can change with the seasons. It is possible that on a nice spring day, some riders will prefer to do more walking, riding bikes or scooters. This means that marginal, backup diesels are not needed so much and spend less time in service. Seasonal variation in demand can also induce the leveraging effect of P in the previous paragraph. If this leverage is strong enough would could see an amplification of seasonality in diesel demand. As electrics displace diesel, seasonal fall off in demand will be sharper than it was in prior years. So a seasonal fall off in spring could be a function more electrics in transit fleets.
Is this enough to see diesel demand fall off 14% and 19% in March and April? Maybe not entirely, but energy economists need to be doing a much better job at analyzing the impact of electric fleets on the seasonality of diesel demand.
Turning to the GDP side, we also can note that building out these electric fleets of buses, trucks and cars is consistent with growing China’s economy while reducing fuel demand. Specifically, net imports of fuel can be offset by China’s manufacturing prowess. So this has implications both for the labor market and the balance of trade. And in particular, it makes China’s economy more resilient to the effects of a tariff ‘war’ with the US. It is simply a matter of time and scale. At some point the growing EV industry adds more to GDP growth while displacing oil demand that undermine diesel demand as a proxy for economic growth. Yes, the economy can be growing just fine as diesel demand plummets. This is not a “bleak picture.” It is a brighter horizon.
This is a curious example of how journalists and even economists can misunderstand the impact of vehicle electrification on the economy. China reports GDP growth at 6.4% in Q1 this, but this is called into question as diesel demand has be plummeting, down 14% and 19% in March and April. The journalist congratulates himself on finding the dark underbelly of the Chinese economy.
But wait a minute, what else could be impacting specific diesel demand in China and growth in the economy. The journalist overlooks the fact that China has be growing a massive fleet of electric buses and is also building out electric trucks too. BNEF has estimated that electric buses displace about 270 kb/d of diesel. This displacement should be taken with a grain of salt, however, because there are microeconomic factors that can greatly amplify the displacement effect. Electric buses operate within fleets that also include diesel buses, but the electric have a much lower operating cost. Both the fuel cost per mile and maintenance per mile are lower, and this is a strong enough opex advantage as to offset the higher capex requirement for electric buses. But low cost per mile is what drives utilization throughout the year. To minimize fleet opex, an operators will seek to get the most mileage out of vehicles with the least running cost. This means an electric bus could have twice the displacement of fuel if it is utilized twice as much as the average diesel bus. So BNEF’s nominal estimate of displacement 270 kb/d could be off by a factor of 2 over the course of a year.
This ratio also depends on what fraction of the fleet electrics comprise. Suppose it is some fraction P. If P/(1-P) is small, then diesel utilization must be close to the average for the fleet because there are just not enough electric buses to relieve diesels from duty when demand is low. But as P/(1-P) increases, then diesel service can be relegated to being backup vehicles used only when demand really high. So here the utilization of diesel buses can fall off a cliff. Maybe they used to be operated 80% of the time, but that falls to less than 20%. Meanwhile, the electrics are used near 90%. So when P was small, one electric maybe did the work of 1.125 diesels, but as P increases, one electric does the work of 5 marginal diesels. So the point here is that in fleet service fuel displacement is not constant, but an increasing function of P.
Furthermore, let’s consider how demand for transit bus service can change with the seasons. It is possible that on a nice spring day, some riders will prefer to do more walking, riding bikes or scooters. This means that marginal, backup diesels are not needed so much and spend less time in service. Seasonal variation in demand can also induce the leveraging effect of P in the previous paragraph. If this leverage is strong enough would could see an amplification of seasonality in diesel demand. As electrics displace diesel, seasonal fall off in demand will be sharper than it was in prior years. So a seasonal fall off in spring could be a function more electrics in transit fleets.
Is this enough to see diesel demand fall off 14% and 19% in March and April? Maybe not entirely, but energy economists need to be doing a much better job at analyzing the impact of electric fleets on the seasonality of diesel demand.
Turning to the GDP side, we also can note that building out these electric fleets of buses, trucks and cars is consistent with growing China’s economy while reducing fuel demand. Specifically, net imports of fuel can be offset by China’s manufacturing prowess. So this has implications both for the labor market and the balance of trade. And in particular, it makes China’s economy more resilient to the effects of a tariff ‘war’ with the US. It is simply a matter of time and scale. At some point the growing EV industry adds more to GDP growth while displacing oil demand that undermine diesel demand as a proxy for economic growth. Yes, the economy can be growing just fine as diesel demand plummets. This is not a “bleak picture.” It is a brighter horizon.
