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California Consumes More Oil Than China: Fact or Market Manipulation?

Commodities / Crude Oil Dec 04, 2010 - 06:21 AM GMT

By: Dian_L_Chu

In this clip dated Nov. 17, CNBC's Sharon Epperson quoted an analyst's note from HSBC pointing out that California currently consumes more crude oil than China. 

As I do not have a copy of the HSBC report, and therefore cannot verify how the conclusion was reached; however, it is hard for me to fathom California even belongs in the same sentence with China on any economic measures. 

Fortunately, since crude oil is probably the most widely traded commodity in the world, its relatively better transparency could quickly shed some light as to this new finding from HSBC.  .

Fact - CA Oil Consumption is 23% of China’s

A search of the statistics from the U.S. Energy Information Administration (EIA) show the top three oil consuming countries in 2009 were: United States - 18.7 million barrels per day (bpd); China - 8.12 million bpd (that’s around 3 billion barrels per year); and Japan at 4.4 million bpd.

As for California, EIA latest data show 682.6 million barrels a year as of 2008, or around 1.9 million b/d--23% of China’s 8.12 million b/d consumption. However, the consumption rate of California has probably dropped way below the 2008 level since it is one of the hardest recession-hit states in the U.S.

GDP & Population – Not Even Close

Another way to assess the possibility that the claim could be true (assuming HSBC has more resources than the U.S. government) is to look at the macroeconomic measure.

Though oil consumption is a function of many market and economic factors, the size of the economy (GDP) and population are two pretty good indicators.

It is true that California's economy is the largest of any state in the U.S., and ranks eighth in the world. According to U.S. Department of Commerce estimates, California’s GDP (gross domestic product) was nearly $1.85 trillion in 2008 (The number should be considerably lower now.)

China, on the other hand, boasting a GDP of $4.9 trillion in 2009 (that’s three times California, by the way), has recently leaped ahead of Japan becoming the second largest economy in the world trailing only the United States.

Population-wise, with just over 1.3 billion people, China is the world's most populous country, whereas California’s population is around 37 million, less than 3% of China’s.

China Matters A Great Deal in Crude

Now let's take a look at China's oil demand outlook. Contrary to the HSBC's implication, according to a Platts analysis, Chinese crude demand in September rose 5.1% year-on-year to an average of 8.68 million bpd. An IEA report earlier in October also indicated Chinese oil demand surged by 8.5% in August on a 12-month basis.

That suggests the much fretted tightening by Beijing to fight off inflation most likely will contribute to a couple percentage reduction at the most in oil demand growth--5-6% range instead of 7-8%. Not to mention Beijing is also expanding their strategic reserves on almost every commodity, crude oil in particular, which could be counted as "inelastic demand."

Needless to say China's energy and oil consumption is only trending up and a major price driver for oil in the foreseeable future.

California Dreaming

While this could be hard to take for some people, but could California, with one third of the GDP and 3% of the population of China, be one day consuming more oil than China? As the old adage goes “Never say never,” the best answer would be - highly unlikely with extreme low probability.

Fact or Market Manipulation?

Based on the discussion so far, HSBC statement seems to defy many indicators as well as known statistics.  Why would HSBC issue such a report to the investment community?  One could only speculate it’s probably a maneuver to manipulate the market (pending review of the supporting data, if any, to HSBC's conclusion.) 

Due to the massive liquidity unleashed by the continuing global quantitative easing, banks and markets are flushed with cash and playing big in both stocks and commodities. And truth be told, China’s growth is the only exciting news driving up the markets these days.

As such, it is easy for large institutions and funds using “China” to pump their positions —short or long.  Since Epperson covers the NYMEX floor for CNBC, this bearish information on crude oil from HSBC mostly likely was spreading across the trading pit.

And quite coincidentally, a considerable liquidation of the crude long positions took place after CNBC and HSBC revealed the “China vs. California” note, which may have had a positive effect on HSBC’s end-of-year quarter.

Trader's Market

Right now, Fed's QE2 most likely has added at least $10 to crude prices, and funds flow along could probably control $100 crude oil price movement, up and down (Remember the drop from $140 to $40 per barrel in six months during 2008 to 2009?) 

So, moral of the story...since the U.S. is still the largest oil consuming country in the world while Cushing is brimming with about half a year worth of crude, and with so much liquidity around, market fundamentals will likely take a back seat while traders run the show in crude market, at least in the near term. 

And by the way, crude oil just jumped about $8 in the past week--on very little fundamental change--to close above $87 a barrel today on NYMEX, while Brent crude even topped $90 a barrel flipping into backwardation, where near month deliveries cost more than later shipments (Bear in mind, unlike WTI in the U.S., Brent crude and Europe do not issue weekly oil inventory report.)  

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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Comments

Ron 04 Dec 10, 17:58

Epperson Really now. Quoting anything that dimwit Epperson says is given her way too much credit. She merely parrots whatever the last trader who whispered in her ear said.