CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE

A

PAPER

APRIL 2006

China’s Growing 

Demand for Oil and 

Its Impact on U.S. 

Petroleum Markets

CBO

© Digital Vision
Pub. No. 2561
The Congress of the United States O Congressional Budget Office

CBO

China’s Growing Demand for Oil and

Its Impact on U.S. Petroleum Markets

April 2006

A

PAPER

Preface

Strong economic growth in Asia, particularly in China, has had a significant impact on 

global markets in recent years, including the markets for crude oil and refined petroleum 

products. This Congressional Budget Office (CBO) paper reviews major developments in 

China’s demand for crude oil and refined petroleum products over the past decade and considers the implications of those changes for motor fuel prices in the United States through 

2010. The paper was prepared in response to a request from the Ranking Member of the 

Senate Committee on Energy and Natural Resources. In keeping with CBO’s mandate to provide objective, impartial analysis, the paper makes no recommendations.

Richard D. Farmer of CBO’s Microeconomic Studies Division prepared this paper under the 

supervision of Joseph Kile and David Moore. Robert Dennis, Matthew Goldberg, Douglas 

Hamilton, Arlene Holen, Juann Hung, Mark Lasky, and Thomas Woodward provided comments on a draft of the paper. Outside of CBO, James Hamilton of the University of 

California at San Diego, Lee Schipper of the World Resources Institute, and Phillip Tseng of 

the Energy Information Administration provided comments. (The assistance of external 

reviewers implies no responsibility for the final product, which rests solely with CBO.)

Christine Bogusz edited the paper, and John Skeen proofread it. Angela Z. McCollough prepared the tables. Maureen Costantino prepared the paper for publication and designed the 

cover, and Lenny Skutnik printed copies of the paper.

Donald B. Marron

Acting Director

April 2006

Contents

1 Summary and Introduction 1

Reasons for China’s Growing Demand for Petroleum 1

Two Scenarios of Future Demand Growth in China 2

Consequences of Slower and Faster Growth in Demand 3

2 Recent Changes in China’s Oil Markets 5

China’s Total Petroleum Use 5

A Shift in Demand Toward Light Petroleum Products 6

Key Determinants of Motor Fuel Use 8

The Changing Structure of the Chinese Oil Industry 11

Government Programs That Affect the Demand for Petroleum 12

3 Scenarios of Future Demand Growth in China 17

Major Oil Market Forecasts 17

The Case for Slower Growth in Demand 21

The Case for Faster Growth in Demand 23

4 Consequences for Motor Fuel Markets in the United States 27

General Consequences for Prices and Price Volatility 27

The Impact of Rising Total Oil Demand on Worldwide Crude

Oil Prices 31

The Impact of Increasing Demand for Light Products on the

Costs of Refining Petroleum 33

Other Influences on Costs to Refine Oil 35

Implications for Policies Affecting Investment in U.S. Refineries 36

A Detailed Tables 39
VI CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Tables

1-1. Implications and Assumptions of CBO’s Scenarios for Slower and Faster

Growth in China’s Demand for Oil 4

3-1. Forecasts of Annual Growth in Gross Domestic Product in China and the World 18

3-2. Forecasts of Total Oil Consumption in China and the World 19

3-3. Forecasts of Oil Use for Transportation in China and the World 20

A-1. China’s Petroleum Balance, Selected Years from 1990 to 2004 39

A-2. China’s Consumption of Refined Petroleum Products, 1995 to 2004 40

A-3. Petroleum Consumption by Major Sectors of the Chinese Economy, 

Selected Years from 1990 to 2002 41

A-4. China’s Consumption of Crude Oil and Selected Petroleum Products,

by Industry, 2002 42

A-5. Income and Employment in China, Selected Years from 1990 to 2003 44

A-6. China’s Population, Indicators of Potential Drivers, and Actual Drivers,

Selected Years from 1990 to 2003 44

A-7. China’s Stock of Motor Vehicles, by Type, Ownership, and Sales,

Selected Years from 1990 to 2003 45

A-8. China’s Stock of Motor and Agricultural Vehicles, by Type and Size, 

Selected Years from 1990 to 2003 46

A-9. China’s Highway Infrastructure, Selected Years from 1990 to 2003 47

A-10. Major Ongoing Refinery Projects in China, 2005 48

Figures

1-1. Annual Change in Global Petroleum Consumption in Selected Regions,

2003 to 2005 2

1-2. Change in Motor Fuel Use and Key Determinants of Oil Demand in China, 

1990 to 2003 3

2-1. Petroleum Consumption and Domestic Oil Production in China, 1980 to 2005 5

2-2. China’s Petroleum Consumption, by Type of Product, 1990 and 2004 6

2-3. China’s Petroleum Consumption, by Economic Sector, 2002 7
CONTENTS VII

2-4. Average Annual Nominal Income and Employment of Urban and Rural

Households in China, Selected Years from 1990 to 2003 8

2-5. Urban Employment and Licensed 

Drivers in China, Selected Years from 1990 to 2003 9

2-6. China’s Stock of Vehicles, Selected Years from 1990 to 2003 10

4-1. Refinery Capacity in China and Other Selected Regions 28

4-2. Prices for Light and Heavy Crude Oils, 2003 to 2005 29

4-3. Worldwide Spare Capacity for Oil Production, Selected Years from 1990 to 2005 32

4-4. Actual Gross Refinery Margins and Margins Estimated from the Relationship 

Between Light Product Yields and Inventory Change, 1994 to 2004 34

4-5. Share of Total Petroleum Demand Met by Light Products, 1994 to 2004 35

Boxes

2-1. Ownership of China’s Oil Businesses 11

4-1. Basic Processes of Petroleum Refining 30

4-2. China’s Strategic Petroleum Reserve 31

Figures (Continued)

CHAPTER

1

Summary and Introduction

China’s demand for crude oil and refined petroleum products has been growing over the past decade, 

and in 2003 and 2004, the country’s demand for oil increased dramatically (see Figure 1-1), surprising many energy analysts. This paper explores the reasons for that 

growth and the implications for petroleum markets in the 

United States. 

World oil prices have been rising since 2004, driven in 

part by the increases in China’s demand for crude oil and 

refined petroleum products. Those increases were most 

prominent for the light petroleum products—gasoline 

and diesel—that are used primarily for transportation. 

Over the next five years, the pace of growth in China’s demand for oil in general, and for transportation fuels in 

particular, could be a key factor contributing to further 

increases in the prices for crude oil and refined petroleum 

products. In the United States, those price increases could 

affect the demand for petroleum and influence the investment decisions of U.S. refiners.

The demand for petroleum has increased recently in 

other regions as well—including the United States, 

Middle Eastern nations, and other Asian nations—which 

has contributed to the higher prices. But those other markets—which are better understood than the Chinese market—are not as likely as China is to register continuing 

large increases in their demand for petroleum over the 

next five years.

A better understanding of the growing Chinese market 

may be difficult to come by because the Chinese economy overall is growing rapidly, economic sectors are 

growing at various rates, and Chinese economic data, 

while improving, are less reliable than those available for 

the United States, Europe, and Japan. Much of the analysis in this paper makes use of official Chinese data on petroleum markets and the economic and social drivers of 

petroleum demand—and even the data on China taken 

from other sources ultimately rely on those official statistics. In recent months, Chinese authorities have announced large revisions to their data on gross domestic 

product (GDP), which have raised questions about the 

quality of that data and the relationship between economic output and energy consumption. Despite those 

questions, the Congressional Budget Office (CBO) finds 

the quality of the statistics sufficiently reliable for the purposes of this analysis.

Reasons for China’s Growing

Demand for Petroleum 

China’s changing petroleum requirements are closely related to its high rates of growth in economic output and 

personal incomes. The growth in incomes and the accompanying changes in petroleum demand are themselves driven by an ongoing population shift from rural to 

urban areas. That growing urban population is demanding new vehicles and new roads, raising the demand for 

energy in the transportation sector (see Figure 1-2). Separately, the growth in output in the industrial sector is 

driving the high demand for petrochemical feedstocks, 

including naphtha-based petrochemicals, which are similar in composition to motor gasoline. 

Those underlying factors suggest a significant momentum in China’s demand for petroleum. A key concern in 

this analysis is not whether China’s demand for petroleum will continue to grow—as it undoubtedly will—but 

how fast it will grow over the next five years. 
2 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 1-1.

Annual Change in Global Petroleum Consumption in Selected Regions,

2003 to 2005

(Millions of barrels a day)

Source: Congressional Budget Office based on data from the Department of Energy, Energy Information Administration, Monthly Energy 

Review (January 2006), Table 3.1b (for U.S. petroleum consumption), and International Energy Agency, Oil Market Report (January 

17, 2006), p. 4 (for other countries' petroleum consumption). 

Notes: Other Asian countries comprise Japan, Australia, and Asian countries other than China that are not members of the Organization for 

Economic Cooperation and Development. 

Europe’s change in demand in 2005 was near zero.

Two Scenarios of Future Demand 

Growth in China

To help explain how China’s oil consumption may 

change over the next five years, this paper presents two 

scenarios that encompass some of the major uncertainties 

underlying demand growth. The scenario of slower 

growth in demand is based on recent forecasts from several government and private organizations, and the scenario of faster growth in demand extrapolates from recent 

higher-growth trends. Each scenario has its own assumptions and implications (see Table 1-1).

In the slower-growth scenario, CBO assumes that growth 

in Chinese oil consumption will average 4.5 percent a 

year through 2010—or approximately the average growth 

from the published forecasts reviewed in this paper. That 

rate, which is half the average growth rate of 9 percent experienced in 2003 and 2004, would be consistent with 

several factors: some slowing in demand in response to 

the near doubling of worldwide oil prices since early 

2004, a reduction in the temporarily high demand for oil 

to generate electricity, and several policy initiatives in 

China that are intended to slow the growth in energy 

demand. 

In the faster-growth scenario, CBO considers the consequences if China’s petroleum use continued to grow at 

the high average pace of the past decade—or about 7.5 

percent a year. That rate would be consistent with continued high growth in Chinese incomes, urban employment, vehicle sales, and highway construction.

In both scenarios, most of the growth in China’s oil demand through 2010 is assumed to be in the form of light 

petroleum products—including motor fuels and some 

Former Soviet Union

Latin America

Europe

Middle East

Other Asian Countries

United States

China

-0.5 0 0.5 1

2003 2004 2005
CHAPTER ONE SUMMARY AND INTRODUCTION 3

Figure 1-2.

Change in Motor Fuel Use and Key Determinants of Oil Demand in China, 

1990 to 2003

(Index, 1990 = 1.00)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 7-11 (consumption of gasoline and diesel oil), 10-2 (average urban income),

16-4 (highway miles), and 16-28 (civil motor vehicles and licensed drivers); and British Petroleum, Statistical Review of World 

Energy (June 2005), for consumption of gasoline and middle distillates. 

petrochemicals—which is consistent with other forecasts 

and recent trends.

Consequences of Slower and Faster 

Growth in Demand 

In the near term, both scenarios of demand growth in 

China are likely to affect U.S. oil markets by causing 

higher crude oil prices, higher costs to refine that oil, and 

greater price volatility. The combined changes in crude 

oil costs and costs of refining could add from about 19 

cents to 38 cents to the cost of a gallon of gasoline or diesel fuel in the United States in the next five years (in 2005 

dollars).

The biggest part of those potential increases would result 

from higher prices for crude oil. The scenarios about future growth in Chinese demand could lead to increased 

crude oil costs that, by themselves, would result in gasoline prices that were 16 cents to 33 cents a gallon higher 

than what they would be otherwise. If worldwide oil supplies were more responsive to increased oil prices than is 

generally assumed to be the case (an assumption underlying several published forecasts of oil prices), then the impact of higher Chinese demand on prices could be 

smaller than the estimates given here. Conversely, if the 

recent restraints on oil production in Saudi Arabia, Russia, and elsewhere did not loosen, the effect of higher demand on prices could be greater yet. Those sensitivities 

for worldwide supply conditions are discussed but not 

evaluated in this paper.

Another factor contributing to potentially higher motor 

fuel prices in the United States would be higher worldwide costs of refining crude oil. Those costs could rise 

over the next five years because of the increasing relative 

demand within China for motor fuels and naphtha-based 

petrochemicals, light products that are especially costly to 

produce from crude oil because they require additional 

equipment for processing and handling. (Alternatively, 

refiners can at higher cost acquire more of the premiumgrade crude oils that can be more easily refined into light 

1990 1993 1996 1999 2002

0

1

2

3

4

5

6

7

Licensed Drivers

Average Urban Income Motor Vehicles

Motor Fuel Use

Highway System Miles
4 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table 1-1.

Implications and Assumptions of CBO’s Scenarios for Slower and Faster

Growth in China’s Demand for Oil

Source: Congressional Budget Office.

products.) Those additional costs for petroleum refining 

could further boost the prices for gasoline and diesel fuel 

in the United States by nearly three cents a gallon in 

CBO’s slower-growth scenario or about five cents a gallon 

in its faster-growth scenario (in 2005 dollars). Those impacts assume that China’s policies guiding how much and 

what kind of refinery capacity to build do not significantly distort worldwide trade patterns.

The two scenarios examined in this paper do not span the 

full range of possible outcomes. Demand growth in 

China could turn out to be below that envisioned in 

CBO’s slower-growth scenario (as, from preliminary data, 

appears to have been the case in 2005) or above that estimated in CBO’s faster-growth scenario (as it was in 2003 

and 2004). In neither case are the consequences of 

China’s growing energy demand likely to appreciably 

dampen U.S. oil use or economic growth. Moreover, 

there are likely to be net benefits to the U.S. economy 

from China’s economic growth and world trade activities 

that this analysis does not address.

Slower Growth in Demand Faster Growth in Demand

Implications of Scenarios for U.S. Markets

Increase in U.S. motor fuel prices by 2010 

(in 2005 dollars)

19 cents a gallon (16 cents from oil 

price changes and 3 cents from 

changes in costs of refining)

38 cents a gallon (33 cents from oil price 

changes and 5 cents from changes in costs of 

refining)

Key Assumptions of Scenarios

Growth in China’s demand for oil through 

2010

4.5 percent annually (Average of 

published growth forecasts) 

7.5 percent annually (Average growth of past 

decade) 

Increase in demand by 2010 Two million barrels a day (Most of the 

increase for motor fuels and other light 

products)

Four million barrels a day (Most of the 

increase for motor fuels and other light 

products)

Economic growth Decline in growth from recent rates Continued high rates of growth

Other assumptions Significant decrease in oil demand in 

response to current high oil prices; 

correction of problems in the electricity 

sector; impact from new fuel economy 

standards and possible new fuel taxes

Continued increases in personal income, 

continued urban migration, large increases in 

the stock of vehicles, and expansion of the 

highway system
CHAPTER

2

Recent Changes in China’s Oil Markets

China’s petroleum markets have undergone profound changes in the past decade as demand for a wide 

range of petroleum products has grown much more rapidly than many analysts expected and as growth in the 

country’s domestic oil production has slowed sharply. 

The increase in demand for oil has been greatest in the 

country’s transportation and industrial sectors, causing 

the mix of products demanded in China to shift away 

from heavy fuel oil and toward lighter fuels—diesel, gasoline, and petrochemical feedstocks. Demand in the transportation sector in particular has been pushed by high 

growth in incomes and demographic changes that are expanding the potential population of drivers. Along with 

high levels of motor vehicle sales and highway construction, those changes are laying a groundwork for future 

demand growth. To help manage those changes, while 

complying with national policies to preserve energy independence and protect the environment, the Chinese government is restructuring its oil industry.

China’s Total Petroleum Use

In 2004, China became the second largest consumer of 

petroleum, behind the United States. In that year, worldwide petroleum demand increased by 3.3 percent, more 

than twice the annual rate of increase over the past decade.1 Nearly 30 percent of that additional demand originated in China, where demand grew at an annual rate of 

15 percent. In the first three quarters of 2005, growth in 

China’s demand slowed, but preliminary data for the 

fourth quarter indicate that growth has again accelerated. 

Because China now consumes so much oil—nearly 6.7 

million barrels a day in 2004—even a modest percentage 

Figure 2-1.

Petroleum Consumption and Domestic 

Oil Production in China, 1980 to 2005

(Millions of barrels a day)

Source: Congressional Budget Office based on data from the 

Department of Energy, Energy Information Administration, “China,” EIA Country Analysis Briefs (August 2005), 

available at www.eia.doe.gov/emeu/cabs/china.html.

Note: Data for 2005 are preliminary.

growth in petroleum demand translates into a great deal 

of new oil each year.

China first emerged as a net importer of crude oil in the 

early 1990s. The country was largely self-sufficient in oil 

resources until 1992 (see Figure 2-1 and Table A-1). Utilizing the resources of its western regions and coastal waters, China’s state-owned oil businesses had been able for 

many years to boost production in line with growing demand. But production growth slowed in the mid-1990s, 

and came close to a halt in 2004, with output at about 

1. Changes calculated from data on world oil consumption and 

prices reported in Department of Energy, Energy Information 

Administration, Monthly Energy Review, DOE/EIA-0025 (July 

2005), Tables 9.1 and 11.2. Oil prices are the costs for U.S. refiners to acquire imported oil.

1980 1985 1990 1995 2000 2005

0

1

2

3

4

5

6

7

Production

Consumption
6 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 2-2.

China’s Petroleum Consumption, by Type of Product, 1990 and 2004

(Percent)

Source: Congressional Budget Office based on data from British Petroleum, Statistical Review of World Energy (June 2005).

Note: “Middle distillates” are diesel fuel, heating oil, kerosene, and jet fuel. “Gasoline” means motor gasoline and naphtha used as feedstock 

for petrochemicals. “Heavy fuel oil” comprises residual fuel oil and bunker fuel. “Other” includes petrochemicals besides naphtha, 

liquefied petroleum gases such as propane, lubricating oils, asphalt, and waxes.

3.5 million barrels a day. By 2004, in little more than a 

decade, China’s net imports of petroleum (including 

crude oil and refined products) had increased to about 

3.0 million barrels a day—compared with 11.9 million 

barrels a day imported by the United States.2

A Shift in Demand Toward Light 

Petroleum Products

The recent growth across sectors of the Chinese economy 

has not been even, and the result has been a major shift in 

the mix of petroleum products consumed in China. A decade ago, fuel oil (in particular, heavy fuel oil for steam 

boilers) was an important part of that demand mix. Since 

then, demand growth has come from motor fuels—diesel 

fuel and gasoline—and from petrochemical feedstocks, 

including naphtha and liquefied petroleum gases.3

Middle distillates are the most important petroleum 

products consumed in China today (by volume) and have 

experienced the most growth in recent years (see 

Figure 2-2 and Table A-2). “Middle distillates” in the 

Chinese data comprise diesel fuel, heating oil, kerosene, 

and jet fuel. Middle distillates and gasoline together—

with diesel being the dominant fuel—accounted for over 

60 percent of petroleum consumption in China in 2004. 

(By comparison, in the United States, gasoline is the 

dominant product, and middle distillates and gasoline

Middle Distillates

 (23%)

Gasoline

 (24%) Heavy Fuel Oil

 (23%)

Other

 (30%)

1990

Middle Distillates

 (35%)

Gasoline

 (25%)

Heavy Fuel Oil

 (14%)

Other

 (26%)

2004

2. Net imports are estimated as the difference between reported total 

consumption of petroleum products and domestic production of 

crude oil. Data on net imports are from British Petroleum, 

Statistical Review of World Energy (June 2005). Data on changes 

in petroleum inventories in China are generally not available. If 

additions to stocks were positive in 2004, as is likely, imports for 

that year could have been higher than what is reported here.

3. The shift away from heavy fuel consumption may be greater than 

even those data indicate, since some heavy fuel oil reportedly is 

processed by petroleum refineries as a substitute for crude oil, not 

burned as fuel.
CHAPTER TWO RECENT CHANGES IN CHINA’S OIL MARKETS 7

Figure 2-3.

China’s Petroleum Consumption, by Economic Sector, 2002 

(Percent)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 7-4 and 7-9.

together account for nearly 75 percent of total petroleum 

consumption.4)

Much of the growth in petroleum consumption and the 

relative growth of particular fuels can be traced directly to 

growth in output of the major sectors of the Chinese 

economy—industrial, transportation, residential, and 

commercial. Changes in the efficiency of energy use in 

different sectors, which also can help to explain consumption trends, are less important than total economic 

activity in the short run.

Activity in the industrial and transportation sectors, 

which together account for over 80 percent of all petroleum use in China, explains much of the increase in demand for diesel fuel and gasoline. In 2002, the industrial 

sector accounted for over half of China’s total demand for 

petroleum (see Figure 2-3 and Table A-3). That sector includes manufacturing, agriculture, and energy conversion 

activities, such as petroleum refining and electricity production (see Table A-4). Manufacturing concerns—many 

of them involving foreign investors from the United 

States, Japan, and South Asia—use refined petroleum 

products such as heavy oil and diesel fuel to operate 

equipment and to heat and cool their facilities and use 

products such as naphtha and liquified petroleum gases 

to produce petrochemicals. In agriculture, petroleum demand is strongest for diesel fuel, which is used to power 

China’s 15 million tractors and 22 million small rural vehicles. The bulk of China’s electricity comes from coal, 

hydroelectric power, and nuclear power, but limits on the 

ability to rapidly expand that capacity in the face of recent growth in electricity demand have steered increased 

usage to older power plants burning heavy fuel oil and 

newer small-scale generators burning diesel fuel. As with 

petroleum demand in general, industrial demand is growing fastest in China’s urban centers.

Residential

 (6%)

Commercial

 (12%)

Transportation

 (25%)

Industrial

 (57%)

 (12%)

 (3%)

 (70%)

 (15%)

Energy Conversion

Manufacturing

and Mining

Agriculture

Construction

Industrial Consumption

4. Calculated from data on annual petroleum consumption in 2004 

from Department of Energy, Energy Information Administration, 

Monthly Energy Review, Tables 3.1b, 3.4, 3.5, and 3.7. For consistency with Chinese data, “middle distillates” include distillates and 

kerosene-type jet fuel.
8 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 2-4.

Average Annual Nominal Income and Employment of Urban and 

Rural Households in China, Selected Years from 1990 to 2003

(Nominal yuans) (Millions of people)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 5-4 and 10-2.

Note: Income is not corrected for changing prices, which generally were falling from 1990 to 1999 and constant thereafter, according to 

Table 9-5 in the China Statistical Yearbook.

About 25 percent of China’s petroleum consumption is 

for transportation, including moving passengers and 

freight by road, water, rail, and air.5 The growing demand 

in the transportation sector reflects the new personal 

wealth in China, as well as the transport requirements of 

industrial and commercial activity in the urban centers of 

the eastern provinces. The major fuels for transport are 

diesel, gasoline, heavy oil (used as bunker fuel in shipping), and jet fuel. Diesel is by far the most important, 

accounting for nearly twice as much consumption as

gasoline.

Key Determinants of Motor Fuel Use

The key factors pushing the demand for oil in the transportation sector in China are the rising incomes of workers and the growing numbers of workers living in big cities. The cities are where the jobs requiring increased road 

travel are and where the road infrastructure supporting 

that travel is being built. That growing transportation infrastructure in turn supports further economic growth 

and attracts migrants to the cities. Signs of high activity 

in China’s transportation sector include increases in per 

capita income, urban populations (and potential driver 

populations), vehicle sales, and highway construction.

Growth in incomes in China and in the size of the potential driving population has exceeded growth in the Chinese economy. Although real GDP growth in China has 

averaged about 9.2 percent annually since 1990, the per 

capita incomes of urban households grew by 13.3 percent 

over that same period (see Figure 2-4 and Table A-5). 

Moreover, although the Chinese authorities do not report 

Household Income Employment

1990 1995 2000 2001 2002 2003

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

Urban Rural

1990 1995 2000 2001 2002 2003

0

50

100

150

200

250

300

350

400

450

500

550

600

5. For background information on the rise of China’s transportation 

sector, see Lee Schipper and Wei-Shiuen Ng, “Rapid Motorization 

in China,” World Resources Institute, October 18, 2004 (a paper 

commissioned for the ADB-JBIC-World Bank East Asia and 

Pacific Infrastructure Flagship Study), available at 

www.cleanairnet.org/asia/1412/articles-60209_china.pdf.
CHAPTER TWO RECENT CHANGES IN CHINA’S OIL MARKETS 9

data on inflation-adjusted incomes, separate data on consumer prices in China indicate that prices have fallen in 

the past decade, suggesting that the increase in real per 

capita incomes was even higher than 13.3 percent.6

(Those statistics predate the upward revisions to Chinese 

data on GDP and growth in December 2005—as do all 

the data on energy consumption and sectoral activity that 

were used for this report.)

Because of the large shift in China’s population from the 

rural areas to the cities, the number of potential drivers 

has been growing rapidly. From 1990 to 2003, as China’s 

total population expanded by about 149 million, migration from the countryside helped the urban population to 

grow by nearly 220 million (see Table A-6). The migration to the cities is all the more important for transportation demand because the employment levels and average 

incomes of city dwellers have been growing relative to the 

levels for dwellers in rural areas. Urban employment grew 

by 3.1 percent a year over the 1990-2003 period, compared with a growth rate for the total population of only 

0.9 percent. From some accounts, it appears that even 

more people are moving into the urban labor force than 

the total number moving to the cities would indicate—

for example, as more women enter the paid workforce 

and as people shift from working for state-operated businesses in which they had been largely underemployed. 

Within those high-income urban areas, the sector of the 

Chinese population ages 15 to 64—the prime age for being drivers—grew by 170 million, or about 4.7 percent a 

year. 

With the impetus from migration, employment, and 

earnings, the number of licensed drivers in China grew by 

nearly 90 million over the 1990-2003 period, or by more 

than 14 percent a year (see Figure 2-5 and Table A-6). 

That is, the rate of growth in the number of licensed drivers in China is more than four times the rate for employed urban people (the potential population of drivers), 

underscoring the consequences for transportation demand of the country’s economic expansion. (By way of 

comparison, the number of drivers in the United States in 

2003 totaled 196 million.7)

Figure 2-5.

Urban Employment and Licensed 

Drivers in China, Selected Years from 

1990 to 2003

(Millions of people)

Source: Congressional Budget Office based on data from the 

National Bureau of Statistics of China, China Statistical 

Yearbook 2004 (Beijing: China Statistics Press, September 

22, 2004), Tables 5-44 and 16-28. 

The transportation requirements of the labor force (for 

commuting, business travel, and intracity and intercity 

road freight) and the means afforded by their increased 

incomes are, in turn, reflected in the growing demand for 

motor vehicles (see Figure 2-6 and Tables A-7 and A-8). 

In 2003, there were nearly 24 million vehicles available 

for civil uses, including about 15 million passenger vehicles (cars and buses) and 9 million trucks. That total 

number was up from about 5.5 million vehicles in 1990, 

indicating average annual growth over those years of 11 

percent. A growing share of the country’s motor vehicles 

are privately owned, too—including over 8 million cars 

and nearly 4 million trucks in 2003. (Vehicles owned by 

governments and businesses—mainly fleet vehicles and 

some vehicles assigned for personal use—account for 6. In the decade from 1994 to 2003, China’s consumer price index 

declined by nearly 20 percent, from 124.1 to 101.2. See National 

Bureau of Statistics of China, China Statistical Yearbook 2004

(Beijing: China Statistics Press, September 22, 2004), Table 9-5. 

The average price declines in urban and rural areas were similar.

7. Federal Highway Administration, Federal Highway Statistics 2003

(November 2004).

1990 1995 2000 2001 2002 2003

0

50

100

150

200

250

300

Urban Employment Licensed Drivers
10 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 2-6.

China’s Stock of Vehicles, Selected 

Years from 1990 to 2003

(Millions of units)

Source: Congressional Budget Office based on data from the 

National Bureau of Statistics of China, China Statistical 

Yearbook 2004 (Beijing: China Statistics Press, September 

22, 2004), Tables 13-7 (tractors), 16-2 (other motor vehicles), and 16-28 (passenger vehicles and trucks). 

Note: “Passenger vehicles” includes cars and buses. “Trucks” 

includes a small number of vehicles (for example, 0.5 million 

in 2003) described only as “other civil” vehicles. “Other 

motor vehicles” includes motorcycles and some off-road 

vehicles; data for that category are not available for 1990 

and 1995.

most of the rest of the stock.) Annual sales of new cars 

and trucks in 2003 were about 4.3 million.

On top of those numbers—and often overlooked by 

studies of transportation demand in China—are government data indicating that there are 71 million motorcycles and other small off-road vehicles, with annual sales 

of over 13 million (despite government efforts to discourage their use in large cities). By way of comparison, there 

were 231 million motor vehicles registered in the United 

States in 2003, including only about 5 million motorcycles.8

 Other vehicles in China include a large number 

of agricultural vehicles that can be used on roads (with 

over 8 million “tire” tractors in 2001, the last year for 

which data are available). And research suggests that the 

number of rural vehicles (small three- and four-wheeled 

diesel-powered vehicles manufactured for use in small cities and rural areas) may be as high as 22 million—although those vehicles may be grouped with “motorcycles” 

in government statistics.9

In conjunction with growth in the driving population 

and vehicle stock, China is spending nearly $29 billion 

annually on new highway construction and expansion.10

In 2003, the full highway system—not just expressways 

and first-class highways—grew by 28,000 miles, and all 

highways and expressways in China extended for 1.1 million miles (see Table A-9). Over the 1990-2003 period, 

China’s highway system grew by 4.4 percent annually. 

And by 2000, over 98 percent of China’s towns and 

townships had highway connections.11 Because much of 

that investment removed local bottlenecks and helped to 

reduce travel times, the actual capacity of the highway 

system to move people and freight was increasing even 

faster than the number of lane-miles. (In comparison, the 

1990 1995 2000 2001 2002 2003

0

2

4

6

8

10

12

14

16

Trucks Tractors Passenger Vehicles

1990 1995 2000 2001 2002 2003

0

10

20

30

40

50

60

70

80

Trucks, Tractors, and Passenger Vehicles

Other Motor Vehicles

Not

Available

Not

Available

8. Federal Highway Administration, “State Motor-Vehicle Registrations—2003” (October 2004), available at www.fhwa.dot.gov/

policy/ohim/hs03/htm/mv1.htm.

9. The estimate of the number of rural vehicles comes from Dan 

Sperling, Zhenhong Lin, and Peter Hamilton, “Chinese Rural 

Vehicles: An Explanatory Analysis of Technology, Economics, 

Industrial Organization, Energy Use, Emissions, and Policy,” 

Institute of Transportation Studies, UCD-ITSRR-04-01 (2004).

10. Estimated by the Congressional Budget Office from the 241 billion yuan (nominal) reported for new highway construction and 

highway expansion in the Chinese Statistical Yearbook 2004, Table 

6-9, using an exchange rate in that year of 8.28 yuan per U.S. dollar. The exchange rate in late 2005 was about 8.10 yuan per dollar.

11. China News and Report, “Development of China’s Transport 

Network,” June 2001.
CHAPTER TWO RECENT CHANGES IN CHINA’S OIL MARKETS 11

U.S. National Highway System comprises about 162,000 

miles, including 47,000 miles of interstate highways.12

The total U.S. system, including state highways, extends 

for about 4 million miles.) 

Much of China’s highway infrastructure is concentrated 

in the coastal provinces that include the country’s largest 

cities—the same regions that are experiencing high 

growth in population and employment (see Table A-9). 

That is the area from Guangdong province in the south 

(on the mainland, near Hong Kong) to Liaoning province in the north (above Beijing). Of the nation’s total 

37,000 miles of expressways and first-class highways at 

the end of 2003, nearly 60 percent of those miles were in 

those coastal provinces and the large coastal cities of 

Shanghai, Beijing, and Tianjin.

The Changing Structure of the Chinese 

Oil Industry

Three state-owned companies dominate all stages of the 

petroleum industry in China (see Box 2-1).13 CNPC (the 

China National Petroleum Corporation) is a vertically integrated business, involved in oil and gas production, refining, pipelines, and retail outlets. It generally operates 

in the North and West of the country. A CNPC subsidiary, PetroChina, is the country’s largest producer of oil 

and gas from onshore regions, and it operates China’s 

largest pipeline complex. CNPC also holds oil and gas assets worldwide.

Sinopec (the China Petroleum and Chemical Corporation) is a second vertically integrated business, involved 

in oil and gas production, refining, pipelines, and retail 

Box 2-1.

Ownership of China’s Oil Businesses

The term “state-owned” as used in this paper means 

that the state holds the majority of shares in a firm. 

But the details of that ownership are not simple, and 

it is often difficult to discern private ownership from 

state ownership. On paper, there generally is an arm’slength relationship between the government agency 

that controls those shares and the firm’s management. 

The mechanisms for establishing state ownership are 

diverse. Businesses operating in China are registered 

under a number of categories. The three major 

groups are domestic-funded enterprises; enterprises 

with funds from Hong Kong, Macao, and Taiwan; 

and foreign-funded enterprises. The largest group of 

registered businesses are the domestic-funded enterprises, accounting for nearly 70 percent of China’s industrial output in 2003.1 Those businesses in turn 

include state-owned industry, collective-owned industry, cooperative-owned industry, limited liability 

corporations, shareholding enterprises, and private 

enterprises.

Actual ownership of a firm is even more complicated 

because the state and the diverse domestic and foreign groups may become partners through various financial arrangements. All together, within the three 

main categories of registered businesses, state-owned 

and state holding enterprises account for about 35 

percent of China’s industrial output.

The three large businesses that produce, import, refine, and market most of China’s oil are controlled by 

state holding companies, which conduct their endeavors through a great many wholly owned and 

joint-stock subsidiaries. The partners in the joint subsidiaries may be domestic-funded enterprises; Hong 

Kong-, Macao-, or Taiwan-funded enterprises; other 

foreign-funded enterprises; or individuals (if public 

stock has been sold).

1. National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: China Statistics Press, September 22, 

2004), Table 14-1.

12. Federal Highway Administration, Federal Highway Statistics 2003.

13. For background information, see Melissa Murphy, “An Overview 

of China’s Energy Sector,” Freeman Briefings, Center for Strategic 

and International Studies (November 2004).
12 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

outlets. Generally operating in the South and East of the 

country, Sinopec is China’s largest petroleum refiner and 

largest retailer of petroleum products. The company produces crude oil domestically but imports most of the oil it 

refines. Like CNPC, Sinopec also holds oil and gas assets 

worldwide. Together, the two companies control 95 percent of the petroleum refinery capacity in the country. 

The third large company—CNOOC (the China National Offshore Oil Corporation)—is involved in the 

production of oil and gas, liquefied natural gas, and petrochemicals.14 It is the largest producer of oil and gas in 

China’s offshore areas, it operates China’s largest petrochemical complex, and it holds oil and gas resources 

throughout the Pacific and in Southwest Asia.

The government has a direct stake in the financial performance of all of those businesses. In addition to taxes on 

income, the government receives a share of the profits 

from those businesses (it holds a majority of the shares in 

each one). Government interests are behind the industry’s 

push to develop oil resources in countries around the 

world. By providing low-cost capital and a supportive foreign policy, the government has enabled the national oil 

companies to sign long-term supply contracts, establish 

equity positions in foreign oil developments, and establish bilateral trade with those potential suppliers. Moreover, as stated in a directive, the government intends to 

consolidate the nation’s oil businesses into a handful of 

large, leaner companies (shedding excess capacity and 

employees) capable of pooling technical resources and 

competing directly with the largest international oil companies.

The Chinese government has also sought to restructure 

its oil industry in other ways. In response to recent concerns about growing oil demand and oil imports, it has 

implemented efforts to make businesses more energyefficient, diversify the sources of energy supply, and curb 

growth in oil demand. 

In the “upstream” sector of the oil business (crude oil production), securing access to crude oil abroad is part of the 

government’s broad strategy to diversify the country’s 

sources of energy. That strategy includes the construction 

of oil and natural gas pipelines from Kazakhstan and Russia and the construction of new port facilities for the importation of liquified natural gas—as well as efforts to 

promote the development of alternative fuels. The effort 

to improve efficiency and profitability has driven a major 

consolidation of businesses and an opening of oil and gas 

activities to foreign investment.15

In the “downstream” sector (refining and distribution), 

concerns about the technical inefficiency of many small 

companies and about air quality have led to further consolidation in ownership. One result was the closure of 

many of the smallest refineries. A related potential motivation for the restructuring was the opening of the petroleum industry and other industries to direct foreign investment, as required by China’s accession to the World 

Trade Organization. China’s refinery businesses have been 

opened to foreign investment on several occasions to help 

provide financing and technical expertise for the effort to 

expand capacity. The industry, however, is not yet fully 

open to foreign capital. For example, the government has 

stipulated that only CNPC and Sinopec can open new retail outlets, so foreign investors must partner with those 

firms to gain entry to the motor fuel market.

Government Programs That Affect the 

Demand for Petroleum

Further change in China’s oil markets is coming from regulations and programs to improve environmental quality 

and constrain growth in oil consumption. Noteworthy 

among the conservation efforts is the recent program to 

establish fuel economy standards for new motor vehicles. 

Other programs that have the potential to affect oil use 

are price controls on petroleum products and taxes affecting the cost of vehicle ownership and use.

The actual effect of those programs is unclear. For example, fuel economy standards are unlikely to have much 

impact in the near term, since new cars can only affect 

the average fuel economy of all vehicles over time. Retail 

price controls on motor fuels, which in the short run 

14. In 2005, CNOOC made a bid to acquire the U.S. firm Unocal.

15. For a discussion of foreign investment in China’s crude oil production and refinery industries, see Department of Energy, Energy 

Information Administration, Privatization and the Globalization of 

Energy Markets (October 1996), Chapter 4; and the Organization 

for Economic Cooperation and Development, Foreign Direct 

Investment and Importance of the “Go West” Strategy in China’s 

Energy Sector (Paris: OECD, March 2002). A discussion from the 

Chinese perspective appears in China E-News, “China Slowly 

Reforming Refineries and Petchem Industry,” available at 

www.pnl.gov/china/sinopec.htm.
CHAPTER TWO RECENT CHANGES IN CHINA’S OIL MARKETS 13

could encourage gasoline use, have been eased. And motor fuel taxes that may appear low by international standards—and which, on their own, would seem not to discourage oil use—do not appear so low when all types of 

taxes on transportation are considered. As a general caveat 

to this discussion of government programs, there are concerns about how well China, as a still-developing country, 

is able to enforce those programs. In particular, institutional problems could cause fuel economy standards or 

other environmental policies to fall short of the government’s stated goals.

Environmental Regulation 

Urbanization, motor vehicle use, and industrial activity 

tend to degrade air and water quality in China. New environmental programs targeting emissions and waste disposal are responsible for the growing adoption of clean 

technologies and practices in all sectors of the petroleum 

industry—although the success of those relatively recent 

efforts cannot yet be assessed. The government’s efforts to 

consolidate ownership in petroleum refining and fossil 

fuel production in China was motivated in part by the interest in closing down small unregulated businesses that 

were contributing to environmental problems. Among 

the changes that could specifically affect petroleum refinery operations are new laws to eliminate lead from gasoline and restrict the sulfur content of gasoline and diesel 

fuel.

Fuel Economy Standards 

China’s fuel economy standards for new vehicles began in 

2005, with a second, more-stringent, phase taking effect 

in 2008. The weight-based standards impose separate 

minimum requirements for fuel efficiency on 16 different 

classes of vehicles, ranging from 38 miles per gallon 

(mpg) for the lightest vehicles to 19 mpg for the heaviest. 

(In 2008, the requirements increase to 43 mpg and 21 

mpg, respectively.) The biggest improvements would be 

required of the heaviest vehicles.16

Price Controls 

Expressed in U.S. dollars, gasoline and diesel prices in 

China are much lower than in other countries. Until recently, China’s system of price controls shielded Chinese 

consumers from the price of oil in world markets. The 

controls originally based prices for refined petroleum 

products on average costs to the oil companies—costs 

that included the controlled price for domestic crude oil. 

The effect of those controls was to convey a subsidy from 

producers to consumers of refined products.

In 2001, however, Chinese policymakers began moving 

away from price controls on energy products by tying retail prices for gasoline and diesel to a weighted average of 

futures prices for those commodities in Singapore, Rotterdam, and New York.17 The government—specifically, 

the National Development and Reform Commission, or 

NDRC—establishes a national benchmark for retail 

prices for all but the largest petroleum marketers. The 

government allows Sinopec and CNPC’s PetroChina to 

set their own retail prices, in accordance with the principle of revising prices only when foreign prices change. For 

smaller marketers, local governments have the immediate 

responsibility for carrying out the central government’s 

guidelines, with additional discretion to alter prices 

within a 5 percent band around the national benchmark.

The NRDC was to revise those prices every few months, 

whenever wholesale prices moved by more than 8 percent, up or down. In March 2006, the commission 

adopted its first major price changes in eight months, increasing pump prices in Beijing to nearly $2.20 a gallon 

for premium grade gasoline and about $1.90 a gallon for 

diesel.18 With worldwide prices for crude oil and refined 

products rising steadily, the time lags in adjusting retail 

prices had created a periodic loss of profits for China’s refiners, prompting the most recent revision in prices.

As a result of China’s policy changes, gasoline and diesel 

prices in China now tend to reflect the marginal costs of 

supplying those fuels over time, without conveying as significant a subsidy to petroleum consumers. But because 

prices still are not completely free to respond to market 

conditions, the current system may be responsible for 

16. For a description of China’s fuel economy standards, see Amanda 

Sauer and Fred Wellington, “Taking the High (Fuel Economy) 

Road—What Do the New Chinese Fuel Economy Standards 

Mean for Foreign Automakers?” (Washington, D.C.: World 

Resources Institute, November 2004).

17. A discussion of Chinese price controls and some of the problems 

associated with them appears in “Trend or Glitch,” Beijing Review

(2005), available at www.bjreview.com.cn/En-2005/05-26-e/

bus-5.htm.

18. China Daily, “Preparation Prevents Higher Oil Price Pain,” March 

28, 2006, available at www.chinadaily.com.cn/opinion/2006-03/

28/content_553748.htm. Prices in yuan per liter were converted 

to dollars per gallon using 0.264 liters per gallon and 8.10 yuan 

per dollar.
14 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

some problems with investment and marketing. Unless 

time lags in adjusting retail prices are completely eliminated, there will be periodic incentives to export products 

if the benchmark price falls below the market value or to 

import them if the market value falls below the benchmark price. Prices that lag behind costs can undermine 

profitability and discourage domestic investment in

refining and distribution capacity. Also, with a national 

benchmark, if prices are not completely free to vary 

across regions, profit incentives may not be sufficient to 

encourage suppliers to keep pace with demand in the 

fast-growing urban areas.

Energy Taxes 

Direct taxes on motor fuels in China are low, compared 

with the levels in most industrialized countries, but additional taxes on vehicle ownership and operation (including extensive road tolls) can add greatly to the cost of 

travel and influence decisions about the fuel economy of 

new vehicles. A full consideration of the effects of taxes 

on motor fuel consumption in China needs to consider 

all of those taxes.

China’s transportation costs reflect the basic costs to 

oil businesses of several taxes assessed by the central 

government:

B A 17 percent value-added tax (or VAT, the main 

source of revenue for the central government),

B An income tax on large enterprises, 

B A “consumption” tax on luxury items, and

B A vehicle purchase tax. 

The VAT and the enterprise income tax are common to 

all businesses, with numerous exemptions or reductions 

depending on the product, the technology of production, 

the age of the operation, and the location of the activity. 

For example, China has a reduced VAT—13 percent—on 

sales of propane, natural gas, and residential energy services. And there are many free-trade zones and foreign 

firms producing for export that pay lower tax rates. The 

consumption tax, assessed on producers of gasoline and 

diesel, is the only direct tax per unit of fuel. Currently, 

that tax is fixed at 117.6 yuan per metric ton for gasoline 

(about six cents a gallon) and 277 yuan per ton for diesel 

(about 10.5 cents a gallon).19 The central government’s 

tax on vehicle purchases depends on the size of the engine, varying from 3 percent for the smallest vehicles to 

20 percent for the largest.20 Only the VAT and the consumption tax directly affect fuel prices and the current 

cost of travel. But the tax on vehicle purchases can indirectly affect the cost of travel over time by influencing 

buyers’ decisions about the fuel economy of new cars.

Estimating the actual costs imposed by the VAT is difficult because an up-to-date history for gasoline and diesel 

prices in China is not readily available. However, information on Beijing prices in March 2006 can help to clarify the impact of those taxes. With prices for premium 

grade gasoline at that time at 4.65 yuan per liter (or about 

$2.20 a gallon), the combined VAT and consumption tax 

included in that price was about 39 cents a gallon.21 For 

comparison, the average price in the United States in that 

month was about $2.50, including a combined federal 

and state tax on gasoline of about 44 cents, on average. (If 

growing crude oil costs were passed through to consumers or if the yuan was revalued—many analysts believe it 

is priced too low relative to the dollar—the Chinese tax 

in cents per gallon would increase.)

Local Chinese governments also impose taxes and fees. 

Additional costs to consumers come from local assessments related to vehicle purchases, driver permits, vehicle 

licenses, and road maintenance fees, and from private 

tolls on expressways and bridges. Road maintenance fees 

and tolls, which together finance much of the country’s 

road construction, are especially costly. Almost all of 

China’s new expressways are toll roads.22 Road maintenance fees are assessed annually, generally on the basis of 

vehicle size—so that owners of larger, less-fuel-efficient 

vehicles have higher costs of ownership.

19. Converted to cents per gallon using 8.53 42-gallon barrels of gasoline per metric ton, 7.46 42-gallon barrels of diesel per metric 

ton, and 8.10 yuan per dollar.

20. China Daily, “Buyers of Big Cars Have To Pay More Tax,” March 

23, 2006, available at www.chinadaily.com.cn/china/2006-03/23/

content_549959.htm.

21. Converted using the factors listed in footnote 17.

22. Alfred Nickesen and others, “Toll Road Securitization in China,” 

The World Bank Group, Roads & Highways Note RH-3 (February 2000).
CHAPTER TWO RECENT CHANGES IN CHINA’S OIL MARKETS 15

It is not clear how much those local charges are costing 

Chinese drivers. But it is possible to get a general idea of 

the revenues required by looking at the country’s annual 

spending on highway construction (which the road maintenance fees and tolls finance) and its consumption of 

gasoline and diesel. An assessment equivalent to nearly $1 

a gallon on gasoline and diesel fuel would be needed to

fully fund China’s annual spending on highway construction of about $29 billion in 2003, assuming (for illustrative purposes) on-highway fuel use of about 2 million 

barrels a day.23

23. In 2004, gasoline consumption in China was 1.6 million barrels a 

day, which was largely for road use. It is not known how much of 

diesel consumption was for road use. See British Petroleum, Statistical Review of World Energy. 

CBO has no information on how the maintenance of roads in 

China is financed. Some of the toll collections could go toward 

that purpose. Maintenance in the United States is generally a local 

concern, funded in part by state motor fuel taxes.

CHAPTER

3

Scenarios of Future Demand Growth in China

This chapter examines two alternative scenarios of 

how rapidly the demand for petroleum in China will 

grow over the next five years. On the one hand, demand 

may be restrained by slower growth in the Chinese economy overall, high oil prices, an easing of some pressures 

that temporarily increased demand, and policies put in 

place by the Chinese government that may reduce petroleum consumption.1 On the other hand, demand may be 

accelerated by the reinforcing trends of growing urban 

populations and incomes and more vehicles and drivers 

with an expanding road system on which to travel.

The growth in China’s total oil consumption in the next 

five years is important for the United States because any 

addition to worldwide oil demand could put upward 

pressure on worldwide oil prices. The economic circumstances that would make the faster-growth scenario feasible are perhaps of most interest to policymakers, since 

that scenario is associated with the largest increases in 

worldwide oil prices. But this paper does not present either scenario as more likely than the other. Circumstances 

may exist in which demand growth in China turns out to 

be below the slower-growth case (as, from preliminary 

data, appears to have happened in 2005) or above the 

faster-growth case (as happened in 2003 and 2004).

In neither case are the consequences of China’s growing 

energy demand likely to appreciably dampen U.S. oil use 

or economic growth. Most likely, the net benefits to the 

U.S. economy from China’s economic growth and 

China’s contribution to the world’s economy—which this 

analysis does not address—will be positive. Furthermore, 

in neither scenario will the price for crude oil in 2010 

necessarily be higher than it is today. Each of the forecast 

reports reviewed here projects a different path for prices, 

consistent with its views on the global growth in worldwide oil demand, not just the growth in China, and the 

changes in worldwide oil supply. But regardless of where 

oil prices are headed—whether up or down—the additional demand from China alone will add something to 

that price. It is those price increments attributable to 

changes in the Chinese market that are of interest in this 

analysis.

Major Oil Market Forecasts

Several government and private groups publish forecasts 

of worldwide energy use through 2010 and beyond. The 

reports examined here, all published in 2004 and 2005 

and prepared before the final data for those years were 

available, come from the Energy Information Administration (EIA), the International Energy Agency (IEA), the 

International Monetary Fund (IMF), the Organization of 

Petroleum Exporting Countries (OPEC), and Global Insight (GI).2 (Updates to the IEA outlook were released in 

November 2005, but they exclude detailed forecasts for 

China. Other major studies of the worldwide energy

market exist but are not publicly available—such as the 

1. Some analysts point to the possibility that new conservation 

policies, such as the promotion of alternative fuels and increased 

efficiency of buildings, could help to slow growth in demand. 

However, many of those policies are unlikely to yield significant 

savings in the next five years, so they are not considered in this 

analysis. For example, in one alternative scenario, the International Energy Agency discusses measures that might yield total oil 

savings of 13 percent by 2030. See International Energy Agency, 

World Energy Outlook 2004 (October 2004), pp. 391 and 393. 

Among the policies the IEA evaluated are new standards for fuel 

economy, plans for increased research and tax credits to promote 

the use of clean vehicles, and plans for expanding China’s intracity 

and intercity railway networks. For the other major forecasts of 

future energy demand in China, the potential contribution, if any, 

from recent conservation programs is not known.

2. See Department of Energy, Energy Information Administration, 

International Energy Outlook 2005 (July 2005); International 

Energy Agency, World Energy Outlook 2004; International Monetary Fund, World Economic Outlook (April 2005); Organization of 

Petroleum Exporting Countries, Oil Outlook to 2025 (September 

2004); and Global Insight, Global Petroleum Outlook (Winter 

2004-2005).
18 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table 3-1.

Forecasts of Annual Growth in Gross Domestic Product in China and the World

(Percent)

Source: Congressional Budget Office based on information from the Department of Energy, Energy Information Administration, International Energy Outlook 2005 (July 2005), Table 2; International Energy Agency, World Energy Outlook 2004 (2005), Table 1.1 and 

p. 43; International Monetary Fund, World Economic Outlook (April 2005), Table 1.1 and p. 163; Organization of Petroleum Exporting Countries, Oil Outlook to 2025 (2004), Table 1; and Global Insight, Global Petroleum Outlook (Winter 2004-2005), Table 12.

Notes: Growth rates are reported as purchasing-power adjusted rates, which generally are lower in each report than forecasts of market rates. 

n.a. = not available.

a. Forecast horizon is 2005 to 2015.

b. Forecast horizon is 2002 to 2010.

c. Base-year forecast is for 2006; forecast horizon for world growth is 2003 to 2030.

d. Base-year forecast is based on average growth from 2003 to 2005; forecast horizon is 2006 to 2010.

e. Forecast horizon is 2005 to 2010.

Global Energy Watch by Cambridge Energy Research 

Associates.) 

The forecasts are in relatively close agreement on the 

prospect of continued high growth in the Chinese economy. All of the forecasts reflect a slowing in the growth of 

oil demand, with total oil consumption growing more 

slowly than overall economic output. But each forecast 

has demand for oil in the transportation sector growing 

faster than economic output—and, as a consequence, demand for oil in other sectors growing much more slowly. 

As a result, the forecasts show transportation fuels as accounting for an increasing share of total oil consumption 

in China.

Recent mid-term forecasts of annual growth in China’s 

gross domestic product through 2010 span a range of 6.4 

percent (from EIA and IEA) to 8 percent (from IMF) (see 

Table 3-1). The 8 percent figure from the International 

Monetary Fund matches the target established in China’s 

11th Five-Year Plan, issued in 2006.3 It is likely that Chinese policies over the next five years will be oriented toward achieving growth that is at least that high. With 

China’s real GDP currently growing at close to 10 percent 

a year, even that 8 percent level would represent a significant slowdown from the trend of the past five years. (The 

historical growth rates for GDP that this paper cites were 

prepared before the statistical revisions announced by the 

Chinese government in December 2005.4 The revisions 

reflect new information on service-sector activity. As a 

consequence, in January 2006, the Chinese government 

increased its estimate of GDP growth in 2004 from 9.5 

percent to 10.1 percent. The current estimate for growth 

in 2005 is 9.8 percent.) 

Behind the projections of some slowing in economic 

growth is a view that China cannot continue its rapid 

pace of capital investment without risking inflation or 

China World

Source of Forecast

2004

(Preliminary)

Average Annual 

Growth, 

2005–2010

2004

(Preliminary)

Average Annual 

Growth, 

2005–2010

Energy Information Administrationa 8.6 6.4 4.9 3.9

International Energy Agencyb 7.0 6.4 n.a. 3.7

International Monetary Fundc 9.5 8.0 5.1 4.4

Organization of Petroleum Exporting Countriesd 8.0 6.8 3.9 3.8

Global Insighte 8.7 6.8 3.8 3.1

3. See Government of the People’s Republic of China, 11th Five-Year 

Plan for National Economic and Social Development (March 2006). 

The plan covers the 2006-2010 period.

4. The revisions were widely discussed in the press. See, for example, 

“China Says It Grew Faster Than First Thought,” New York Times, 

December 20, 2005, p. C4; and “China Raises Growth Figures for 

Recent Years,” Wall Street Journal, January 10, 2006, p. A12.
CHAPTER THREE SCENARIOS OF FUTURE DEMAND GROWTH IN CHINA 19

Table 3-2.

Forecasts of Total Oil Consumption in China and the World

(Millions of barrels per day)

Source: Congressional Budget Office based on information from the Department of Energy, Energy Information Administration, International Petroleum Monthly (June 2005), Table 2.4, and International Energy Outlook 2005 (July 2005), Table A4; International 

Energy Agency, Monthly Oil Market Report (April 12, 2005) and World Energy Outlook 2004 (2005), Table 3.1; International Monetary Fund, World Economic Outlook (April 2005), Table 4.2; Organization of Petroleum Exporting Countries, Oil Outlook to 2025

(2004), Table 3; and Global Insight, Global Petroleum Outlook (Winter 2004-2005), Table 2.

a. Values for 2004 were not available; estimates shown for that year are forecasts reported for 2005.

stressing the country’s financial institutions. For those 

reasons, many analysts agree that China’s government will 

continue its efforts to restrain the pace of economic expansion. Moreover, China’s growing current-account surplus may exert upward pressure on the value of its currency. A stronger yuan would decrease China’s net exports 

and help to moderate its GDP growth, at least in the 

short run.

In each forecast, growth in total oil consumption in 

China through 2010 is lower than the projected growth 

in GDP and below the growth in oil consumption over 

the past decade (see Tables 3-1 and 3-2). The forecast 

growth rates for China’s total oil use range from 3.5 percent a year (IEA) to 5.8 percent (EIA)—below the average growth of 7.5 percent a year from 1995 to 2004. The 

ratios of projected growth in total oil consumption to 

growth in GDP—described as the income elasticity of oil 

demand—range from 0.55 (IEA) to 0.91 (EIA).5 (For 

comparison, total oil consumption in the United States 

and other mature economies generally grows at about half 

the pace of the economy, reflecting an income elasticity of 

oil demand equal to about 0.5.6

)

There is greater agreement among forecasters about the 

demand for oil in the transportation sector than about total oil use in China (see Table 3-3). The forecast growth 

in demand for oil consumed for transportation from 

2004 to 2010 ranges from 6.0 percent a year (IEA) to 8.0 

percent (OPEC). That compares with annual growth of 

10.8 percent for oil consumption in China’s transportation sector over the past decade and 8.4 percent for consumption of gasoline and middle distillates, including

China World

Source of Forecast

2004

(Preliminary) 2010

Average Annual 

Growth 

(Percent)

2004

(Preliminary) 2010

Average Annual 

Growth 

(Percent)

Energy Information

Administration 6.5 9.2 5.8 82.5 94.6 2.3

International Energy 

Agency 6.4 7.9 3.5 82.5 90.4 1.5

International Monetary 

Fund 6.4 8.6 4.9 82.4 92.0 1.8

Organization of Petroleum 

Exporting Countriesa 6.0 7.6 3.9 81.0 88.7 1.5

Global Insight 6.7 8.8 4.5 82.4 92.2 1.9

5. Those ratios summarize the short-term relationship between 

changes in oil use and economic output—or income. The 

additional effects of changing oil prices on demand are included 

in the elasticity by way of their indirect effect on economic

activity.

6. The income elasticity for mature market economies was calculated 

from Department of Energy, Energy Information Administration, 

International Energy Outlook 2005, on the basis of growth in 

transportation oil use described in Table 3 and GDP growth 

described in Table A3. Separately, the International Monetary 

Fund assumes an income elasticity of demand for transportation 

fuels that is 0.32 for OECD countries and the newly industrialized Asian economies and 0.85 for other non-OECD countries; 

see International Monetary Fund, World Economic Outlook, Table 

4.3. In the past decade, oil consumption has grown at an average 

annual rate of 1.8 percent, while real GDP has grown at 3.3 

percent.
20 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table 3-3.

Forecasts of Oil Use for Transportation in China and the World

(Millions of barrels a day)

Source: Congressional Budget Office based on information from the Department of Energy, Energy Information Administration, International Energy Outlook 2005 (July 2005), Table 3 and p. 23; International Energy Agency, World Energy Outlook 2004 (2005); International Monetary Fund, World Economic Outlook (April 2005), Table 4.2 and p. 165; Organization of Petroleum Exporting 

Countries, Oil Outlook to 2025 (2004), Table 8; and Global Insight, Global Petroleum Outlook (Winter 2004-2005), Tables 14 and 

40.

Note: n.a. = not available.

a. Growth rate is for 2002 to 2015. China’s level in 2010 is calculated from the 2002 level and forecast growth rate for China; see International Energy Agency, International Energy Outlook 2005, p. 23. Estimates in quadrillion Btus converted using 5.98 million Btus per barrel 

(the average heat content of imported crude oil to the United States).

b. Growth rate is for 2002 to 2010. Data for all transport oil from Appendix A of the World Energy Outlook 2004, Reference Scenario World 

and Reference Scenario China. Data for road transport oil from Figure 8.13, p. 266. Data in metric tons of oil equivalent (mtoe) converted 

using 7.7 barrels per ton, for consistency between forecasts in mtoe and barrels from Table 3.1.

c. Base year is 2003. Growth rate is for 2003 to 2015. Estimate for 2010 is calculated using forecast for GDP growth in 2010 from the World 

Economic Outlook, Table 4.2. The International Monetary Fund (IMF) expects the use of oil for transportation to be 60 percent of the 

increase in total oil use by 2030. IMF estimates the income elasticity for transportation oil use in China to be 0.55, so the annual growth 

can be imputed from IMF’s GDP growth rate for China.

d. Base year is 2000. Growth rate is for 2000 to 2010.

e. Converted from metric tons of oil equivalent using 7.6 barrels per ton to preserve consistency with other Global Insight forecasts that are 

reported in barrels.

uses of those fuels in other sectors (see Tables A-1 and A3). In contrast to total oil use, consumption for transportation in those forecasts generally is projected to keep 

pace with growth in the overall economy through 2010. 

Combining the forecast results, the ratios of growth in 

transportation demand to growth in GDP range from 

about 0.93 (OPEC) to about 1.13 (EIA). (Some of the 

difference may be attributable to different concepts of 

consumption for transportation, relying variously on total energy, total oil, and total oil for road use.)

Forecasts for the Chinese transportation sector reflect 

much higher growth than those for the U.S. transportation sector. Transportation demand in the United States 

(which dominates total U.S. oil demand) has been growing over the past decade at about 1.8 percent a year. That 

is half the rate of growth in the general economy (3.3 percent) but more than twice the rate of growth of the total 

population (0.8 percent).

China World

Source of Basis for Forecast

2004

(Preliminary) 2010

Average 

Annual 

Growth 

(Percent)

2004

(Preliminary) 2010

Average 

Annual 

Growth 

(Percent)

Energy Information Administration—

All Transport Energya 1.9 3.4 7.2 39.1 48.3 2.5

International Energy Agencyb

All transport oil 1.7 2.7 6.0 36.6 44.7 2.5

Road transport oil 1.1 1.9 6.3 n.a. n.a. n.a.

International Monetary Fund—

All Transport Oilc n.a. n.a. n.a. 46.3 54.3 2.3

Organization of Petroleum Exporting 

Countries—Road Transport Oild 0.9 2.0 8.0 28.2 33.6 1.8

Global Insight—All Transport Oile 2.0 3.3 6.5 39.4 48.3 2.5
CHAPTER THREE SCENARIOS OF FUTURE DEMAND GROWTH IN CHINA 21

Complementing the published forecasts of high growth 

in transportation use are generally low forecasts for 

growth in oil consumption by other sectors of the Chinese economy. The combined forecasts for oil consumed 

in the residential, commercial, and industrial sectors indicate annual growth through 2010 that ranges from 1.6 

percent (OPEC) to 3.9 percent (EIA).7 Those rates show 

expansion in the demand for oil by homes and businesses 

(for space heating, machine operations, processing of raw 

materials, and so forth) that is from one-fifth to one-half 

the rate of expansion in the general economy. The rates 

are slower than the 4.9 percent pace of growth for those 

sectors from 1995 to 2002 (the most recent year for 

which sectoral data are available) and the 6.4 percent 

growth for fuels other than gasoline and middle distillates 

from 1995 through 2004.

The forecasts also indicate a general consensus that transportation fuels will make up an increasing share of the total mix of petroleum products consumed in China in the 

future. Whereas the forecasts for total oil demand are important for worldwide oil prices, the forecasts for the relative demand for transportation fuels are important for the 

future costs of refining petroleum products.

The Case for Slower Growth in 

Demand

The slower-demand-growth scenario presented here assumes that total Chinese oil use will continue to grow at 

the rates that had been projected in the reports by the 

government and private organizations reviewed in this 

paper. Taking the average of those forecasts, the growth in 

this scenario would be 4.5 percent a year, resulting in total oil demand by 2010 of about 8.5 million barrels a 

day—an increase of about 2 million barrels a day over the 

current level. Based on those forecasts and recent growth, 

most of that additional demand is expected to be for light 

petroleum products—especially motor fuels in the transportation sector.

Consistent with that view, at the end of last year (before 

final data were available), growth in the demand for oil in 

2005 indeed appears to have slowed. Based on data available through September 2005, IEA expects that China’s 

demand for oil in 2005 will be only about 2.9 percent 

higher than in the previous year.8

That scenario also is consistent with the view that the 

temporary market conditions of the past couple of years 

have eased and that new initiatives to restrain growth will 

succeed. Some support for that result comes from analyses concerned with structural weaknesses in China’s financial sector and with its ability to sustain high levels of 

capital investment in the near future.9

Demand Response to High Oil Prices

The major forecasts reviewed here were prepared before 

the big increase in worldwide oil prices in 2005. Some 

change in demand in response to those increased prices 

may have contributed to a slowdown in the growth of oil 

consumption in China that year. If oil prices remain high 

or rise further, that dampening effect will probably continue. Consistent with the view that consumers may have 

responded to the sharp increases in petroleum prices by 

buying less gasoline, oil consumption in the United States 

in 2005 was flat, too—even before the gasoline price 

hikes that followed Hurricanes Katrina and Rita.

It is difficult to assess precisely how demand will respond 

to changing prices in China. Prices for petroleum were 

controlled until 2001, so there has not been much statistical evidence of price and consumption changes to evaluate. Also, as discussed in this paper, so many other factors 

that determine the demand for oil were changing at the 

same time. In both the short and the long terms, prices 

are generally less important for predicting oil consumption than are population and income—both of which 

were adding to demand in China even as oil prices rose.

Reversal of Some Temporary Demand

One circumstance that may have contributed to the high 

demand for oil of the past few years has been China’s 

problems in generating and delivering enough electricity 

to support its growing cities and industries. A part of that 

added demand may have been for heavy fuel oil, consumed by the electric utilities in central generating plants. 

(In 2002, utilities in China generated about 79 percent of 

their electricity from coal, 17 percent from hydropower, 2 

percent from heavy fuel oil, and 2 percent from nuclear 

7. Total consumption by other sectors was estimated by subtracting 

transportation consumption from total consumption.

8. International Energy Agency, Oil Market Report (January 17, 

2006), p. 4.

9. An important discussion of that point appears in Morris 

Goldstein and Nicholas Lardy, “What Kind of Landing for the 

Chinese Economy?” Institute for International Economics, Policy 

Briefs in International Economics, No. PB04-7 (November 

2004).
22 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

power.10) But, according to that explanation, problems 

with the reliability of the supply of electricity also caused 

many businesses and building owners to install small 

diesel-powered generators of their own—known as distributed generation—to meet their individual needs. So 

as the country continued to add central generating plants 

(largely powered by coal and nuclear energy) and to expand the transmission and distribution networks in 

2005, some of the demand for diesel fuel would have 

eased.

It is difficult to know to what extent a shift toward distributed generation has increased the demand for diesel 

fuel in China. The electricity produced by those small 

diesel-powered generators is not counted with the data on 

the electricity sector, and whatever diesel fuel is used for 

that purpose is included (but not distinguished) in the total fuel consumed by manufacturing, commercial businesses, and residences. However, it is known that the consumption of middle distillates (including diesel) and 

heavy fuel oil each grew by an average of 15 percent a 

year in 2003 and 2004, compared with annual growth for 

gasoline of about 10 percent in the same period. As a first 

approximation, if diesel consumption for transportation 

had been growing at the same 10 percent pace as gasoline 

consumption, then some of the additional demand for 

middle distillates could have been for diesel to use in distributed generators. That possibility points to a maximum increment of diesel demand for power generation 

in 2004 and 2005 combined of only about 0.20 million 

barrels a day—or less than 4 percent of China’s total oil 

use.

Government Efforts to Restrict Consumer Credit and 

New Car Sales

Another factor that may contribute to a slowdown in oil 

use relates to efforts by the Chinese government beginning in 2004 to curb automobile sales through a general 

tightening of consumer credit. The effects would be 

somewhat limited because a big part of vehicle sales is to 

state-owned businesses and government agencies, not to 

individuals. Those sales would more likely depend on the 

size of government- and state-owned businesses’ budgets 

than on credit conditions. (Those cars and trucks are classified as “transport vehicles” in the Chinese transportation statistics, as distinct from “privately owned” vehicles; 

see Table A-7.) Moreover, it has been reported that only 1 

in 10 car sales to private parties is financed by loans.11

Higher interest rates notwithstanding, separate changes 

in lending practices in China that are reducing the cost 

and time necessary for making loans are likely to increase 

car sales over the next five years. In particular, foreign 

automakers in China are working to create the financial 

information systems that will help them confirm credit 

histories for individuals and speed up the process of making personal loans. Consistent with those developments, 

“passenger cars for private use” is the fastest growing category of vehicle sales in China.

New Fuel Economy Standards and Easing of

Limits on Small Car Use

China’s central government recently initiated a program 

to raise the fuel economy of new passenger vehicles. And, 

in a separate action, it directed local governments to lift a 

number of local restrictions on the use of small cars in

cities. 

The goal of China’s new standards for automobile fuel efficiency, commencing in 2005 and ratcheting up in 2008, 

is to curb the growth in motor fuel consumption. That 

program could save some oil, but it is important to recognize its limitations in the short term. According to the 

World Resources Institute, only 66 percent of the cars 

sold in China in 2004 would meet the 2005 standards, 

and only 4 percent of the SUVs and minivans sold in 

2004 would meet those standards. The impact of the program would be further limited in the next five years because fuel savings can only grow with cumulative vehicle 

sales of more-efficient vehicles. Moreover, some analysts 

have raised questions about the effectiveness of the standards, and any fuel savings could be even smaller than 

policymakers might expect.

In particular, the program is likely to face the same problems as those seen in implementing corporate average fuel 

economy, or CAFE, standards in the United States.12

Commercial vehicles and light trucks in China are not 

10. Based on 2002 data from the National Bureau of Statistics of 

China, China Statistical Yearbook 2004 (Beijing: China Statistics 

Press, September 22, 2004), Tables 7-4, 7-5, and 7-6.

11. Shai Oster, “DaimlerChrysler Offers Financing in China,”

Washington Post, November 2, 2005, p. D5.

12. For background information on the U.S. program, see 

Congressional Budget Office, The Economic Costs of Fuel Economy 

Standards Versus a Gasoline Tax (December 2003).
CHAPTER THREE SCENARIOS OF FUTURE DEMAND GROWTH IN CHINA 23

subject to the fuel economy standards, and there is nothing to keep the mix of vehicles from shifting toward the 

heavier, less-efficient models. In the United States, the average fuel economy of new vehicles has been declining 

since 1987, because the standard for light trucks is lower 

than that for passenger cars and automakers have been 

able to produce more SUVs and vans—vehicles that are 

classified as light trucks but that compete directly with 

passenger cars. With 16 classes of vehicles in China’s program, that type of shifting between models may be even 

easier. The standards are stringent, however, and the biggest improvements will be required of the heaviest vehicles covered by the program.

Beginning in March 2006, the government also has eased 

restrictions on the use of the smallest vehicles in certain 

urban areas.13 Many of those vehicles—with engine sizes 

of 1 liter or less—had until then been banned from more 

than 80 cities because of unsafe designs and local government concerns about the possibility that great numbers of 

very small vehicles—like bicycles a few years ago—projected an image of low economic development. With design improvements, some of those concerns have eased. 

This change could promote sales of these mainly 

Chinese-made vehicles as well as improve average fuel 

economy. However, it is not known whether that policy 

change is simply acknowledging the existing popularity of 

such vehicles or what fuel savings could result.

Possible Future Increases in Fuel Taxes

China currently is debating whether to impose a national 

fuel tax in its effort to consolidate and streamline the collection and management of the government revenues related to vehicle ownership and use. Proponents of such a 

tax point to the potential benefits from reduced fuel consumption. Unlike policy measures that restrict vehicle 

sales or call for improved fuel economy, the full impact of 

a fuel tax could be immediate. Without knowing the details of a new tax, however, determining the impact on 

demand for motor fuels is not possible.

Aside from the fact that demand for gasoline and diesel 

fuel in general is not very responsive to small changes in 

price—especially in China, where so many vehicles are 

state-owned—there are many questions about how effectively such a tax could be implemented. One question 

concerns exemptions. If the fuel consumed by agricultural vehicles was exempt—as it is in the United States—

then the impact of the tax would be small, because the exemption would apply to millions of small rural vehicles in 

the Chinese countryside that use diesel fuel for road 

travel. Moreover, if such a tax only replaced road maintenance fees (a variable cost of travel), the ultimate effect on 

the total cost of driving might be nil.

The Case for Faster Growth in Demand

The faster-demand-growth scenario assumes that total 

Chinese oil use will continue to grow at the past decade’s 

average pace of about 7.5 percent a year, with total oil demand by 2010 of just over 10 million barrels a day, or 

about 4 million barrels a day higher than China’s consumption in 2004. Underlying this construct is the idea 

that the structural changes under way in China will persist—specifically, that rising urban populations and incomes will continue to push up the numbers of drivers 

and vehicles using an expanding road system—and will 

result in greater consumption of transportation fuel. 

Faster growth would require that those factors not be significantly altered in the near term by business downturns 

or dampened by the Chinese government’s efforts to rein 

in economic growth and inflation by restricting consumer demand and investment. Consistent with recent 

trends in the basic determinants of petroleum demand 

and with recent demand growth, most of that additional 

demand is assumed to be for light products—including 

motor fuels in the transportation sector and diesel fuel 

and petrochemicals in the industrial sector.14

Despite the sustained high growth in oil consumption 

over the past decade, continued growth is not certain. In 

2005, preliminary data on oil consumption indicated 

slowing growth into the fall. However, the early indicators at year’s end were that growth would return to the 

rates experienced in 2003 and 2004. In September 2005, 

total oil consumption was growing at an annual pace of 

13. See “China to Remove Restrictions on Smallest Cars,” Wall Street 

Journal, January 5, 2006, p. A12.

14. In contrast, the slower-growth scenario assumes that all of the 

increase is for the light products consumed in the transportation 

sector, consistent with forecasts that indicated relatively weak 

growth in nontransportation sectors of the economy. The fastergrowth scenario assumes that demand for diesel and petrochemicals in the industrial sector will be part of the total demand 

growth through 2010. However, for the purposes of estimating 

the impact of the growing demand for light products on refineries’ 

costs, this analysis assumes that the relative mix of transportation 

fuels and light industrial fuels and feedstocks does not matter.
24 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

8.6 percent, gasoline consumption at 14.4 percent, and 

new car sales at 31 percent.15

Income Growth

Some analysts believe that the Chinese government will 

not be successful in restraining capital spending and export growth, in which case the continuation of high 

growth in output and personal income—and oil consumption—would be likely. As a matter of political concern in China, future economic expansion may be necessary to prevent unemployment from rising as the influx 

of people to the cities continues. Not surprisingly, a number of economists not directly involved with energy forecasting support an outlook for continued economic 

growth—at the rate of 8 percent or higher—in China.16

But the faster-growth scenario could hold true even if demand for oil in the residential, commercial, and industrial sectors was to lag, because continued high growth in 

the transportation sector is likely.

Migration to the Cities

The potential population of drivers and general economic 

activity, which are key determinants of motor fuel demand, have been growing in China at a pace greater than 

motor fuel use. The continuing steady growth in the urban population and urban employment in China give 

further impetus to the idea that high growth in transportation demand is likely to persist (see Tables A-5 and A6). The faster-growth scenario suggests that much of the 

new demand for motor fuels is closely related to changing 

demographics that will add to the demand for transportation fuel, independently of the pace of overall economic 

activity. 

The migration to the cities and the social changes that are 

increasing the relative numbers of individuals of prime 

age in the population both have great momentum. The 

thrust of Chinese policy is to accommodate that movement by providing employment and housing opportunities rather than acting to slow the growth of the cities. No 

studies reviewed by CBO suggest that the Chinese government will reverse the tide of people moving to the cities or that the age pyramid will be altered in the next few 

years. 

Further evidence for the potential for continued migration may come from a comparison with urbanization in 

the United States. In the decade after 1900, when urban 

residents made up nearly 40 percent of the U.S. population, the urban population was growing at nearly twice 

the rate of the total population.17 In China’s most recent 

census (2000), the country’s urban population was up to 

a similar 35 percent of the total population, but the urban population was growing by 4.3 percent a year, 

or nearly four times the rate of growth for the total

population.

The Growing Vehicle Stock

The potential demand for motor fuels is most directly indicated by changes in the numbers of motor vehicles and 

licensed drivers. In recent years, the number of drivers in 

China has been growing faster than the overall stock of 

cars and trucks and faster yet than the demand for motor 

fuel (see Figure 1-2 on page 3). 

The rate of growth in demand for vehicles appears to be 

increasing. Over the 2000-2003 period, annual growth in 

the number of passenger vehicles (including buses) averaged 13.7 percent, trucks averaged 4.4 percent, and motorcycles and other unregistered vehicles, 13.3 percent. 

Data on the composition of that stock, available only for 

2003 and 2004, indicate that the number of the largest 

and the smallest vehicles registered for highway use was 

essentially unchanged. But the number of medium-sized 

and small cars (which account for three-fourths of all passenger vehicles) grew in that short period by nearly 27 

percent, and the number of middle-sized and light trucks 

(which account for three-fourths of all trucks) grew by almost 10 percent. “Other” motor vehicles (mainly motorcycles) increased in 2004 by 15 percent, or 10 million 

units. Separate data indicate that annual motorcycle sales 

currently are over 13 million units and that the total 

15. International Energy Agency, Oil Market Report (November 10, 

2005), p. 11.

16. For example, see Michael Mussa, “Global Economic Prospects: 

Slower But Still Solid Growth in 2005; Worries About Growth 

and Inflation for 2006,” Institute for International Economics 

(April 2005), available at www.iie.com/publications/papers/

mussa0405.pdf.

17. U.S. population data for 1900 and 1910 are from Bureau of the 

Census, “Mini Historical Statistics: Population Characteristics 

(Sex, Race, Urban, Rural),” available at www.census.gov/statab/

www/minihs.html. Chinese population data for 1990 and 2000 

are from the National Bureau of Statistics of China, China Statistical Yearbook 2004, Table 4-4. 
CHAPTER THREE SCENARIOS OF FUTURE DEMAND GROWTH IN CHINA 25

number registered by the end of 2005 was going to be in 

the range of 95 million to 100 million.18

Many analysts expect growth in the country’s stock of 

passenger cars, trucks, motorcycles, and small rural vehicles to remain high. In one study, the sales of cars and 

trucks alone are forecast to grow from 4.4 million new 

units in 2003 to 7 million by 2010.19 At that higher 

level, China would be the second largest automobile market in the world (after the United States, but ahead of Japan). That private forecast is broadly consistent with the 

International Energy Agency’s outlook for the total stock 

of civil vehicles to grow by nearly 20 million in China 

from 2002 to 2010.20 Under an assumption of a 5 percent rate of attrition for old vehicles each year, those new 

sales would take the total car and truck stock from 23.8 

million units in 2003 to 52 million in 2010.

Some observers find support for growth in China’s current low levels of vehicle intensity per capita. In 2003, 

there were only about 11 registered passenger vehicles (including buses) and seven trucks per 1,000 people (see

Tables A-5 and A-7 for data on population and vehicle 

stock, which were used to compute vehicle intensity). By 

2010, with 0.5 percent population growth and a rate of 

sales that boosts the vehicle stock to 52 million units by 

that year, China would still have only 38 vehicles per 

1,000 people. That projection compares with a 2003 rate 

of over 800 vehicles per 1,000 people in the United 

States, which includes nearly 500 automobiles per 1,000 

people.21

Those small figures on vehicle concentrations may overstate the potential for future growth in vehicle ownership, 

travel, and, hence, fuel consumption. Despite relatively 

few cars, China has an extensive public transportation 

system, the number of motorcycles is large, and there are 

many small rural vehicles that are not counted in either 

the data on civil motor vehicles or motorcycles. Taxis and 

buses are reportedly used much more intensely than similar vehicles in the United States. Moreover, the current 

stock of vehicles is concentrated in the urban areas, where 

there were about 14 automobiles and 240 motorcycles 

per 1,000 households in 2003.22 In Beijing, the average 

was 66 automobiles per 1,000 households.

18. Jialing, Inc., “China Rolls Out Motorcycles,” reprinted from the 

American Journal of Transportation (April 14, 2004), available at 

www.jialing.co.za/news%202.htm.

19. FOURIN China Auto Weekly, “2010 China Automotive Market 

Forecast,” available at www.fourin.com/chinaautoweekly/

2010CAMF.html.

20. The IEA’s forecast of the vehicle stock in 2002 and 2010 comes 

from its World Energy Outlook 2004, Figure 8.13. Detailed data 

were confirmed in a private communication with the IEA’s Economics Analysis Division: 24.07 million vehicles in 2002, and 

43.06 million in 2010.

21. U.S. vehicle statistics are from Federal Highway Administration, 

“State Motor-Vehicle Registrations—2003,” available at 

www.fhwa.dot.gov/policy/ohim/hs03/htm/mv1.htm.

22. See National Bureau of Statistics of China, China Statistical Yearbook 2004, Table 10-17.

CHAPTER

4

Consequences for

Motor Fuel Markets in the United States

This chapter examines the potential impact of 

China’s economic growth on future oil prices and oil refining costs according to the scenarios of slower and faster 

demand growth developed in Chapter 3. Over the next 

five years, the likely impacts of economic growth in 

China on oil markets in the United States all relate to 

prices: increased crude oil prices, greater costs to refine 

oil, and, as a result, higher prices for gasoline and diesel 

fuel. The combined changes in crude oil costs and costs 

to refine it could add a total of 19 cents to 38 cents to the 

cost of a gallon of gasoline or diesel fuel in the United 

States in the next five years (in 2005 dollars). 

The growing total demand for oil products in China will 

add pressure on worldwide crude oil prices over the next 

five years. And the growing relative demand for motor fuels and other light products within China will add pressure on costs to refine oil worldwide and in the United 

States. The potential for increased price volatility, attributable to China’s contribution to growing worldwide demand and increasingly tight market conditions, is addressed in this analysis but not estimated. 

The possible changes in worldwide oil prices over the 

next five years are calculated using an estimate of the 

price elasticity of the net supply of oil. Changes in costs 

to refine oil are calculated using the statistical relationship 

over the past decade between refinery margins and light 

product yields, and controlling for the effect of changing 

product inventories. The task of estimating the effects of 

China’s economic growth on oil prices is complicated because the markets for crude oil and motor fuels are world 

markets, which will also be affected by changes in oil demand and refinery investments elsewhere in the world. If 

the world oil supply is more responsive to price changes 

than assumed here, the effects on world prices of growing 

demand for oil in China will be smaller than what is 

shown. 

A number of additional factors bear on potential market 

effects. One is the policy choices that China will make 

about how much to invest in its domestic capacity for refining crude oil. Others are pressures on motor fuel prices 

that may come from changes in the environmental rules 

that affect product quality or refinery operations, changes 

in the quality of crude oils available to refineries, and 

changes in the mix of light products demanded—especially with diesel use growing faster than gasoline use in 

China and around the world.

General Consequences for Prices and 

Price Volatility

In the near term, growing oil demand and the changing 

mix of products in China are likely to push up prices for 

crude oil (and price premiums for lighter oils) in the 

United States, boost prices for motor fuels, and increase 

the volatility of prices.

Crude Oil Prices and Costs of Refining 

Rising oil demand in China will increase the price of 

crude oil in the United States and around the world, 

which will be passed on to prices for all petroleum products—including gasoline and diesel fuel. Less clear is how 

the growing relative demand for motor fuels within 

China could further contribute to increased prices for 

those fuels in the United States. Projections from the Energy Information Administration made in 2005 indicate 

that Asia, with recent investment activity in China, is 

moving toward becoming the biggest center for petro-
28 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 4-1.

Refinery Capacity in China and Other Selected Regions

(Millions of barrels a day)

Source: Congressional Budget Office based on data from the Department of Energy, Energy Information Administration, International 

Energy Annual 2003 (July 2005), Table 3.6, and the data file supporting the report, available at www.eia.doe.gov/pub/

international/iealf/table36.xls.

Note: “Capacity” is crude oil distillation capacity, measured at the beginning of year.

leum refining in the world.1 All together, Asian countries 

already have about as much refinery capacity as North 

America or Europe (see Figure 4-1). As China becomes a 

growing presence in the worldwide refining industry, developments in its domestic petroleum markets will 

become increasingly important for costs of refining 

worldwide.

The growing relative preference of the Chinese market 

for light products such as diesel fuel, gasoline, and petrochemical feedstocks increases the price for premium 

grades of crude oil and adds to refiners’ costs for processing low-quality oils. The market for premium crude oils 

is seeing some of that effect on prices (see Figure 4-2). 

Light, sweet crude oils have high natural yields of light 

distillates and low levels of sulfur. China, like many other 

countries, is competing more and more with the United 

States in the world oil markets for the types of crude oil 

that are most easily refined into motor fuels, especially 

gasoline and diesel that will satisfy increasingly stringent 

environmental standards for sulfur emissions.

To boost the percentage yield of light products, one alternative to processing additional volumes of light, sweet 

oils is to invest in additional refinery capacity to process 

more of the less-valuable heavy, sour oils. Among the key 

refinery investments needed are catalytic cracking, hydrocracking, and coking units for boosting the yield of 

gasoline and diesel components from heavier oils and

North

America

Central and

South America

Europe and

Former

Soviet Union

Middle East Africa Asian Countries

Other Than

China

China

0

5

10

15

20

25

30

1990 1995 2000 2001 2002 2003 2004 2005 2006

0

1

2

3

4

5

6

7

Worldwide Capacity, by Region, 2006

China's Capacity, Selected Years from 1990 to 2006

1. Department of Energy, Energy Information Administration, 

Annual Energy Outlook 2005 (February 2005), Figure 97.
CHAPTER FOUR CONSEQUENCES FOR MOTOR FUEL MARKETS IN THE UNITED STATES 29

Figure 4-2.

Prices for Light and Heavy Crude Oils, 2003 to 2005

(Nominal dollars a barrel)

Source: Congressional Budget Office based on data from the Department of Energy, Energy Information Administration, Petroleum Marketing Monthly (August 2005), Table 27.

Note: Prices are “landed” costs (including insurance and transportation to port) of imported crude oil. The industry standard established by 

the American Petroleum Institute for measuring the specific gravity of crude oil is “degrees API.” Light crude oils are those with 40 

degrees to 45 degrees API gravity. Heavy crude oils are those with 20 degrees to 25 degrees API gravity.

hydrotreating units for removing sulfur from sour oils 

(see Box 4-1). Current indications are that the Chinese 

are interested in making such investments. For example, 

the Chinese refining industry has recently partnered with 

ExxonMobil and the Saudi Aramco to build a new refinery that would be capable of handling the heavier grades 

of Saudi crude oil.2

At a basic level, the shift in worldwide demand to motor 

fuels means an increase in the necessary yield of those 

products from crude oil and, hence, an increase in the 

costs of producing motor fuels. However, the magnitude 

of that cost increase would depend on the location and 

design of new refining capacity. New capacity that 

yielded a mix of products that did not match relative demand would generally add further to refiners’ costs and 

possibly to transportation costs. (There is a lowest-cost 

configuration of refinery processes for producing any particular mix of finished products, and costs increase 

sharply with efforts to push the yield of particular products beyond the optimal yield for a given configuration.) 

In the current example, to meet the growing demand for 

motor fuels, that prospect of further cost increases would 

be true whether the incremental refinery yield of light 

products was too low (raising the need to import additional motor fuels as well as placing additional demand 

on refineries elsewhere) or too high.

Price Volatility 

A part of the current concern about the impact of China’s 

growing energy demand on oil price volatility relates to 

the fact that the available buffer of excess production 

capacity in the world market is already very slim (see 

Figure 4-3). Without that buffer—crude oil that is available on short notice at a relatively constant cost—any increase in demand must be met from costly incremental 

sources. The ability of crude oil producers worldwide to 

boost output in response to supply disruptions or demand surges is likely to remain limited or even diminish 

further for the next few years, until Saudi Arabia and perJanuary

2003

April

2003

July

2003

October

2003

January

2004

April

2004

July

2004

October

2004

January

2005

April

2005

0

10

20

30

40

50

60

Heavy

Light

2. See “Exxon, Partners to Start Work on Oil Refinery Project in 

China,” Washington Post, July 1, 2005, p. A8.
30 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

haps a few other countries meet their stated goals of attaining substantial levels of excess capacity.

The strategic inventories of crude oil held by the United 

States and several other countries may be able to augment 

that slim buffer of excess current production capacity. Efforts by China to develop its own strategic inventory may 

be important in that context, although that inventory 

will not be completed within the next five years (see Box 

4-2). Currently, the United States and other members of 

the International Energy Agency are committed to maintaining a 90-day emergency supply of oil and oil products 

(or an equivalent capability to restrict consumption). 

However, it is difficult to know how well a release of 

those strategic inventories (or conservation measures) 

would help to moderate the price impact of a disruption, 

since the impact would depend on the timing and magnitude of such a response.3

 China currently is not a member of IEA, and it is not known if or how it would coordinate its stock withdrawals with other countries’. Over the 

next few years, as China works to fill its reserve, those additional oil purchases could make worldwide oil markets 

tighter than they already are.

Box 4-1.

Basic Processes of Petroleum Refining

A petroleum refinery is a collection of processing 

units, usually starting with an atmospheric distillation unit that separates crude oil into its naturally occurring components, or fractions, some of which are 

light and some heavy. From that point, however, different refineries will add different mixes of other 

types of units, with the overall design depending on 

the quality of crude oil they want to process and the 

final mix of products they want to sell. 

Five basic refinery processes can increase the yield of 

light, high-quality products from crude oil or sustain 

the yield of light products from crude oils of diminishing quality. The processes—from the most basic to 

the most complex—are as follows.

B Topping, which occurs in an atmospheric distillation unit, separates the crude oil into its natural 

components. Depending on the properties of the 

oil, a topping refinery can produce naphtha (the 

basic blending component of finished gasoline) 

and other light distillates, but they generally are of 

insufficient quality to be sold as finished products. 

B Hydroskimming, which requires the addition of a 

catalytic reforming unit, upgrades the naphtha

from distillation (for blending with gasoline) and 

produces hydrogen (for use in hydrotreating units 

to remove sulfur from diesel and other products).

B Catalytic cracking, in a vacuum distillation unit, 

augments the hydroskimming to pull out additional fractions of heavy distillates from the crude 

oil and, in a fluid catalytic cracking unit, breaks 

the heavy products from distillation into gasoline 

and light distillates (including diesel fuel and 

kerosene).

B Hydrocracking, done in a unit that adds to or replaces the catalytic cracking unit, further increases 

the yields of gasoline and diesel fuel. That process 

requires more hydrogen than the catalytic reformer produced from the original crude oil feedstock, so the hydrocracking refinery must also 

produce or purchase hydrogen from another 

source. (An important raw material for hydrogen 

production is natural gas.)

B Coking, accomplished in a unit added to the hydrocracking refinery, provides the fullest conversion of heavy oils into distillates, with petroleum 

coke (a combustible solid) produced as a byproduct.

3. For a critique of the emergency response in the 1990 Gulf War, 

see Congressional Budget Office, Rethinking Emergency Energy 

Policy (December 1994).
CHAPTER FOUR CONSEQUENCES FOR MOTOR FUEL MARKETS IN THE UNITED STATES 31

The Impact of Rising Total Oil 

Demand on Worldwide Crude

Oil Prices

Depending on whether growth is slower or faster, CBO 

estimates that the increase in China’s total demand for petroleum in the next five years could cause oil prices to be 

as much as $7 to $14 a barrel higher (in 2005 dollars) 

than they would be otherwise. If those increases in crude 

oil costs were completely passed through to consumers, 

prices for a gallon of gasoline or diesel could rise by between 16 cents and 33 cents in the United States.

The potential range of effects on oil prices is inferred 

from the increase in oil consumption through 2010 in 

the slower- and faster-demand-growth scenarios on the 

basis of an approximation of the five-year price elasticity 

of net worldwide supply. That elasticity is an estimate of 

the percentage change in worldwide oil prices that would 

be necessary to eliminate a given percentage imbalance in 

worldwide oil supply and demand over that period. Specifically, it represents the ratio of the percentage net disruption—whether attributable to a change in demand or 

supply—to the percentage price change. To illustrate 

those effects, this analysis assumes that the five-year elasticity is 0.2, which means that a 1 percent supply shortfall

Box 4-2.

China’s Strategic Petroleum Reserve

In general, few oil companies want to store oil for the 

remote possibility of a politically motivated disruption of oil supplies or a major accident of unprecedented scope, especially if those companies would 

not have control over decisions to build up that reserve or release the oil. The costs of holding such 

stocks tend to outweigh the private benefits from 

their expected use. The Chinese central government, 

however, has taken a longer term view of such supply 

disruptions in working to construct a strategic inventory of crude oil. (The United States and Japan already maintain such government-owned stockpiles of 

oil, and several other countries belonging to the International Energy Agency require private companies 

to hold a certain number of days of oil supply for 

emergency use.)

China is currently working to construct storage facilities and acquire oil for its strategic inventory. In the 

next five years, the biggest impact of China’s strategic 

inventory program may come through the purchases 

of oil necessary to fill the inventory, because that demand for oil will put additional upward pressure on 

worldwide oil prices. The magnitude of that effect is 

uncertain, though, because China is still building its 

strategic reserves and has not yet begun to fill them.

The Chinese government’s stated goal—delineated in 

its 10th Five-Year Plan for National Economic and Social Development—is to build up by 2008 enough 

holdings to cover a 35-day supply of crude oil. The 

plan calls for developing four sites of storage tanks, 

capable of holding a total of 101.9 million barrels of 

oil. At current rates of oil consumption, however, that 

reserve would be enough to meet all domestic demand for less than 20 days. Although filling of the reserve may commence by late 2005, only one storage 

site—a 33-million-barrel tank farm in Zhejiang province—is currently under construction, and a second 

site (in Shangdong province) is not scheduled for 

completion until 2007.
32 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 4-3.

Worldwide Spare Capacity for Oil Production, Selected Years from 1990 to 2005

(Millions of barrels a day)

Source: Congressional Budget Office based on data from the Department of Energy, Energy Information Administration, Short-Term Energy 

Outlook (January 2006), Figure 9.

Note: Spare capacity is the difference between production capacity and average annual crude oil production, as reported for members of the 

Organization of Petroleum Exporting Countries, including Iraq.

would require a 5 percent price increase response to restore balance in the market.4

To apply the net supply elasticity to the estimation of 

price change requires having an estimate of the base price 

(from which the change takes place) and the percentage 

change in consumption. In this case, the base price is the 

2005 price of crude oil, and the percentage change in 

consumption is the growth in Chinese demand (from the 

slower- and faster-demand-growth scenarios) divided by 

worldwide oil consumption in 2005. On the basis of partial data for the year, worldwide oil consumption in 2005 

was about 83 million barrels a day and the average worldwide oil price in 2005 (measured as the spot price for 

West Texas Intermediate crude oil, as traded on the New 

York Mercantile Exchange) was about $57 a barrel. With 

a projected five-year increase in Chinese demand of 2 

million barrels a day (in the scenario of slower demand 

growth), the oil price change necessary to keep the market in balance would be nearly $7 a barrel (or about 16 

cents a gallon). With an increase in Chinese demand of 4 

million barrels a day (in the scenario of faster demand 

growth), the oil price increase would be about $14 a barrel (or about 33 cents a gallon).

The price effects from the two scenarios do not encompass the full range of possible outcomes. For example, the 

International Energy Agency projects that the increase in 

oil consumption in China by 2010 could be as low as 1.5 

million barrels a day (see Table 3-2 on page 19), which 

would result in smaller price increases than what are 

shown here. Or, with a return to the demand increases recorded in 2003 and 2004, growth in oil consumption 

could be above the level in the faster-demand-growth 

case, which would result in larger price increases.

And in both scenarios, because of the current tight situation in worldwide oil markets, it is hard to know what 

level of price response would be necessary to keep the 

world oil market in balance. In particular, there is a new 

uncertainty underlying future oil supplies, as OPEC 

shows the first indications of having difficulty keeping 

pace with worldwide demand. In early 2005, Goldman 

Sachs suggests that oil prices could spike as high as $105 a 

barrel in 2007, and IMF described an alternative scenario 

1990 1995 2000 2001 2002 2003 2004 2005

0

1

2

3

4

5

6
CHAPTER FOUR CONSEQUENCES FOR MOTOR FUEL MARKETS IN THE UNITED STATES 33

wherein oil prices could reach $80 a barrel in 2006.5 If 

the worldwide oil supply remained relatively unresponsive to price changes, both the low- and high-end price 

impacts presented in this analysis could be greater than 

they would be otherwise. However, some analysts still 

hold with the view that worldwide supplies remain adequate and that oil prices will fall in the next few years, 

back below $35 a barrel. That view of falling prices in the 

face of rising demand suggests an expectation that a 

strong supply response to prices above $35 should be under way, in which case the price impact of higher demand 

for oil in China could be smaller than the estimates presented here.

To further underscore the uncertainty about future supplies, with crude oil prices remaining above the $60 a 

barrel level (for West Texas Intermediate) in early 2006 

and no immediate downturn in sight, some forecasters 

have begun to rethink that downward trajectory. For example, in its July 2005 International Energy Outlook, the 

Energy Information Administration had forecast that 

worldwide oil prices would reach only about $32.50 a 

barrel by 2010 (in 2005 dollars). But in January 2006, 

EIA released a revised outlook that has oil prices falling to 

only about $45 a barrel by 2010 (in 2005 dollars).6

The Impact of Increasing Demand for 

Light Products on the Costs of Refining 

Petroleum 

In addition to the cost of crude oil, the cost to refine petroleum is the other component of U.S. motor fuel prices 

that is likely to be affected by developments in China’s 

petroleum markets. As discussed here, the cost to refine 

petroleum is the average cost of converting crude oil into 

finished products and distributing those products to 

wholesale markets. Changes in those costs worldwide are 

in part a consequence of China’s growing total demand 

for petroleum because within that total demand, the demand for motor fuels (diesel and gasoline) and other 

light, costly-to-refine products is growing even faster. Yet 

those demand pressures would probably have only a small 

impact on costs of refining as long as China’s efforts to 

keep pace with its changing demand did not introduce 

significant distortions into the worldwide market for refined products.7 In the absence of such distortions, the 

impact on costs for gasoline and diesel in the United 

States would be nearly three cents a gallon in the slowerdemand-growth scenario and about five cents a gallon in 

the faster-demand-growth case (both in 2005 dollars).

A general rule of thumb for gauging how changes in the 

cost to refine oil relate to the changing product mix can 

be inferred from the historical relationship between gross 

refinery margins and light product yields, controlling for 

other important factors affecting costs (such as inventory 

change, which affects distribution costs, and environmental requirements) and profitability (such as capacity utilization and interest rates). To illustrate the relationship between costs of refining oil and product yields, the only 

4. Both the Energy Information Administration and the International Monetary Fund assume the one-year elasticity of net oil 

supply to be 0.1. (Mathematically, the net supply elasticity reflects 

the sum of the absolute values of the demand and the supply elasticities.) See Department of Energy, Energy Information Administration, “Rules-of-Thumb for Oil Supply Disruptions” 

(September 2, 2004), available at www.eia.doe.gov/emeu/security/

rule.html; and International Monetary Fund, World Economic 

Outlook (April 2005), Table 4.7. That figure would be low for an 

analysis of five-year effects, since the response of petroleum production and consumption to changes in price generally increases 

over time as oil businesses have more time to find additional oil 

and consumers have more opportunities to make investments to 

save energy or switch to other forms of energy. From the models of 

the Energy Information Administration, the 10-year response of 

total oil demand to oil prices is about 0.2 (absolute value). With 

that demand reduction likely to be followed by a very small supply 

response, the five-year elasticity for net supply would normally be 

something more than 0.2. Given current market conditions, however, with members of the Organization of Petroleum Exporting 

Countries generally unable to rapidly increase production, it is 

likely that the market’s response to any given shortfall will have 

less additional supply to draw on than in past years. For those reasons, 0.2 is taken here to be representative of the likely five-year 

impact.

5. The investor report by the Goldman Sachs Group is not publicly 

available; a summary appears in Peter A. McKay, “Goldman Analysts Deliver Oil Shock,” Wall Street Journal, April 1, 2005, p. C4. 

A scenario that has oil prices spiking to $80 a barrel is assessed in 

International Monetary Fund, World Economic Outlook, Figure 

4.6.

6. Department of Energy, Energy Information Administration, 

Annual Energy Outlook 2006 (Early Release), January 2006. Forecasts are inflated to 2005 dollars using the implicit GDP price 

deflator.

7. Distortions could be introduced in several ways—for example, if 

China opted for a policy of pursuing self-sufficiency in its capacity 

to refine crude oil or, at the opposite extreme, opted to rely completely on increased imports of products from refineries elsewhere. 

(The cost increases resulting from such distortions of free trade are 

not evaluated in this analysis.)
34 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Figure 4-4.

Actual Gross Refinery Margins and 

Margins Estimated from the Relationship Between Light Product Yields and 

Inventory Change, 1994 to 2004

(2005 dollars a barrel)

Source: Congressional Budget Office based on price data from

the Department of Energy, Energy Information Administration, Petroleum Navigator, available at http://

tonto.eia.doe.gov/dnav/pet/pet_sum_top.asp.

Note: The gross refinery margin represents a “3-2-1 crack spread,” 

under the assumption that a refinery can process three 

barrels of crude oil into two barrels of gasoline and one 

barrel of middle distillates.

controlling factor considered here is the change in refined 

product inventories (see Figure 4-4). (The logic is that 

when storage tanks are filling rapidly, the costs of delivering finished products will be higher than they otherwise 

will be; and when tanks are being drained, the delivery 

costs will be lower. Those cost changes are assumed to be 

passed through to prices.) The statistical relationship between margins, yields, and stock changes suggests that an 

overall increase in the yield of motor fuels of 1 percentage 

point (with no further change in stock additions) will be 

associated with an increase in average refining costs of 

$1.33 a barrel (or just over three cents a gallon), in 2005 

dollars.

That rule of thumb reflects a number of simplifying assumptions.8

 Its calculation of gross refinery margins (a 

weighted average of gasoline and diesel prices minus 

crude oil costs) omits other costs of refinery operations 

that may have been changing over the past decade. For 

example, some of the new costs for complying with environmental regulations are not included. Despite that limitation, research indicates that changes in the gross and 

net margins are closely related.9

 Also, the data on annual 

stock changes omit information on inventories in China 

and other developing countries. Those inventory data are 

generally not available, and it is not known how their 

omission affects the results. In general, a preferable way to 

model the determinants of refiners’ costs—which is beyond the scope of this paper—would consider the increases in average costs of refining for the different basic 

configurations of refineries, from simple hydroskimmers 

to complex coking facilities (see Box 4-1 on page 30). 

Those increasingly complex configurations add equipment to recover hydrogen, remove sulfur, and extract and 

recombine hydrocarbons to alter the mix of finished petroleum products.

Both of CBO’s scenarios of future growth assume that 

most of the increase in Chinese petroleum demand 

through 2010 will be for light products. Adding the respective increases in light product demand—about 2 million barrels a day in the slower-growth scenario (4.5 percent a year) and 4 million barrels a day in the fastergrowth scenario (7.5 percent a year)—to the level of 

worldwide oil consumption in 2004 and recalculating the 

worldwide yield of light products indicates how Chinese 

demand may affect those yields and, hence, costs of refining. In the slower-growth scenario, the worldwide yield of 

1994 1996 1998 2000 2002 2004

0

1

2

3

4

5

6

7

8

Actual Margin

Estimated

Relationship

8. In particular, those relatively small impacts assume that worldwide 

efforts to accommodate the changing demand mix reflect optimal 

levels of new investment around the world and trade in crude oil 

and finished products. That is, the world’s petroleum refiners 

(including refiners in China) would be free to respond to the 

growing and changing demand for petroleum products in China, 

so that the changes in refining capacity worldwide, combined with 

new patterns of trade, would help to supply finished products 

everywhere at the lowest cost. On that basis, the change in the 

average global refinery yields that was necessary to meet the new 

Chinese demand for light products would be most relevant for 

understanding the resulting change in refining costs in the United 

States.

9. For example, see Department of Energy, Energy Information 

Administration, Performance Profiles of Major Energy Producers 

2003 (March 2005), Figure 47.
CHAPTER FOUR CONSEQUENCES FOR MOTOR FUEL MARKETS IN THE UNITED STATES 35

Figure 4-5.

Share of Total Petroleum Demand

Met by Light Products, 1994 to 2004

(Percent)

Source: Congressional Budget Office based on data from British 

Petroleum, Statistical Review of World Energy (June 

2005).

Note: Light products are gasoline and middle distillates (including 

diesel and jet fuel).

light products from crude oil in 2010 would increase 

from 67.5 percent to 68.3 percent, adding about $1 a 

barrel (or nearly three cents a gallon), in 2005 dollars, to 

the cost of supplying gasoline and diesel in the United 

States and other countries.10 In the faster-growth scenario, the worldwide yield in 2010 would increase from 

67.5 percent to 69.1 percent, adding just over $2 a barrel 

(or about five cents a gallon), in 2005 dollars.

Evidence of changing refinery yields in China is consistent with demand changes there. China’s increased production of light products in the past two years stands out 

compared with the increases for those products in the 

United States and the rest of the world (see Figure 4-5). 

But the recent sharp increase in product demand appears 

to have surprised Chinese refiners as much as it did energy analysts elsewhere. China’s oil industry has responded to that high demand growth by accelerating 

construction of new refineries (with government assistance in the form of expedited siting and construction 

permits). Refinery investment took an especially large 

jump from January 2005 to January 2006 (see Figure 4-1 

on page 28). Nine projects currently in progress or awaiting government approval would add about 2 million barrels a day of new distillation capacity before 2010 (see 

Table A-10).11 If all of those projects are completed as 

planned, China’s total capacity will be about 8 million 

barrels a day at that time—a level that would be insufficient to meet all the expected increase in oil use in CBO’s 

faster-growth scenario. If China is expecting faster demand growth, consistent with the government’s 10-year 

plan, it is unclear whether the current level of refinery investment reflects a strategy to rely increasingly on imported oil in the future or just a lag in making investments in refinery capacity sufficient to keep pace with 

demand. In March 2006, the government announced 

planning goals for refinery capacity in 2010 that would 

boost that capacity by more than 30 percent above current levels.12

Other Influences on Costs to Refine Oil

The impact of increasing light product yields on costs of 

refining is more complicated than the simple relationship 

estimated in this paper. Some of the influences that may 

affect that relationship are transitory, successively pushing 

costs up and then back down, and others are more sustained in nature.

An example of the type of event that can alter costs temporarily by raising demand or restricting refinery activity 

is the damage from Hurricanes Katrina and Rita in 2005. 

That damage significantly disrupted the supply of refined 

petroleum products in the United States, causing the

10. To illustrate, the calculation is 68.3 percent minus 67.5 percent 

(or 0.8 percent) times $1.33 a barrel, which equals $1.06 a barrel. 

With 42 gallons in a barrel, the impact of that slower-growth scenario is equivalent to about 2.5 cents a gallon.

1994 1996 1998 2000 2002 2004

0

50

60

70

80

United States

Rest of the World

China

11. Those projects are reviewed in Kang Wu and Fereidun Fesharaki, 

“As Oil Demand Surges, China Adds and Expands Refineries,” 

Oil & Gas Journal (July 25, 2005), pp. 20-24; and Department of 

Energy, Energy Information Administration, “China,” EIA Country Analysis Briefs (updated in August 2005), available at 

www.eia.doe.gov/emeu/cabs/china.html.

12. China Daily, “China To Boost Oil Refinery Capacity,” March 17, 

2006, available at www.chinadaily.com.cn/english/doc/2006-03/

17/content_544001.htm. 
36 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

margins of refiners in the Gulf Coast to more than quadruple from August to September.13

Among the factors that could influence worldwide costs 

of refining or refinery margins over a long period are 

changes in the volume of sales, which directly affect

the profitability of supplying motor fuels and influence 

how much of any increase in costs of refining can be reflected in refinery margins and passed through to retail 

consumers.

Other important factors that could add to costs and 

would need to be addressed in order to best establish the 

relationship between refinery yields and margins include:

B The changing quality of available crude oils, 

B The increasing costs of complying with environmental 

rules, 

B The increasing use of nonoil inputs (such as ethanol) 

to produce motor fuels, and

B The growing difficulty of siting new refineries (potentially a concern in China as well as in the United 

States).

For one additional factor—changes in the relative demand for gasoline and diesel fuel within the total mix of 

light products—the direction of impact on the costs of 

refining is less clear. Most of the growth in total petroleum sales worldwide and in sales of light products has 

been for diesel fuel. In the United States, diesel consumption tends to grow with increases in long-haul trucking 

and, hence, with overall economic output (which means 

at a faster pace), whereas gasoline consumption tends to 

grow with increases in population (which means at a 

slower pace).14 Those different causes probably exist in 

China, too, where the rate of growth in the use of diesel 

fuel is higher than that for gasoline. In China, truck traffic is growing with the economy, as is the number of 

small rural vehicles (already in the millions). Outside the 

transportation sector, growth in the demand for diesel for 

distributed electricity generation (by individual businesses and for buildings) has been high, too.

It is not clear what the higher growth in the demand for 

diesel (relative to that for gasoline) may mean for costs of 

refining. In general, increased yields of gasoline are more 

costly to obtain than high yields of middle distillates (diesel fuel and heating oil). But in the past few years, wholesale prices for diesel have been approaching and, on occasion, exceeding the prices for gasoline. That may be a 

short-term phenomenon that will pass with some redesign of refineries. But with an increasing imbalance projected in the light product mix over the next five years, 

the rise in the cost of diesel relative to that of gasoline 

could persist.

Implications for Policies Affecting 

Investment in U.S. Refineries

China’s demand for petroleum in general—and for light 

products in particular—may add to cost pressures on 

U.S. refiners and could affect future refinery investment 

and operations. Even before the latest growth in Chinese 

demand, some analysts were claiming that refineries in 

the United States faced a number of policy-related constraints on their ability to meet growing demand at home 

and to comply with new environmental laws affecting 

product quality and plant emissions.15 In 2005, the hurricane damage to refineries along the U.S. Gulf Coast and 

the resulting large increase in refinery margins added to 

concerns about the adequacy of capacity. Those concerns 

have been accompanied by calls for specific policy 

changes to remove such constraints or to otherwise support increased investment in refineries.

Changes in Chinese demand could put pressure on U.S. 

refiners in two ways. If China consumed an increased 

share of the light, sweet (or low-sulfur) crude oils to feed 

its demand for diesel, gasoline, and petrochemicals, then 

U.S. refiners would have to invest more than they otherwise would in the increased processing of heavy, sour oils. 

Alternatively, if China decided to rely increasingly on imports of refined petroleum products, that could put increased pressure on U.S. refiners to divert products from 

13. Current information on refinery margins in major refining centers domestic markets to export markets—if not directly to 

is available in International Energy Agency, Oil Market Report, 

October 11, 2005.

14. For a recent analysis discussing the link between freight traffic and 

economic growth, see Congressional Budget Office, Freight Rail 

Transportation: Long-Term Issues (January 2006).

15. For example, see National Petroleum Council, Observations on 

Petroleum Product Supply, A Supplement to the NPC Reports: U.S. 

Petroleum Product Supply and U.S. Petroleum Refining (December 

2004).
CHAPTER FOUR CONSEQUENCES FOR MOTOR FUEL MARKETS IN THE UNITED STATES 37

China, then to other countries, who may in turn be the 

ultimate exporters to China. (Equivalently, U.S. refiners 

might have to boost output if U.S. importers of refined 

products saw their foreign sources of gasoline and diesel—mainly in Europe and Latin America—diverted to 

China.) Aside from additional pecuniary costs for producing clean fuels, the additional refinery activity in the 

United States also could be related to additional social 

costs in the form of increased emissions from those 

plants.

Advocates of a change in policies affecting refineries point 

to a number of constraints on refiners’ ability to process 

the heavier, more-sour oils and on their ability to expand 

output and capacity.16 Those constraints include ones 

that arise from emissions controls on refineries—a consequence of national clean air laws (establishing ambient air 

quality standards and limiting plant emissions of sulfurous and nitrous compounds) and restrictions on technologies used at industrial fuel-burning installations 

(known as New Source Review). Other constraints on refinery operations arise from standards for the motor fuels 

themselves, including clean air laws that restrict the 

amount of certain toxic chemicals in gasoline and, more 

recently, new limits on the sulfur content of gasoline and 

diesel.

Some analysts also believe that local requirements for permits may be impeding the construction of new refineries. 

But refiners in the United States have been able to meet 

growing demand for motor fuels by expanding the downstream capacity at existing refinery complexes.17

How much longer that type of expansion can continue is 

unclear, however. In the future, some all-new refinery 

complexes may well become the more economical investment—as may be evidenced by the increases in refinery 

margins that probably will follow the growing worldwide 

demand for oil products. At that time, local requirements 

for permits could become restrictive.

The consequences of China’s economic growth for the 

costs to U.S. refiners from complying with existing and 

new policies affecting their capital spending and operations will depend on changes in the worldwide trade in 

refined products. Consideration of the full international 

picture is beyond the scope of this paper, although two 

basic effects are worth noting. If excess refinery capacity 

emerged in other countries (whether in countries with 

low economic growth or in oil-exporting countries that 

decided to further develop their export capacity), the 

need for new capacity in the United States would be 

smaller than what it would be otherwise. Or, if fast-growing countries did not expand their refinery capacity, the 

call on U.S. refiners to boost their exports would be 

greater than what it would be otherwise.

That future trade in petroleum products could also have 

consequences for the types of refinery investment that the 

United States might want to make. As this paper points 

out, the mix of products being consumed in Asia is 

changing, as China and other countries demand more 

gasoline, diesel, and other light products (especially 

petrochemical feedstocks). For example, if China did not 

alter the complexity of its refineries to boost the percentage yield of motor fuels, its efforts to produce additional 

motor fuels from refineries of a more-standard configuration would yield an excess supply of heavy, residual products. Those heavy products then could be exported to the 

United States or elsewhere, where significant capacity already exists to process them into more useful products. In 

that situation, the United States might want even more 

capabilities to convert those heavy products, although 

negative environmental consequences could ensue from 

processing feedstocks that could have an especially high 

content of sulfur and heavy metals.

16. Ibid.

17. For example, see D.J. Peterson and Sergej Mahnovski, New Forces 

at Work in Refining (Arlington, Va.: RAND Science and Technology, 2003).

APPENDIX

A

Detailed Tables

This appendix presents 10 tables that convey additional background information on the Chinese economy 

and its energy sector.

Table A-1.

China’s Petroleum Balance, Selected Years from 1990 to 2004

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 7-4, 7-9, 17-8, and 17-9 (for 1990 to 2002); and British Petroleum, Statistical 

Review of World Energy (June 2004) and Statistical Review of World Energy (June 2005) for 2003 and 2004. 

Notes n.a. = not available. 

Source data in metric tons converted using 7.3 barrels a ton. Sectoral data for 2003, available from the International Energy Agency’s 

report on “2003 Energy Balances for China,” indicate total supply and consumption of about 5.02 million barrels a day, with transportation activity above 2002 levels, commercial and industrial activity below 2002 levels, and residential activity about the same.

a. Negative amounts indicate additions to stocks.

b. The values for transportation use appear too low, given independent data on the consumption of gasoline, diesel fuel, and jet fuel. Those 

products also may be counted in the industrial sector because so many vehicles are owned by businesses.

c. Total supply minus total consumption. The high estimates for 2003 and 2004 may reflect the omission of data on additions to stocks in 

those years.

1990 1995 2000 2001 2002 2003 2004

Petroleum Supply (Millions of barrels of crude oil equivalent a day)

Crude oil production 2.77 3.00 3.26 3.28 3.34 3.39 3.49

Net Imports -0.47 0.24 1.52 1.41 1.63 2.18 2.99

Crude oil n.a. n.a. 1.20 1.05 1.24 1.67 2.34

Refined products n.a. n.a. 0.32 0.36 0.39 0.51 0.65

Change in stocksa -0.01 -0.03 -0.25 -0.05 0.02 n.a. n.a.

Total Supply 2.29 3.21 4.53 4.64 4.99 5.57 6.48

Petroleum Demand (Millions of barrels of crude oil equivalent a day)

Residential sector 0.06 0.14 0.25 0.26 0.30 n.a. n.a.

Commercial sector 0.24 0.42 0.57 0.59 0.60 n.a. n.a.

Industrial sector 1.62 2.07 2.56 2.57 2.83 n.a. n.a.

Transportation sectorb 0.34 0.57 1.10 1.14 1.23 n.a. n.a.

Unaccounted for 0.04 0 0.01 0.01 0.01 n.a. n.a.

Total Consumption 2.30 3.21 4.49 4.57 4.96 5.33 6.17

Discrepancyc -0.01 0 0.04 0.07 0.03 0.24 0.31
40 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table A-2.

China’s Consumption of Refined Petroleum Products, 1995 to 2004

(Millions of barrels a day)

Source: Congressional Budget Office based on data from British Petroleum, Statistical Review of World Energy (June 2005).

Note: “Gasoline” includes gasoline for aviation and vehicle use as well as light distillates used as feedstocks for petrochemicals (such as 

naphtha). “Middle distillates” includes kerosene, jet fuel, heating oil, and diesel fuel. “Heavy fuel oil” comprises crude oil consumed as 

fuel, residual fuel oil for boilers, and bunker fuel for tankers. “Other” includes petrochemicals besides naphtha, liquefied petroleum 

gases such as propane, lubricating oils, asphalt, and waxes.

Gasoline Middle Distillates Heavy Fuel Oil Other Total

1995 0.904 0.997 0.669 0.819 3.390

1996 0.986 1.080 0.719 0.888 3.672

1997 1.111 1.202 0.750 0.871 3.935

1998 1.098 1.277 0.725 0.946 4.047

1999 1.164 1.455 0.694 1.103 4.416

2000 1.313 1.633 0.725 1.314 4.985

2001 1.252 1.709 0.728 1.342 5.030

2002 1.387 1.786 0.705 1.500 5.379

2003 1.440 1.905 0.791 1.654 5.791

2004 1.686 2.352 0.907 1.739 6.684
APPENDIX A 41

Table A-3.

Petroleum Consumption by Major Sectors of the Chinese Economy, 

Selected Years from 1990 to 2002

(10,000 metric tons)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 7-4 and 7-9. 

Note: Data on sectoral activity are reported here in units of 10,000 metric tons per year to remain consistent with the presentation of 

Chinese government publications and avoid the confusion of the multiple conversion factors that would be necessary for reporting in 

barrels, the commonly used unit in U.S. publications.

a. “Commercial” includes consumption categorized in the China Statistical Yearbook as that for “wholesale and retail trade,” “heating” 

(assumed to reflect the production of steam and hot water for buildings), and sectors categorized as “others” (assumed to reflect consumption by service industries, such as those for finance, real estate, information, and so on).

b. “Industrial” includes consumption categorized in the China Statistical Yearbook as that for “farming, etc.,” “construction,” “final industry” (assumed to be utilities’ consumption for supplying electricity, steam, and gas in manufacturing and mining), and petroleum refinery 

losses. If utilities’ “gas production” represents natural gas distribution, that consumption should be categorized in the transportation sector instead (for consistency with its treatment in the U.S. national income and product accounts).

c. This is a balancing item, calculated to represent the difference between total petroleum consumption and the sum of consumption in the 

various sectors.

Sector 1990 1995 2000 2001 2002

Residential 285 682 1,256 1,295 1,478

Commerciala 1,192 2,124 2,855 2,960 2,992

Wholesale and retail trade 78 334 545 567 593

Heating 356 400 427 439 421

Other service industries 758 1,390 1,883 1,954 1,979

Industrialb 8,111 10,372 12,783 12,854 14,125

Agriculture 1,034 1,203 1,497 1,568 1,674

Construction 327 243 344 372 410

Final consumption in manufacturing and mining 5,180 7,096 9,016 9,060 9,855

Intermediate consumption (Energy conversion)

Petroleum refinery losses 296 420 722 617 892

Electric power and steam production 1,234 1,359 1,178 1,214 1,276

Gas production 40 52 26 23 19

Transportation 1,683 2,864 5,509 5,693 6,157

Unaccounted for usec 215 23 36 37 28

Total Petroleum Consumption 11,486 16,065 22,439 22,838 24,780
42 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table A-4.

China’s Consumption of Crude Oil and Selected Petroleum Products,

by Industry, 2002

(10,000 metric tons)

Continued

Industry Crude Oil Gasoline Kerosene Diesel Oil Fuel Oil

Agriculture 0 203 1 1,495 0

Farming, forestry, animal husbandry, fishery, and water 

conservation 0 188 1 1,484 0

Logging and transport of wood and bamboo 0 15 0 11 0

Utilities 69 192 61 349 902

Electric power, steam, and hot water 69 24 1 251 883

Natural gas 0 1 0 11 19

Tap water 0 2 0 2 0

Other resident servicesa 0 164 61 84 0

Construction 4 122 0 252 19

Mining and Quarrying 3,379 89 8 307 197

Coal mining and dressing 1 30 6 55

Petroleum and natural gas extraction 3,378 39 0 187 196

Ferrous metals mining and dressing 0 6 0 16

Nonferrous metals mining and dressing 0 5 1 14 0

Nonmetal minerals mining and dressing 0 9 0 34 1

Other minerals mining and dressing 0 0 0 1 0

Manufacturing 18,909 500 79 1,150 1,851

Nondurable goods

Food processing 0 31 0 33 8

Food production 0 13 0 20 9

Beverage production 1 8 0 12 8

Tobacco processing 0 31 0 5 1

Textile industry 0 35 4 44 65

Garments and other fiber products 0 8 1 15 15

Leather, furs, down, and related products 0 5 0 14 3

Timber processing, bamboo, cane, palm fiber, and 

straw products 0 3 0 6 3

Papermaking and paper products 1 16 3 30 22

Printing and record medium reproduction 0 7 6 8 2

Cultural, educational, and sports articles 0 3 1 16 1

Petroleum processing and coking 16,318 16 17 77 480

Raw chemical materials and chemical products 1,877 55 10 125 370

Medical and pharmaceutical products 0 11 0 7 5

Chemical fiber 646 4 0 11 88

Rubber products 0 8 0 7 12

Plastic products 1 12 0 41 9
APPENDIX A 43

Table A-4.

Continued

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Table 7-9. Data categories have been reordered to parallel the presentation of U.S. 

industry accounts by the Department of Commerce, Bureau of Economic Analysis, in its Survey of Current Business and other publications.

Note: According to the China Statistical Yearbook, these data measure the consumption of petroleum by “material production sectors, non 

material production sectors, and households in the country.” Industry-level data are not available for the consumption of other petroleum products (such as jet fuel and petrochemical feedstocks) and coking products (such as benzene), so they are not shown here. 

However, the total volume of those other products is included in the total consumption for all energy, as presented in Table 7-9 of the 

Yearbook. Data on sectoral activity are reported here in units of 10,000 metric tons per year to remain consistent with Chinese government publications and avoid the confusion of the multiple conversion factors that would be necessary for reporting in barrels, the 

commonly used unit in U.S. publications. 

a. “Other resident services” is equivalent to the data category “residential consumption” in the China Statistical Yearbook, originally 

reported as a separate activity and not with utilities.

b. Although not defined in the data, this category presumably includes consumption by industries in finance, real estate, and other services.

Industry Crude Oil Gasoline Kerosene Diesel Oil Fuel Oil

Durable goods

Furniture manufacturing 0 4 0 3 1

Nonmetal mineral products 50 56 2 302 339

Smelting and pressing of ferrous metals 13 31 6 81 263

Smelting and pressing of nonferrous metals 0 11 1 43 69

Metal products 0 20 2 44 13

Ordinary machinery 0 22 4 32 8

Equipment for special purposes 0 27 1 11 10

Transportation equipment 0 20 7 42 12

Electric equipment and machinery 1 18 0 27 12

Electronic and telecommunications equipment 0 10 0 61 15

Instruments, meters, and cultural and office 

machinery 0 3 0 11 0

Other manufacturing industry 0 13 11 24 7

Wholesale Trade, Retail Trade, and Catering Services 0 224 13 281 12

Transportation, Storage, and Post and Telecommunications 

Services 178 1,503 617 2,965 872

Other Servicesb 1 916 140 870 19

All Industries 22,541 3,750 919 7,668 3,874
44 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table A-5.

Income and Employment in China, Selected Years from 1990 to 2003

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 5-4 and 10-2.

Note: Income data for urban households are reported as per capita annual disposable income; for rural households, as per capita annual net 

income.

Table A-6.

China’s Population, Indicators of Potential Drivers, and Actual Drivers,

Selected Years from 1990 to 2003

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 4-1 (population), 4-4, 4-6, and 16-28 (drivers).

Note: n.a. = not available.

1990 1995 2000 2001 2002 2003

Annual 

Growth, 

1990-2003 

(Percent)

Average Disposable Income 

(Nominal yuans)

Urban households 1,510.2 4,283.0 6,280.0 6,859.6 7,702.8 8,472.2 13.3

Rural households 686.3 1,577.7 2,253.4 2,366.4 2,475.6 2,622.2 10.3

Number of Employed People 

(Millions)

Urban areas 170.4 190.4 231.5 239.4 247.8 256.4 3.1

Rural areas 477.1 490.2 489.3 490.8 489.6 487.9 0.2

1990 1995 2000 2001 2002 2003

Total Population (Millions) 1,143.33 1,211.21 1,267.43 1,276.27 1,284.53 1,292.27

Percentage of total living in cities 26.4 29.0 36.2 37.7 39.1 40.5

Percentage of total ages 15 to 64 66.7 n.a. 70.2 n.a. n.a. 71.3

Motor Vehicle Drivers (Millions) 16.36 35.02 76.56 84.55 93.62 106.11

Automobile drivers (Millions) 7.91 16.73 37.47 44.63 48.27 53.68
APPENDIX A 45

Table A-7.

China’s Stock of Motor Vehicles, by Type, Ownership, and Sales,

Selected Years from 1990 to 2003

(Millions of units)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 16-2 (for “other motor vehicles”), 16-28, and 16-30; and information from 

reports in China Daily (“Honda Motorcycle Sales to Grow by 34%,” December 27, 2004) and Jialing, Inc. (“China Rolls Out Motorcycles,” from AJOT, April 14, 2003, available at www.jialing.co.za/news%202.htm).

Note: n.a. = not available.

a. The total number of civil vehicles does not equal the total number of vehicles by ownership because of differences in definition.

b. “Other civil vehicles” are referred to in the data as “special vehicles,” but it is unclear what type of vehicles they are. The numbers are 

estimated for 1990 to 2001 as the difference between “total” civil vehicles and the sum of “passenger vehicles” and “trucks” in Table 16-

28 of the China Statistical Yearbook.

c. “Transport vehicles” are vehicles owned by governments, state-owned businesses, and large private businesses. The numbers before 

1999, which only indicate the relatively few vehicles owned by the Department of Highway Transportation, are omitted.

d. Estimated as the difference between “total” new registration of civil vehicles and new registration of “passenger vehicles” in Table 16-30 

of the China Statistical Yearbook.

e. Estimated from data for 2002 and reported rates of growth in that year and in 2003.

1990 1995 2000 2001 2002 2003

Motor Vehicle Stock (End of year)a

Civil vehicles (Registered for highway use) 5.51 10.40 16.09 18.02 20.53 23.83

Passenger vehicles 1.62 4.18 8.54 9.94 12.02 14.79

Trucks 3.68 5.85 7.16 7.65 8.12 8.54

Other civil vehiclesb 0.21 0.37 0.39 0.43 0.39 0.51

Other motor vehicles (Including motorcycles and 

off-highway vehicles) n.a. n.a. 41.68 47.24 61.74 71.09

Ownershipa

Transport vehicles (Fleet vehicles)c

Passenger vehicles n.a. n.a. 2.17 2.55 2.90 3.52

Trucks n.a. n.a. 4.86 5.09 5.37 5.72

Privately owned vehicles

Passenger vehicles 0.24 1.14 3.65 4.70 6.24 8.46

Trucks 0.57 1.32 2.59 2.99 3.41 3.67

New Vehicle Sales

Passenger vehicles n.a. n.a. n.a. n.a. 2.29 3.16

Trucksd n.a. n.a. n.a. n.a. 1.08 1.18

Motorcyclese n.a. n.a. n.a. 12.44 13.00 13.25
46 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table A-8.

China’s Stock of Motor and Agricultural Vehicles, by Type and Size, 

Selected Years from 1990 to 2003

(Millions of units)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 13-7 (for “agricultural tractors”), 16-2, 16-28, and 16-30.

a. “Other civil vehicles” are referred to in the data as “special vehicles,” but it is unclear what type of vehicles they are. The numbers are 

estimated for 1990 to 2001 as the difference between “total” civil vehicles and the sum of “passenger vehicles” and “trucks” in Table 16-

28 of the China Statistical Yearbook.

1990 1995 2000 2001 2002 2003

Motor Vehicle Stock (End of year)

Civil vehicles (Registered for highway use) 5.51 10.40 16.09 18.02 20.53 23.83

Passenger vehicles

Large (Including buses) n.a. n.a. n.a. n.a. 0.75 0.76

Medium and small n.a. n.a. n.a. n.a 8.95 11.33

Mini n.a. n.a. n.a. n.a. 2.32 2.70

Total Passenger Vehicles 1.62 4.18 8.54 9.94 12.02 14.79

Trucks

Heavy n.a. n.a. n.a. n.a. 1.48 1.37

Middle and light n.a. n.a. n.a. n.a. 5.79 6.35

Mini n.a. n.a. n.a. n.a. 0.85 0.82

Total Trucks 3.68 5.85 7.16 7.65 8.12 8.54

Other civil vehiclesa 0.21 0.37 0.39 0.43 0.39 0.51

Agricultural tractors

Large and medium 0.81 0.67 0.97 0.83 0.91 0.98

Mini 6.98 8.65 12.64 13.05 13.39 13.78

Total Tractors 7.79 9.32 13.61 13.88 14.30 14.76

Diesel engines on farms 4.11 4.91 6.88 7.29 7.51 7.50

“Tire” tractors 4.63 5.92 8.21 8.26 n.a. n.a.

Other motor vehicles (Including motorcycles and 

small rural vehicles) n.a. n.a. 41.68 47.24 61.74 71.09
APPENDIX A 47

Table A-9.

China’s Highway Infrastructure, Selected Years from 1990 to 2003

(Thousands of miles)

Source: Congressional Budget Office based on data from the National Bureau of Statistics of China, China Statistical Yearbook 2004 (Beijing: 

China Statistics Press, September 22, 2004), Tables 16-3 and 16-4. 

Notes: n.a. = not available.

Data for highway and expressway miles in coastal provinces and cities include, from south to north, Guangdong, Fujian, Zhejiang, 

Shanghai, Jiangsu, Shandong, Beijing, Tianjin, Hebei, and Liaoning.

1990 1995 2000 2001 2002 2003

Length of Transport Routes

All highways and expressways 639 719 872 1,055 1,097 1,125

Expressways only 0 1 10 12 16 18

First-class highways only n.a. n.a. n.a. n.a. n.a. 19

All highways and expressways in coastal

provinces and cities n.a. n.a. n.a. n.a. n.a. 311

Expressways in coastal provinces and cities n.a. n.a. n.a. n.a. n.a. 9

First-class highways in coastal provinces and cities n.a. n.a. n.a. n.a. n.a. 13
48 CHINA’S GROWING DEMAND FOR OIL AND ITS IMPACT ON U.S. PETROLEUM MARKETS

Table A-10.

Major Ongoing Refinery Projects in China, 2005

Source: Congressional Budget Office based on information from Kang Wu and Fereidun Fesharaki, “As Oil Demand Surges, China Adds and 

Expands Refineries,” Oil & Gas Journal (July 25, 2005), pp. 20-24; and Department of Energy, Energy Information Administration, 

“China,” EIA Country Analysis Briefs, available at www.eia.doe.gov/emeu/cabs/china.html.

Note: CNPC = China National Petroleum Corporation; CNOOC = China National Offshore Oil Corporation; n.a. = not applicable.

Chinese Business Foreign Partner

Location

(City, Province)

Added Capacity

(Thousands of

barrels a day)

Projected

Completion Date

Sinopec ExxonMobil, 

Saudi Aramco

Quanzhou, Fujian 80 to 240 Early 2008

CNPC (PetroChina) n.a. Dalian 250 to 400 Early 2006

Sinopec Yangpu, Hainan 160 2006-2007

Sinopec Saudi Aramco 

(pending)

Qingdao, Shandong 200 2008-2009

CNOOC Shell (pending) Huizhou, Guangdong 240 2008

CNPC (PetroChina) n.a. Dushanzi, Xinjiang 100 2009

Sinopec Dagang, Tianjin 250 Waiting for government 

approval

CNPC (PetroChina) n.a. Dagang, Tianjin 200 Waiting for government 

approval

Sinopec n.a. Beihai, Guangxi 160 Waiting for government 

approval