Publications: Notes at the Margin

Oil's China Problem; The Californization of the Refining Market (August 28, 2023)


2023 has passed at what feels like record speed. It seems like oil ministers, analysts, and oil company executives were only yesterday reveling in China’s opening and the return of a strongly bullish oil market. Eight months later, the crude market is struggling to reach and remain at the mid-$80 price that prevailed in January. The market has deteriorated so much that BP CEO Bernard Looney found himself practically begging for investment dollars in India, perhaps because stakeholders there had shunned his firm in favor of NVIDIA, a company that barely existed when BP bought Standard Oil of India and Arco. Today, NVIDIA’s market capitalization is $1.11 trillion, eleven times that of BP. Perhaps Looney and other oil company CEOs worry that the techies will use NVIDIA’s AI chips to replace oil. It should be a valid concern.


Here, we focus first on the impact of China’s declining economy on the oil market. The oil producers’ ebullience in January has correctly turned to despair. China’s economic growth has slowed. By the end of the year, the nation will likely be in recession, although only a few daring economists have issued such projections. The country’s economy is shrinking and will continue to slow. Chinese consumption of oil and other commodities will drop in concert. Worse for oil, China will push hard to maintain certain industries, particularly its electric vehicle (EV) production. It will also push its EV exports, and each exported electric vehicle will cut a little more out of global oil demand.


BP’s Looney may also fret that his company is losing to petroleum marketers. The firm’s market cap has declined by one-third from its September 2019 peak. Meanwhile, Marathon Petroleum, the company that now owns much of the refining and marketing assets sold by BP on the US West Coast, has increased its market cap by 40 percent over the same period. Oil refiners and marketers are picking oil producers’ pockets, especially BP’s, in the West Coast market. Margins there keep rising at the producers’ expense. This “Californization” of the oil market is spreading to other parts of the United States and the world. The impact is particularly obvious in the distillate market. We discuss this “Californization” in the second section of the report.


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