Could diesel fuel go the way of the dinosaur?
The rise of cheap liquefied natural gas is driving the demand for trucks powered by the fuel – at least in China, according to the Financial Times. That uptick in LNG-powered shipping appears to be contributing to a major drop in diesel usage in the country, so much so that China may now be past peak diesel demand.
Matt Smith, energy analyst for Kpler, spoke with the Standard about what’s behind the shift and whether we could see similar trends in the U.S.
This transcript has been edited lightly for clarity:
Texas Standard: I want to make sure folks understand what exactly we’re talking about when we say LNG. Most folks understand diesel: It’s the stuff that you get at the pump, you know, and you don’t want to accidentally mix it with gasoline. But LNG – is that the same thing as like propane, like what we use on our grills and that kind of thing?
Matt Smith: Yes, in that it is liquid. So LNG stands for liquefied natural gas. And the reason that you move it around the world on these LNG tankers or it can be consumed as a fuel for trucking is because when you freeze it – and you have to to freeze it at about 260 to -260°F – it then goes from a gas to a liquid.
And when you do that, it’s much more energy dense than it is as a gas. And so you basically get much more bang for your buck when it’s that liquefied form.
Diesel demand in China is believed to be peaking because of a switchover to LNG vehicles. Break down what that means as a practical matter.
So what’s driving this is two things, really: subsidies and essentially the relative cheaper price of LNG versus diesel. So what we’re seeing is widespread adoption in China of LNG for heavy-duty trucks essentially. So we’re seeing truck sales there probably peaking, pushing above 200,000 by the end of this year.
This is so important when you put it into numbers: Chinese diesel demand is about 4.5 million barrels per day. That’s more than the U.S. And transportation accounts for 60% of that.
So as you see such widespread adoption, the transportation sector or that share is going to to be peaking around now, and then diesel demand will be in gradual descent or this slide lower from here on out.
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Well, now, by way of extending that replacement theory, what about gasoline demand in China? Could you swap off LNG for gas?
This is the wildest thing. Gasoline demand is also peaking in China, but for a different reason. So this is because of electric vehicles as opposed to a switch to LNG. Pretty wild, huh? But again, it’s being driven by subsidies and other incentives. And those have been key for this widespread adoption in China.
And so this puts it into context, right? In recent months in China, over half of in total vehicle sales there have been either hybrids or electric vehicles. And so what has happened essentially is China’s done this across various different elements of its economy. It just creates overcapacity. And that’s why you get this massive ramp-up.
And so China’s essentially been providing subsidies for electric vehicles over the last decade or so, and it’s yielded these massive results. And so, you know, to put this in context with the U.S., U.S. electric vehicle/hybrid sales are about 15%, something like that. Only 1% of vehicles on the road are typically hybrid or electric in the U.S.
Seems like this would have pretty big implications for Texas, a major both oil exporter and you’re also talking about a surplus of LNG here. Are we talking about major sales to China here or what?
Well, yes, the U.S. is already a big provider of LNG into Asia, globally and into China as well. But to your point there, if we have Chinese diesel demand peaking, our gasoline demand peaking out as well, we’re seeing a leveling off in Chinese crude imports as well.
And so the U.S. is already seeing shrinking exports this year to China versus last year. And we may have to see just alternative destinations found for that oil. Whereas on the flip side, as you mentioned, LNG should be pulled more to China as it continues this ramp-up in the vehicle side of things.
