The following news article has been published by the Financial Times on 28-Oct 2019, written by Sun Yu, editor on the China economics desk of the FT. The article has been reduced for editorial purposes. The full article can be found here.

China is likely to miss a deadline for enforcing the mandatory use of ethanol-blended petrol nationwide by 2020. Two years after Beijing unveiled its plan for the compulsory use of E10, or petrol with 10 per cent ethanol content, across the country, just three north-eastern provinces, home to a vibrant corn ethanol industry, and the northern city of Tianjin have hit the target.

While a number of provinces have experimented with ethanol fuel — which Beijing considers more environmentally friendly — progress is limited, underlining the challenges facing China’s leadership in meeting policy objectives when they are at odds with local interest groups.

Nationwide use of ethanol in fuel would increase China’s annual corn consumption by at least 45m tonnes, or 18 per cent of national output last year, estimates Liu Lei, an analyst at Luzheng Futures. “Both farmers and traders are hoping for China’s ethanol fuel policy to materialise so corn prices can pick up,” said Mr Liu, “but that scenario is not going to happen in the foreseeable future.”

In the central province of Henan, E10 accounted for 57 per cent of petrol consumption last year even though local governments made it mandatory to use ethanol fuel in 2004, according to Jiang Shoulin, general manager of Sinopec Luoyang, a subsidiary of the state-owned oil company. The rules were promulgated most recently in Taiyuan, a northern city that implemented the E10 mandate on October 1. However, interviews with a dozen local petrol stations show none of them is providing ethanol-blended gas. “Taiyuan isn’t ready for E10,” said one service station owner.  

Many plants are running at a low capacity because of a lack of orders. In addition, the country is grappling with a shortage of supply. According to US Department of Agriculture data, China is expected to produce 3.4m tonnes of fuel ethanol this year, far from the 15m tonnes needed to honour its E10 promise. In part, that reflects the high cost of producing ethanol.

The Singapore-based Asian Clean Fuels Association estimates that full implementation of E10 in China would cost almost $43bn to upgrade refineries and petrol stations. A shift to the nationwide use of E10 is also opposed by producers of MTBE — a key ingredient in standard gasoline that is excluded from ethanol-blended gasoline. Switching to ethanol fuel would pose a big risk to MTBE-producing factories, which are large taxpayers and employers in many provinces. “China’s petrochemical industry will suffer significant losses if we can’t find a solution,” said Zong Baoning, a researcher at Sinopec, the nation’s largest oil refiner and a big MTBE producer. State-owned energy companies are also reluctant to pay for the E10 bill. “How can we be active in developing ethanol fuel when we couldn’t benefit from it?” asked an official at CNOOC, the nation’s third-largest oil company.

There are no subsidies for refineries to upgrade their facilities or compensation for closing down MTBE capacity. This threatens to make ethanol a lossmaking business, prompting oil firms to delay the release of E10 in many places, said the CNOOC official. The policy inertia is shattering hopes that China’s corn demand will receive a boost from the E10 mandate. Analysts said the futures market had stopped pricing in a surge in ethanol fuel use in the next 12 months.

While major international oil companies are buying into electric mobility and charging network businesses, Saudi oil giant Aramco continues to bet on oil demand in the transportation sector, investing “tens of millions of US dollars” every year to develop and support the development of vehicles with cleaner and more efficient internal combustion engines (ICEs).

“Our business is [mainly] in liquid hydrocarbon fuel, [so] we aim to make sure its environmental impact is reduced to a point where it remains competitive for internal combustion engines,” South China Morning Post quoted Amer Ahmad Amer, Chief technologist at Aramco’s research and development centre, as saying recently at a research facility in Saudi Arabia.

Rather than betting on electrification, Saudi Aramco is doubling down on oil, looking to make gasoline and diesel engines more efficient and less polluting. The Saudi investment in internal combustion engines also comes at a time when major legacy automakers are redirecting billions of U.S. dollars into electric vehicles (EVs) to challenge Tesla.

Aramco believes that peak oil demand is nowhere in sight and that oil will continue to be the dominant source of energy in the transportation sector in the medium term.

“The biggest bang for us in the short to midterm until around 2040 is from improvements on the internal combustion engines until mass adoption of [sustainable pure electric] transport,” Amer said, as carried by South China Morning Post.

Saudi Aramco is collaborating with the King Abdullah University of Science and Technology (KAUST) in Saudi Arabia, in the so-called ‘Clean Combustion Research Center’ to work on more efficient and less polluting combustion engines.

In March this year, Aramco took part in one of the world’s largest auto shows, the Geneva International Motor Show, as part of what it said was its “active efforts to improve the efficiency of energy use in the transport sector, in particular, by improving the environmental performance of internal combustion engines.”

President Trump promised the American people that his Administration would address and correct the current fuel economy and greenhouse gas emissions standards, and his Administration has taken steps to fulfil this promise.

On 19-September, the U.S. Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) and the U.S. Environmental Protection Agency (EPA) took an initial step towards finalizing the proposed Safer, Affordable, Fuel-Efficient (SAFE) Vehicles Rule by issuing a final action entitled the “One National Program Rule,” which will enable the federal government to provide nationwide uniform fuel economy and greenhouse gas emission standards for automobiles and light duty trucks.

A top priority for President Trump, when finalized, the proposed SAFE Vehicles Rule standards would establish attainable fuel economy and GHG vehicle emissions standards that will help ensure that more Americans have access to safer, more affordable, and cleaner vehicles that meet their families’ needs. The SAFE rule’s standards are projected to save the nation billions of dollars and strengthen the U.S. domestic manufacturing base by adding millions of new car sales. Most importantly, because newer cars are safer than ever before, the new standards are projected to save thousands of lives and prevent tens of thousands of Americans from being hospitalized by car crashes.

“Today’s action meets President Trump’s commitment to establish uniform fuel economy standards for vehicles across the United States, ensuring that no State has the authority to opt out of the Nation’s rules, and no State has the right to impose its policies on the rest of the country,” said Secretary of Transportation Elaine L. Chao.

“Today, we are delivering on a critical element of President Trump’s commitment to address and fix the current fuel economy and greenhouse gas emissions standards,” said EPA Administrator Andrew Wheeler. “One national standard provides much-needed regulatory certainty for the automotive industry and sets the stage for the Trump Administration’s final SAFE rule that will save lives and promote economic growth by reducing the price of new vehicles to help more Americans purchase newer, cleaner, and safer cars and trucks.”

The action finalizes critical parts of the SAFE Vehicles Rule that was first proposed on Aug. 2, 2018 and brings much-needed certainty to consumers and industry by making it clear that federal law pre-empts state and local tailpipe greenhouse gas (GHG) emissions standards as well as zero emission vehicle (ZEV) mandates. Specifically, in this action, NHTSA is affirming that its statutory authority to set nationally applicable fuel economy standards under the express pre-emption provisions of the Energy Policy and Conservation Act dictates that such state and local programs are pre-empted. For its part, EPA is withdrawing the Clean Air Act pre-emption waiver it granted to the State of California in January 2013 as it relates to California’s GHG and ZEV programs. California’s ability to enforce its Low Emission Vehicle program and other clean air standards to address harmful smog-forming vehicle emissions is not affected by today’s action.

This action will help ensure that there will be only one set of national fuel economy and greenhouse gas emission standards for vehicles. The agencies continue to work together to finalize the remaining portions of the SAFE Vehicles Rule, to address proposed revisions to the federal fuel economy and GHG vehicle emissions standards.

In the One National Program Rule, NHTSA and EPA have made the following determinations:

Pursuant to Congress’s mandate in the Energy Policy and Conservation Act, only the federal government may set fuel economy standards, and state and local governments may not establish their own separate fuel economy standards. This includes state laws that substantially affect fuel economy standards (such as tailpipe GHG emissions standards and ZEV mandates).

In addition, EPA is withdrawing the 2013 Clean Air Act waiver that authorized California to pursue its own tailpipe greenhouse gas emission standard (fuel economy standard) and ZEV mandate. As a result, these two programs are also prohibited by the Clean Air Act.

Global vehicle production is falling at the fastest rate since the financial crisis - depressing manufacturing output, freight and the consumption of oil and other commodities. Global motor vehicle output declined last year by 1%, the first annual decrease since 2009 and only the third fall in 20 years, according to data from the International Organization of Motor Vehicle Manufacturers (OICA). But output is on course to drop much faster in 2019, with production up so far in Japan, but down slightly in the United States and plunging in other major auto manufacturing centres, including China, India and Germany.

Motor manufacturing is one largest and most networked of all global value chains, making it central to the global economy. Motor manufacturers are among the world’s largest consumers of energy and raw materials, intermediate products such as plastic, steel and aluminium, and services such as marketing and advertising. The industry is a crucial source of demand for durable capital goods, a generator of high-value exports, and a provider of high-wage middle-class employment in most countries. Its dispersed supply and marketing chains are a major driver of domestic and international freight demand, and by extension transportation fuels, especially diesel. Growth in the worldwide vehicle fleet is the most important driver of consumption of refined fuels, and consequently crude oil.

Motor manufacturing therefore lies at the heart of the global energy system. Right now, the industry’s problems, with output falling for two years in a row, help explain the severe slowdown in oil consumption growth since the middle of 2018.

AUTO SLOWDOWN

Japan’s vehicle production was up by 3% in the first five months of the year compared with the same period a year earlier. But U.S. vehicle output was down by almost 2% in the first six months, according to data from the U.S. Federal Reserve. China’s output fell 13% in the first six months and Germany’s was down 12%, in both cases the worst performance since 2009. India’s production was shrinking at a year-on-year rate of 11% in the three months from April to July, according to figures published by the International Organization of Motor Vehicle Manufacturers. Plunging vehicle production has been a major contributor to the weakness in global manufacturing and freight reported since the middle of 2018. It explains the slowdown in oil consumption growth in 2018, which worsened in the first half of 2019, as the auto industry moved fewer parts around and put fewer vehicles on the road. Oil consumption growth is unlikely to accelerate again until motor manufacturing production itself starts to improve.