China Going Crazy for SUVs

| Mon Apr. 22, 2013 10:59 AM EDT

The SUV craze has hopped the Pacific Ocean and headed to China:

Gone are the days when buyers in China, the world’s largest car market since 2009, mostly purchased fuel-sipping compacts and subcompacts. Their shift toward larger and ever-more-numerous vehicles is not only driving up China’s oil import bill and contributing to pollution but is also fattening automakers’ profits — and manufacturers made clear over the weekend that they plan to infuse the market with large vehicles.

General Motors announced that it would introduce nine new or restyled S.U.V. models in China in the next five years, and disclosed that it would build four more factories and add 6,000 jobs to accommodate its ever-rising sales here.

This is why global consumption of oil doesn't respond very strongly to higher prices. As incomes go up in developing countries, demand for oil also goes up, and this offsets the reduction in demand due to higher oil prices. You can see this vividly in China, where incomes are increasing steadily and, sure enough, the newly emerging middle class wants SUVs even though world oil prices remain pretty high.

So what does reduce oil demand? Lower incomes, of course. Recessions reduce oil demand quite nicely. That's not the answer anyone wants, but it seems to be the correct one.

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