The slowdown in China's economy is so significant that oil prices, already in a free fall that has cut their value by a third since the summer, stand to remain weak for years to come, a prominent Chinese economist is warning.
Oil prices fell to four-year lows Thursday after OPEC member states opted not to trim output, a decision that sent the international Brent price of oil plunging more than $5 (U.S.) a barrel. The decision was widely viewed as a strategic move by the cartel to clip the wings of fast-rising U.S. output from booming regions like the Bakken and the Eagle Ford.
But Andy Xie, the often-contrarian former top Asia-Pacific economist for Morgan Stanley, warned that the massive investment overhang in China, valued at more than $6-trillion, will dramatically affect its energy demand growth, and will, as a result, rein in oil prices for a long time to come.
"China's energy demand, the only source of growth for a decade, has fallen sharply," he said in an interview. "There are several conspiracy theories out there. None can affect demand supply balance, which determines prices."
In mid-September, more than a month before Goldman Sachs rocked markets with its prediction that oil prices would fall to $70 a barrel, Mr. Xie told a conference in Kuwait that he expected oil prices to nosedive to $60. The audience laughed. Now, he's being invited back to speak again.
"I told them the whole damn thing is driven by China. When the investment cycle turns down, everything goes down."
For years, China alone propelled fully 50 per cent of the annual world growth in oil demand. But, Mr. Xie said, the country may bow out of its role in supporting global energy demand for a while. "The oil price will be range-bound between $60 to $80. There's not another cycle coming. You look at China's infrastructure – it's built."
Supply and demand can, of course, operate independently. But the OPEC decision to leave a production ceiling untouched, particularly at a time when oil prices had already fallen far from their lofty heights, suggests a "major tactical shift," IHS Energy analysts Bhushan Bahree and Jamie Webster wrote Friday.
"OPEC has signalled that oil prices will have free rein to respond to other supply and demand inputs to strike a balance," they wrote.
In other words, the demand pull, and China's role in it, is likely to play a major role in setting prices for some time to come.
China has already become uniquely important as the world's largest importer of oil, buying roughly 60 per cent of its 10-million barrels per day from others. And Mr. Xie believes China's vast energy demand, beyond oil alone, will play an even more outsized role in the future: "My call is based on the oil price eventually following China's coal price," he said. "China's coal is equal to four Saudi Arabias in energy equivalent."
No matter what, the downturn in prices stands to accentuate China's influence by providing it an opportunity to cheaply augment its strategic reserves – already believed to stand at 90 days. That in turn "gives China the potential, or the option, of using it as a political-economic tool to their own advantage," said Philip Andrews-Speed, a principal fellow with the Energy Studies Institute at National University of Singapore.
Beyond that, the mere fall in oil prices is a huge win for China: the basic math of a tumble from $115 to $72 a barrel suggests annual savings to the country's drivers and industrial users equivalent to more than 1.5 per cent of current GDP.
Natural gas prices that are tied, or indexed, to oil will also fall, potentially providing a major leg up for China's ambitions to move away from coal and toward a cleaner-burning source of energy.
Low oil prices will, nonetheless, exact a toll on China's national oil companies, already struggling to reform, and on Beijing's desire to substantially boost domestic energy output. China has in recent years embarked on a major program to extract its own shale gas reserves, which are believed to be the world's largest. It set a target of producing 60-billion to 100-billion cubic metres of shale gas per year by 2020 (the entire Canadian industry products 142-billion a year), and spent heavily to accomplish that goal. Estimates suggest state-owned oil companies Sinopec and CNPC lost $1-billion pursuing shale gas last year, and China set a national subsidy of roughly $1.83 per thousand cubic feet.
But even before the oil price fell, the Chinese government acknowledged that it was unlikely to meet its goal, lowering its target to 30-billion cubic metres. Lower prices are unlikely to make domestic drilling easier for the heads of the country's state-owned energy giants.
"If I was a chief executive, I would be asking for a meeting with very high leadership to say, 'ok how do I respond to this?'" Mr. Andrews-Speed said.