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BEIJING — 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.
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