The world's greatest oil exporter has become the industry's biggest bear. Ali al-Naimi, the Saudi Arabian oil minister reckons the world may never see $100 (U.S.) oil again.
The prediction, made in an interview recently, came as he gave warning that the Kingdom would continue pumping crude at full throttle even if the price fell to $20 per barrel. Canadian oil investors and industry lobbyists will be tempted to dismiss this talk as bluff from a seasoned poker player. The Saudis have every interest in frightening weaker players into quitting the game but Mr. Al-Naimi is not just a gambler with a lot of chips on the table; he has other reasons to be bearish. He may be looking at China and what he sees is likely to make life very difficult for the oil exporters for years to come.
A fortnight ago and while most of the world was transfixed by the tumbling oil price, the Chinese government was making policy plans for the future of the People's Republic. The annual Central Economic Work Conference issued its pronouncement of government economic policy for the year ahead and it is worth remembering that such policy prescriptions mean a lot in a centrally planned economy.
Alongside a signal that monetary policy had been too tight and needed to be more balanced, the big message was that China needed to adjust to a "new normal." This is the new catch-phrase used by the Beijing mandarins to describe China's transition to slower growth and the shift from an economy driven by export manufacturing to a more modern economy where demand is generated by internal consumption.
The key aspects of China's new normal are: increased consumption of goods and services; a focus on new technologies and business models; industry consolidation in areas of oversupply; more emphasis on human capital; a shift in focus to compete less on price and volume and more on quality and diversity; and more transparent and better-regulated markets.
It's a list that could almost have been drawn from the grumpy complaints of hawkish U.S. senators who for years berated the Chinese for dumping cheap manufactured commodity products on the world. What is interesting is that China has itself decided that the pile-it-high, sell-it-cheap era is over: goodbye smokestacks, hello offices and shopping malls.
This will not happen overnight but the transition will be faster than any of us imagine. If we doubt that, consider the speed at which China industrialized during the first decade of this century, a period during which Chinese oil consumption doubled. The world was caught out by the impact of the surge in demand for energy and we know what happened to the oil price, which reached $140 per barrel in 2008. Oil exporters scrambled to catch up with what was then rapidly becoming the "new normal" of a China industrializing at breakneck speed.
The world did catch up, thanks to the technology of shale oil and gas. Even more importantly, it made huge gains in energy efficiency, which enabled the capitalist Western economies to continue growing while burning less fuel, exporting the spare barrels to East Asia. We should now therefore expect that China's transition to a second "new normal" will lead to a huge downward energy shift. From rapidly rising energy intensity during the smokestack period, we will see a switch to falling energy intensity as a future China requires fewer barrels of oil to produce a thousand dollars of GDP output.
If you still think the Saudi oil minister is bluffing rather than launching a war of attrition, consider the seaborne trade in iron ore. Weak manufacturing surveys from China caused the iron ore price to slump last week to just $68 per tonne, its lowest level in five years. The price has halved this year and it reflects the rout in the Chinese steel sector, which suffers huge overcapacity. Yet, like the Saudis with their oil price war, the kings of iron ore, Rio Tinto and BHP Billiton in Australia and Vale from Brazil have decided to carry on producing at maximum volume. It's a helter skelter race to the bottom and Jimmy Wilson, BHP's president said as much in November: "If the volume doesn't come from our business, it's going to come from other businesses."
Devil take the hindmost. The kings of iron ore want to be the last men standing as weak producers shut up shop because they know this isn't a hiccup, a turn in the cycle. It is a secular and fundamental commodity slowdown, reflecting big changes in the profile of global demand. Just as Chinese demand was the spur for the commodity supercycle of the first decade of the 21st century, the Chinese transition from a surplus cheap labour economy to a rapidly aging society of scarce labour will be the deflator that kills off excess demand for raw materials.
For raw material producers, that means only one thing: a relentless quest for efficiency. The Saudi oil producers and the Australian iron ore diggers have thrown down the gauntlet. Continental Resources, the Bakken oil producer, has cut its capital expenditure budget for the second time in two months, reducing investment in 2015 by 41 per cent. Even so, the company that led the shale revolution reckons that its output will still rise by between 16 and 20 per cent, as clear a signal as any that shale oil will continue to keep America's tank full for the foreseeable future.
For Canadian producers of raw materials, the message from the Far East is quite clear: The "new normal" will be very strange and unpleasant for anyone who is expecting that their lifestyle supercycle will resume after a brief interruption.