The Oil Price Crash and Economic Slow Down in China

Guest / joint post with EM commenter Javier

Two of the factors in the oil price crash are well constrained: 1) oversupply of expensive light tight oil (LTO) in North America and 2) the decision of OPEC to not cut production. The third possible factor of weak global demand is not so easy to constrain but the current oil price crash bears many of the same hallmarks as the 2008 finance crash. This has lead to speculation that weak global demand, stemming from masked economic woes, may also be playing a key role.

In response to this, commenter Javier sent me a collection of 10 charts that he had collected from various internet sources together with his commentary that forms the basis of this joint-post. These charts tell a clear story of a major economic slowdown in China. This most certainly will be implicated in the ongoing oil price weakness. The $10,000 question is will China make a cyclical rebound like it has done in the past?

Figure 1 GDP growth. YoY = year on year % change. Note many charts are not zero scaled. China’s economy is still growing at 7% per year but has slowed down dramatically from 12% 5 years ago. Such change has happened before, notably between 1994 and 1998 linked to the Asian currency crisis. The oil price hit $10 per barrel in 1998. And in 2007 to 2009 an even more sharp fall related to the financial crash was also accompanied by a crash in the oil price.

Javier points out that in a country with rapid population growth a higher GDP growth rate is required than in a country with stable or declining population and he suggests that 7% is in reality approaching recessionary levels.

Figure 2 Decline in the growth rate of industrial production mirrors the decline in the growth rate of GDP (Figure1).

Figure 3 Fixed Asset Investment is a technical measure of investment in hard assets, infrastructure, property and plant and machinery. The graph tells the story of a country growing at phenomenal and increasing rates of growth up to 2005, that is the definition of exponential growth. From 2005 to 2009 the growth rate was flat, i.e. the growth was linear. From 2010 China is investing in fixed assets at decreasing rates of growth.

The change in 2005 is coincident with a change in growth and oil consumption in many OECD countries and therefore indicates that a global source of economic distress took place at about that date. China is changing the way it grows as it is not possible to grow exponentially forever.

Figure 4 Retail sales is a measure of national consumer expenditure. 2008 was the year of the Beijing Olympic Games, so we can pretty much discount the strong peak that year and see in this graph a strong growth in consumer expending until 2010. Since then retail sales have being growing at a slower rate, and current rate of growth is the slowest in ten years.

Retail sales growth will be driven by two factors. 1) the number of individuals economically active which in China grew at a phenomenal rate with the great migration to the cities and 2) the prosperity of those economically active.

Figure 5 Unlike in the previous graphs, China home prices have recently gone into an actual negative rate of change, which means that home prices are actually decreasing in China. If unchecked this could become a serious problem for China since real estate represents about 75% of household assets. So home prices are important for how Chinese perceive their own wealth. Falling house prices also lead to the risk of negative equity where the asset value falls below the amount of debt secured against the asset.

Figure 6  Rail freight is now falling at 16% per annum having gone into negative territory in mid 2014. In the case of China this is a measure mainly of national trade. This mirrors the picture of falling international trade as indicated by the sharp fall in the Baltic Dry Shipping Index.

Figure 7  Consumer Price Index (CPI) measures the average change over time in the prices paid by consumers on a representative basket of goods and services, while Producer Price Index (PPI) measures the average change over time in the selling prices received by domestic producers for their output. PPI shows an abrupt worsening for producers in 2011, since then the timid recovery ended badly in mid 2014 and PPI is now at levels found during recession. CPI shows that China is also flirting with deflation, which is bad news for banks and all individuals and organisations that have debt.

Figure 8  This graph shows that as export growth has stalled and imports are actually declining since 2013 and specially since mid 2014. This is one of the main causes of the commodity price crash that includes oil. China is buying less raw materials which is bad news for commodity producers that depend on China, like Australia. Note exports are still well in excess of imports and China still runs a huge balance of trade surplus.

Figure 9  Growth in oil consumption in China underpinned the bull run in the oil price. This growth in consumption stalled in 2012. The reasons for this should be clear from the preceding charts.

Figure 10  The phenomenal growth in China has been fuelled in part by an equally phenomenal growth of debt. The chart shows private sector debt has gone from much lower than OECD countries to much higher in just two decades. Debt is a fantastic growth hormone, but it is subject to a very strong diminishing returns curve. When there is too much in the system, it becomes a growth inhibitor.


A wide range of economic measures shows that China is undergoing a period of rapid economic slow down and is flirting with recession. China has grown to become the world’s second largest economy and strong Chinese growth has underpinned global growth for many years. Without it, the world faces the risk of another global recession. The slowing of growth in China means a softening of demand for natural resources, including oil and softening of demand for consumer products made in Europe and the USA.

Low oil prices may help stimulate growth in China and without this stimulus the global economy may already have been in recession.

Many of the charts are simply thermometers of the Chinese economy. Three of the measures, however, give rise to more concern about China’s ability to climb out of the malaise as it has done before. Falling property values, risk of deflation and debt saturation. Like many of the world’s leading economies, China, appears to have driven into the same economic cul-de-sac.

Sources of charts

Dr. Ed’s Blog
Snake oil trading blog

Who is Javier?

Javier holds a PhD in Biochemistry and Molecular Biology and has been a scientist for 30 years in molecular genetics and neurobiology. He wrote a blog on macroeconomy and investments from a cyclic point of view for over two years and currently writes a blog in Spanish about the economic crisis, energy crisis and climate change under the pseudonym Knownuthing.

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35 Responses to The Oil Price Crash and Economic Slow Down in China

  1. Florian Schoepp says:

    Some observations:
    generally speaking, Chinese statistics have to be taken with a large grain of salt. See for example:
    I know this organisation is biased, but there are more links from other news outlets, describing the same phenomenon.
    That being said, I think that a graph showing electricity use would compliment the picture. To produce something, you need electricity.
    It is hard to believe that the use of oil in the PRC has stalled since 2012 while the economy has been growing at around 7% each year and over 50 million new passenger cars (plus x million new trucks) have been sold since then. For this to happen, Chinese companies would have to use completely new technology in order to achieve this growth without using more oil.
    Imports are down in the second half of 2014. That is because of the low price of oil; easing their trade balance.
    Traffic: Rail traffic is slowing down? Well, as far as I remember it has been difficult to transport coal from the north to the south by rail. The “solution” was to use trucks to transport the additional coal which could not be shipped via railway.

    Again: the general trend might be down, but not at such a fast pace. For me, house prices are the most disturbing trend. Looking at the Shanghai stock market: could it be that the authorities are trying to counter-balance the not-so-good-feeling from housing with a stock market rallye?

    • Euan Mearns says:

      Chinese companies would have to use completely new technology in order to achieve this growth without using more oil.

      Well the three gorges dam came on stream in 2012. 22.5 GW of power. Perhaps this has replaced some oil fired power stations? The Chinese used to use a lot of diesel generators. And while I accept the stats may be dubious, I’m not sure if the Chinese authorities would want to paint a false bleak picture.

      • Florian Schoepp says:

        Euan, so right. Forgot the enormous 3 gorges dam. I also have no idea as to the exact thinking of the Politburo. But I believe that employment numbers and purchasing power are important to them. After all: isn´t socialism/communism about full employment and “everybody to his needs”? In other words: does everybody have a job and can he buy enough for his money? Therefore, CPI would look good to me, if I were part of the steering committee…

    • Willem Post says:


      Often overlooked it the law of large numbers. Over the longer term, large economies, such as the EU, US, and China, cannot grow faster, in a healthy fashion, than the world economy, about 2%-3% per year. Deficit financing and quantitative easing are usuallly required due to prior, unhealthy growth.

      The U.S. and the EU have reached that stage of slow growth. China is approaching it in the near term. It will still have a big trade surplus to enable it to be a world financier and expand influence.

      It’s large market is coveted by the U.S. and EU.

  2. Askja Energy says:

    I would not agree with that “the decision of OPEC to not cut production” was a major factor in the oil price crash. Yes – it probably made the crash faster but not necessarily deeper. As explained in a paper by Baumeister and Kilian from last February (“Understanding the Decline in the Price of Oil since June 2014”), there are two major and quite equivalent factors to the oil price crash; fast increased oil production in the US (a positive supply shock) and a slowdown in oil demand in the first 6 months of 2014 (due to economic troubles). Now the IEA is also expecting a slow down in the first six months of 2015. I start to wonder if Jeremy Grantham is right. Has new oil exploration become so expensive, it is starting to withhold the future possibility for GDP growth?

  3. Javier says:

    The existance of a bias in the reporting of the data does not matter if one studies rate of change. Only if the bias is getting stronger or weaker, and as far as I know there is no evidence that those chinese are getting more “honest” or less “honest”. While we wait for that evidence, the only reasonable thing is to go with the data. Is the data change consistent with external sources? Yes it is. Baltic Dry Index crash, commodity prices crash, weaker growth in global oil demand, all are consistent with a Chinese slower growth.

    You are right with an electricity consumption graph being useful. It is here:
    I am sure Euan can show it.
    Together with a source that updates december 2014 data to zero growth:

    It does say the same thing. Further, Chinese authorities are alerting about slower growth coming:

    The oil graph does not say that use of oil has stalled, it says that it’s growing slower. As far as I know yearly figures are still growing aided by the filling of increased strategic reserves.

    Regarding stock markets, they are not a good leading indicator. They usually grow until they crash.

  4. jacobress says:

    The big question is: will the lower oil prices spur economic growth in the world?

  5. glen Mcmillian says:

    Personally I believe the answer to the current oil price crash can be well explained in very simple terms if a few economic definitions are properly understood.

    The most abused words in English these days are probably liberal, conservative, fascist, and demand.

    In the case of demand we all forget that DEMAND is a math FUNCTION rather than a quantity. The effing economy does not ” demand ” more or less of any good or service. It simply buys or consumes more or less of any given good or service at any given time based on the price of that good or service at that time.

    In the case of oil for instance I would be driving my ancient full sized four by four truck on a regular basis if gasoline were still a dollar a gallon a gallon but with gasoline at two to four bucks I drive it as little as possible and drive my econobox car whenever I can.Most people don’t even have this degree of flexibility in their consumption of oil though.

    Now in the case of oil not much of it is used directly for purposes of pleasure and recreation. We don’t burn a whole lot more oil just because it happens to be cheap IN THE SHORT TERM. We can’t all rush out and buy a new gas hog truck or a pleasure boat on short notice. Most oil is burnt incidental to getting to work , getting goods to market, and so forth. Basically this means that the amount of oil that is needed does not vary very much in the SHORT term. The amount of gasoline an individual needs SHORT TERM to commute and shop short term is basically more or less fixed within a fairly narrow range. Getting a new larger or smaller car or changing jobs or moving is not something that happens – something that CAN happen -on a collective basis over a period of a few months.

    The world only wants so much oil at ANY GIVEN MOMENT no matter how cheap it might be. Collectively speaking we are not in a short term position to buy new larger cars and trucks or just take a few weeks off from work and go jet setting around the world or buy a new house in the far suburbs.

    Conversely we MUST buy enough to manage our personal affairs and our collective business affairs NO MATTER how expensive oil might be at any given moment.

    SO – perhaps the true explanation for the current oil price crash is that the world for various reasons just doesn’t want any more oil than it is currently consuming SHORT TERM. I personally might use twice as much at a dollar a gallon but not too many people own gas hog ancient trucks AND econobox cars. Not many of us have the leisure time to go on a motor tour of the continent- nor the money for hotels and restaurants as well as gasoline.

    Now I am only a ” cow college ” ( land grant state university ) trained agriculturist but my course work did include the basic course in economics back in the dark ages and a life time of practical experience selling my production has backed up what my econ professor had to say back then.

    Short term commodity prices don’t have jack shit to do with long term demand.

    The world has it’s head up it’s butt so far it will never glimpse daylight again believing long term economic conditions determine the short term price of any commodity that is basically used up as it is produced excepting some minor fraction that might or might not go into long term storage..

    A few years back I hauled a truck load of the prettiest just picked peaches all over the two closest market towns and couldn’t sell them for even ten cents a pound because every store and market was stocked to the roof with peaches.Market glut in mid July. That same load of peaches would have brought me enough to live for a year the following January when the only peaches available are much inferior not so fresh air freighted from the far end of the earth.

    Oil customers don’t buy oil TODAY on the basis of the expected price of oil a year or two years or ten years down the road. Customers from the commuter with a scooter to airlines buy oil TODAY to use today and over the next few days or months at the most.

    Anybody who believes otherwise is too ignorant to carry on an intelligent conversation and should be ignored.

    With the exception of the strategic petroleum preserve and whatever stocks the military has in storage not even Uncle Sam buys oil today for use more than a few weeks or maybe months down the road. A farmer with on ample on farm storage might buy a few thousand gallons periodically in order to get a cheaper delivered price on it but hardly any farmer has enough storage to last him more than a few months at the most. Construction companies and airlines etc generally depend on day to day or at most week to week deliveries.

    In terms of economic definitions oil is extremely inelastic in the short term meaning the collective customer will not absorb much additional oil short term no matter how cheap it gets – nor will the collective customer buy much LESS oil no matter how expensive it gets – again in the short term.

    We buy milk for our kids – as much as we want them to have up to the limits of our purse – but no more even at half the going price. But IF milk gets cheap enough – THEN we might buy a LITTLE more to feed the cat or throw out a LITTLE milk that is still fresh.

    Now if we change the FOCUS of this discussion to the available SUPPLY and CONSUMPTION of oil from the SHORT term to the LONG term then arguments about economic growth or contraction and the price and availability of oil are good solid arguments.

    Oil producers necessarily base their production planning on the long term since it takes year and years to bring new production online from a scratch basis. Consumers and businesses can and do base their long term decisions to some extent on the expected long term price of oil and their expected long term income prospects.

    Hey guys this thing is not so complicated.

    Oil is cheap right now for some very basic reasons. One , the economy is sluggish to actually ill on a world wide basis- plus efficiency and conservation measures plus substitution are taking effect faster than expected – fast enough to influence consumption short term. I have a friend with a new Corvette that gets better gas mileage than a new Pinto I owned back in the eighties. You can’t buy an oil furnace anymore without ordering it weeks in advance- heating and air contractors no longer keep them in stock. It’s all heat pumps now.

    Two , oil buyers buy on CURRENT needs rather than ( irrelevant bullishit ) projected needs years from now.

    Three , oil companies are compelled to sell into the CURRENT market at the current price if they want to sell at all.

    Production has held up better than expected and consumption has failed to grow as fast as expected the result being an unexpected market glut.Given that oil demand is highly inelastic the price has necessarily fallen off a cliff in order to support the consumption of the amount currently being produced.

    This is basically ag econ 201,202,203 from back in the sixties. I took this course in the same classroom at the same hour as the econ majors and it was taught by an econ professor. Nobody ever explained why it was called ag econ for ag majors and just econ for business majors.

    The real question is how long it will take for the oil industry to contract sufficiently to reduce production enough for the price to go back up again. Depletion never sleeps and some companies, maybe most oil companies are running at a long term loss. My seat of the pants guess is that prices will be back up to the hundred bucks class within a year or two assuming the world economy gradually recovers from the flu rather than having a stroke or a heart attack.

    My guess is that Old Man Business As Usual will get over his current health problems to the extent growth will resume and continue for a few more years yet.

    But we must not forget that OLD MAN BAU IS OLD and that oil is not the only depleting natural resource. BAU is a dead man walking barring a successful transition to renewable energy or to nukes which are arguably renewable in some respects.

    We may have another decade or two before the energy shit hits the economic fan hard and fast. Maybe not that long.

    • BigComfySofa says:

      Many companies will buy hedges to protect themselves from changes in oil/fuel prices. This is effectively the same as buying X gallons of fuel for Y dollars (usually close to the current price) for months or years in the future. This means that a lot of crude oil, gasoline, jet fuel, etc. is bought at the current price, and the current price is affecting future volumes of these commodities.

      This is one reason why U.S. airfare has not decreased very much compared to the cost of gasoline: airlines hedged in higher prices and now have to wait to buy cheaper jet fuel due to their contract limitations. Also the same reason why U.S. oil producers haven’t completely shut down their crude oil production: even though day-to-day traders are buying contracts at $45-50/Bbl, their hedge contracts allow them to effectively sell oil for $75-$100/Bbl (depending on when they hedged). Many of these hedges are set to expire in 3Q-2015.

    • Willem Post says:


      Regarding stuff hitting the fan, you are too pessimistic. Countries will extract coal, oil and gas for many more decades, at least about 100 years, while RE systems are being built out, and conservation and efficiency kicks in.

      That means fossil fuels will gradually become a less and less percentage of world total energy generation.

      • Ed says:

        I would say that SOME countries will be extracting coal, oil and gas for many decades. How many of them will be exporting the stuff in a few decades time ? Specifically, how many net oil exporters will there be in 20 years time ? None ?

        A Citigroup report a few years ago predicted that Saudi Arabia (the largest net exporter of oil) would be using all its production for itself by 2030.

        Jeffrey Brown has written extensively on the topic.

        • Glen Mc Millian says:

          I agree with Ed that SOME countries have enough fossil fuels and other natural resources to supply their own essential needs for quite a while yet -maybe even as long as a century in some cases.

          But if anybody has come up with a good counterargument to Jeffrey Brown’s Export Land Model I have not yet seen it.

          We might not have enough one time gifts of nature left even in countries such as the US and Canada to manage a successful transition to a renewables based economy – although I am personally optimistic that it is technically possible for us to do so.

          But I wouldn’t get trapped in Egypt or any other similarly situated country for seventy two GOOD looking virgins.

          Such countries have almost nothing to export long term to pay for the food they aren’t capable of producing for themselves due to population overshoot.

          I hope Willem is right about fossil fuels lasting long enough for renewables to get built out on the necessary scale – but I don’t personally believe it will happen in most parts of the world.

          The ” progress” ambulance is almost for sure going to run out of gas on the way to the ” technology ” hospital the optimists are counting on to save us in the collective sense.

          The population of the world is very likely to shrink substantially over the next century or two.

          A few rich countries that still have remaining substantial resources plus good wind and sun resources plus the ability to defend themselves plus well educated people and stable governments MIGHT wise up and get REALLY moving in time to manage a successful transition to renewables.

          I have asked a number of physicists and all of them are confident that a renewables based economy is technically feasible but none of them would go so far as to predict a successful transition.

          In any case I personally believe that with a long term war time type effort at least a few countries such as the USA , Canada, Brazil , etc could manage a successful transition.

          We will have to lower our per capita energy consumption by half or two thirds but this is easily doable in the technical sense by diverting resources currently devoted to luxury goods such as large cars to mass transit and or electric vehicles mostly charged by wind and solar power in the case of personal transportation.

          Most houses can be refurbished to use half or less as much energy as they do now for the price of one nice new car and a new house can be built to use very little energy not produced on site or nearby.

          If I could find buyers for them I could produce apples on my farm for half the current wholesale average price using half the energy – simply by using less chemical inputs. Unfortunately shoppers insist on picture perfect produce- FOR NOW. I expect this will change and that a few decades down the road most folks will be glad to have a nice apple that tastes just as good but that is not quite so perfect on the outside.

          One truck load of potatoes turns into ten truck loads of potato chips. When diesel fuel gets to be expensive enough potatoes will still be affordable compared to potato chips because the cost of processing, packaging and transporting chips accounts for most of the price of them.

          We can and will live on a lot less energy per capita. We don’t have any choice barring miracles on the technology front.

          • A C Osborn says:

            You doom & gloom guys make me laugh.
            Was finding & using “Coal” a miracle?
            Was finding & using “Oil” a miracle?
            Was the invention of the “steam engine” a miracle?
            Was “Electricity” a miracle?
            Was the “Petrol Engine” a miracle?
            Was the the “airplane” a miracle?
            Was the “computer” a miracle?
            Was “space flight” a miracle?
            Was the invention of “Penicillin & Antibiotics” a miracle?
            Was “Fracking” a miracle?
            Was “Atomic power” a miracle?
            Satellites?, Mobile Phones?, Televisions?, Xray machines?, CAT Scans?,the list is just too long.

            The answer to all those questions is Yes & No, to us they were just “progress”, to someone from the 1700/1800s they were miracles.

            So you think that the human race has no more “miracles” left in it then?
            Well for a start how about Methane Hydrates?
            How about Thorium Reactors?
            How about Molten Salt Reactors?
            How about LENR?
            How about Biotic Energy?
            And they are just the ones we know about.

          • Euan Mearns says:

            AC – I think you can forget about methane hydrates.

          • A C Osborn says:

            Euan, it is the old story of “needs Must”, when the price of Coal & Oil get very high it will make financial sense to go for hydrates, unless there is a mass build out of some kind of Nuclear, which doesn’t look likely.
            Something has to provide Base Load unless there is some “miracle” in energy storage instead, who knows?

          • Euan Mearns says:

            This one I believe will come down to ERoEI – a thermodynamic limit. If we use more energy to get the stuff than comes out then it will not happen. Sometimes we do this where there is an upgrading of energy quality. Going after hydrates will mean burning oil, lots of it, to get at a little gas.

          • Ed says:

            I just worked out the renewable energy figures per capita per day for the UK in 2013 for those that are interested.

            We produced 53.7 TWh shared between 64.1m people. This works out as 2.29 kW/day per person. (an increase of 29% over 2012, which was 1.78)

            To put this is prospective. 1kWh/day would be enough to light a 40W lightbulb each day. We current consume about 200 kWh/day each on average. (ref: David Mackay, renewable energy without hot air)

          • louis says:

            unless there is a mass build out of some kind of Nuclear, which doesn’t look likely

            As with Iran who have been fighting a sanctions battle
            for the last 30 years or so, national role out seems unlikely for any nation not already at the table leaving global role out a near impossibility.
            ….. but of course this is still only electricity.

  6. Bill says:

    Typo in figure 1 description.

    “The oil price hit $10 per barrel in 2008.”

  7. Rob says:

    I watch the country of manufacture of my shopping. There was a period a few years back where just about everything was made in China. Is some of the slow down in China attributable to the fact that their production costs have gone up and they are no longer able to compete on price alone? Might it be that the slow down is due to the population demanding higher wages rather than lack of purchasing power in the countries buying the goods? The goods are still being made elsewhere – that I buy anyway

  8. louis says:

    I think the end of the programs of Quantative Easing are starting to show through.

  9. Ed says:

    Bollocks. Made a typo on my previous comment. It should read “This works out as 2.29 kWh/day per person.” Forgot the “h”. I do know the difference between energy and power, honest.:(

    • A C Osborn says:

      Wow, 53.7 TWh, that is 6.05GW per hour, 24 hours per day 365 days a year.
      Which is nearly twice what it has produced in the last 12 months.

      • Ed says:

        Not sure what your point is, A C. My mathematics is correct, if that is what you are getting at.

        2.29 kWh/day per person in the UK from renewables compared to 200 kWh/day that we use in total on average. That is just over 1% of our energy consumption coming from renewables.

        Even if renewables were to undergo 4 doublings, i.e. from 2 to 4 to 8 to 16 kWh/day per person it would be barely enough cover our basic essential energy needs for 64 billion people without fossil energy.

        • Ed says:

          I meant 3 doublings 2 to 4 to 8 to 16, sorry

        • A C Osborn says:

          Ed, was expressing surprise at the 53.7 TWh during 2013.
          As I said it equates to over a continuous 6GW/hour, but Gridwatch only has about 2.8Gw/h for renewables.
          So off grid and solar must have supplied the other 3.2Gw/h.

  10. At what point does improvements in efficiency become part of the equation. China as been for many years considered a very inefficient economy from the point of view of energy. They are trying to reduce pollution, and it would stand to reason that even if they are not focused on efficient, it would be achieved as a side-effect.

    That would allow them to maintain a growth rate, yet possibly use less energy.

    Or said another way, if they have a 7% growth rate (and that is low for them), and energy efficiency is flat, how is it that their use of oil is flat. That makes no sense. It should be growing at 7%. Unless one of those two charts is a lie.


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