Supercycle Or Not, Expensive Oil Is Unavoidable

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Charles Morand

In an upcoming article in the journal Resources Policy, David Humphreys, former Chief Economist at Rio Tinto and Norilsk Nickel, argues that skeptics are right to question the notion that mineral prices in the 2003 to 2008 period were rapidly uptrending as part of an emerging multi-decade supercycle.

He argues that the rise in demand underpinning steep mineral price increases had two distinct causes: (1) an “extended economic upswing” driven by an ample supply of cheap credit (we know now where that got us); and (2) a “deeper-rooted structural shift in the economy” resulting from the growing industrialization and urbanization of emerging markets, driven in large part by a labor cost advantage.

While Humphreys agrees that mineral resource prices may not continue to increase sharply – once the world emerges from recession – for the next 20 or 30 years as would be the case if we were engaged in a supercycle, he nonetheless disagrees that once supply catches up to demand things will go back to “normal”.

Supply catching up to demand means prices reflecting the industry’s marginal production costs, or the costs of extracting each incremental unit of resource. Although the increase in  mineral prices may not go on for decades, the author argues, there is nonetheless a high probability that the new “normal”, when marginal production costs stabilize, will mean substantially higher prices than the old “normal”, and that this will become the new reality.

The insight provided by Humphreys applies equally well to oil and gas. Unconventional  resources such as oil sands, shale gas and deep offshore drilling, while they will certainly help alleviate the supply-side impact on prices of declining production in conventional fields, will appreciably raise the industry’s marginal production costs, thus contributing to higher long-term prices even if stabilization occurs in a matter of years rather than decades.

Either way – whether we are engaged in a supercycle or not – we can now be fairly certain that we are entering a world where some of the natural resources that were essential to our becoming industrialized and wealthy will no longer be cheap, save for the odd recessionary period.   

The impact on the prices of final goods will vary based on how labor-intensive they are; for many manufactured goods, cheap labor in emerging markets will continue to limit the price impact of more expensive commodities, whereas for goods where commodity costs account for the bulk of final price the impact will be much more direct.

One of the industries that will be most heavily impacted by this is the car industry because of high gasoline prices. Given all of the hurdles that currently stand in the way of electrification, there is a good chance that we reach, within the next few years, a point where drivers are hit really hard in the wallet by high gas prices but not quite hard enough to justify the much higher expense – both in terms of money and foregone conveniences like trunk space and unlimited range – of an EV or PHEV.

The most likely winner from this, in my view, will be mass transit. As I argued in an earlier article on Obama’s high-speed rail plan, mass transit is to transportation what efficiency is to energy; although a renewable kWh is good, an avoided one is even better, and so it goes for EVs/PHEVs.

There are three stocks that I see as potentially major beneficiaries from a growth in mass transit – two rail stocks and one bus stock. The two rail stocks are Bombardier (BDRBF.PK) and Alstom (AOMFF.PK), which I profiled earlier this year. The bus stock is New Flyers Industries (NFYIF.PK), which Tom profiled last year. All three stocks will see material positive earnings impacts from growing expenditures on mass transit, unlike Siemens (SI) that, despite a strong position in rail, is highly diversified outside of transit and unlikely to see success in rail move the needle substantially on the earnings front.

As Tom pointed out in his article on New Flyers, it will take a lot for Americans to change their lifestyles and driving habits. However, all signs point to the fact that “a lot” is what we have coming our way – in fact, it will become the new reality and will have crippling economic impacts if we don’t find a way to adjust. Moreover, Americans are no longer the only consumers that matter – North American cities are growing more slowly than Asian ones, our population will most likely begin to decline sometime in the next few years and wealth creation is increasingly shifting to Asia. Many emerging markets are already embracing mass transit and will have a much bigger stake than we do in trying to limit the impact of secularly high oil prices on their economic development.

DISCLOSURE: None                      


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  1. I agree with your logic, but expect a different outcome. While I’m personally rooting for a shift toward mass transit in the US, the trends seem to suggest that it will take more than expensive gas to get consumers out of their cars and on to trains and buses. Consumers are faced with a big financial premium to switch to the first generation of plug in vehicles. However, what is preventing consumers from shifting to the affordable, small, fuel efficient vehicles available today?

  2. I don’t agree entirely with your claim that: “it will take more than expensive gas to get consumers out of their cars and on to trains and buses”, although you are right that high gas prices won’t lead to an explosion in public transit usage overnight.
    Take the following quote from the American Public Transport Association (
    “From 1995 through 2008, public transportation ridership increased by 38% — a growth rate higher than the 14% increase in U.S. population and higher than the 21% growth in the use of the nation’s highways over the same period.”
    APTA has data on this on its website and I haven’t analyzed it in detail yet, but I suspect that growth in public transport usage that was ~2.7x larger than population growth and 1.5x larger than growth in national highway usage was at least partly due to higher energy costs in the past 5 years.
    Of course, nothing precludes Americans from getting small fuel efficient cars. But the same argument can be made here; high gas prices alone won’t lead people to get rid of their existing vehicle overnight, especially if they have a few more years to go.
    The growth of small, fuel efficient cars will be a gradual process, and I suspect that along the way many households are going to take a hard look at public transit, especially if expensive gas becomes the norm. I certainly don’t see the two phenomenon as being mutually exclusive.


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