China, Not U.S., Key to Global Oil Demand

Posted by Jeff Rubin on June 1st, 2011 under SmallerWorldTags: , , ,  • 10 Comments

What’s more important to world oil demand- gasoline prices in the U.S. that are nearly $4 a gallon, or power rationing in China?

To Americans, of course, it’s the former. But to world oil markets, the latter may be a far more significant indication of where oil prices will be heading this summer.

At today’s pump prices, it’s a safe bet U.S. gasoline consumption during the peak summer driving season will be lower than last year. One of the ironies for U.S. motorists is the relatively low taxation rates on gasoline makes their pump prices more sensitive to rising world oil prices than pump prices in higher taxed jurisdictions such as Western Europe or Canada. That makes U.S. gasoline demand one of the most price-sensitive in the world.

Four dollar per gallon gasoline prices will curb Americans’ appetite for oil, as well as squeeze out a lot of other spending by the U.S consumer. But as the U.S. continues to pare back its oil consumption, other economies will seek a bigger share of the pie from a near static world oil supply. With power shortages spreading in China and Japan, as well as India and Pakistan, demand for diesel fuel is soaring in power-starved Asia.

While few places in North America burn triple digit oil to generate electricity, many places in Asia still do. Even more do when coal-powered grids start to ration power to major industrial users like what is occurring in China right now..

Past power outages have bumped up China’s diesel consumption by as much as another 600,000 barrels/day once power rationing spurs the use of back up diesel generators. And this summer’s power shortages could be bigger than 2004, which temporarily blacked out huge swaths of the Chinese economy.

When you throw in more demand of another 200,000 to 300,000 barrels a day for diesel from Japan to compensate for sidelined nuclear reactors, it is not hard to see nearly a million barrels a day of additional oil demand coming from the power needs of Asia’s two biggest economies. And that doesn’t even begin to include the demand for oil from another 18 million cars on the road in China from new sales this year.

Guess where much of the oil to meet all this new Asian demand is likely to come from?

With little, if any usable excess capacity in OPEC, world crude demand is already on the verge of outpacing world supply. In the resulting zero sum world, conflicting trends in oil consumption between the world’s two largest oil consumers, the U.S. and China, will not be the exception but the norm.

If the Chinese economy is going to continue to increase its oil consumption by 10% a year, another economy will have to cut back its oil consumption by a comparable amount to make room for the increase in Chinese demand.

More and more, that place looks like America.

  • Rojelio

    At what point does China need to send their military all over the middle east in order to keep guzzling? Presumably that’s what allowed the US to consume  20-some % of the world’s daily supply. Will China attempt to take over this role?

  • Rojelio

    At what point does China need to send their military all over the middle east in order to keep guzzling? Presumably that’s what allowed the US to consume  20-some % of the world’s daily supply. Will China attempt to take over this role?

  • Woodsjulie2000

    Rojelio, I often wondered about that, and also when China will annex Australia for its coal. 

  • Unc

    Jeff, the big squeeze for energy is indeed happening, as we speak, India is also scramble-ing for energy, paying 12 buck a unit for natural gas shipments compressed, the demand for energy is ramping up big time, germany is faze-ing out nuclear generation after the didi in japan, If even 20% of all nuclear power generation world-wide, gets phased out, that is a huge chunk of generating capacity that will have to be replaced, people world wide like there lights on and like driving cars and on and on.Ah yes, the world is getting smaller. Unc. fsj bc

  • Doctor Torpedo

    Hi Jeff, Read your book, and now follow your blog. Thanks for the good work. Don’t know if you saw the Devilish Packaging, Tamed story from 1 June. Thought you might be interested.

  • GTI

    they won’t.
    Maybe because the “Anglo world” will defend Australia
    or maybe the Chinese are good enough in math to figure out that it is cheaper to buy the resources than use them on military adventures that will bankrupt them (like $300 to $400 gallon of gas for US troops in Afganistan -that’s right, google it)
    there is no need to “defend” the oil, they have nothing else to sell but sand
    but they have every right not to sell it to us, it is theirs, not ours
    and that, is a big problem for westerners who have had their way for centuries at others’ expense
    time to adjust our way of life

  • Rojelio

    Ok, the catastrophic policies of the US aside, how would “just buying the oil” allow China to consume way more than its fair share of the dwindling global supply? Isn’t this something that they would need to do in order to continue their high growth rate and perhaps become the next empire?
    Or maybe the days of the global empires are over. Our industrial methamphetamine trip grinds to a halt.

  • GTI

    they will do what rich people do when they want something, they can outbid poorer people. They have the financial resources and they have the manufacturing base to trade things needed by the people with oil. Military adventures in far away places need a lot of oil to make that work, wars are won or lost more through logistics than great generals and moreso when oil keeps going up and is harder to get. But never underestimate the ability of narrow minded generals to convince the powers that be that they can win. Just look at the US in Korea, Vietnam, now Iraq and Afganistan. And you can go back as far as recorded history and see that repeated over and over again. But the Chinese have never been a world wide expansionary power like the Europeans or Americans, they don’t want to control your politics, they just want to do business. Now if we could only get the US and UK to think the same way………………

  • Nuno

    Not just US, Europe as well… 

  • Rojelio

    I guess the point I failed to make above was that the only reason that the US is even able to overconsume so much is (or has been) because of military domination. How else does the US consume something like 20% of all the oil consumed globally every day?
    I wonder if China may find it difficult to “just buy” as much as they need without spending on military capabilities just like the US has for so long.

    Actually the Chinese have tried their hand at being an empire if you go back far enough (~200BC) but what the Chinese have been in the past have nothing to do with the new world coming soon.