In their June report, the IEA warned that unless OPEC could increase production by at least 1.5 million barrels a day, world oil demand is going to surpass available supply during the second half of the year.

It means if there is not enough supply to match the 89 million barrels of oil the global economy is expected to burn every day, world oil prices have only one direction to go.

With no obvious end in sight to the Libyan conflict, and sectarian violence against oil fields and refineries suddenly on the rise in Iraq ahead of the scheduled U.S. troop withdrawal, the prospects are not promising for OPEC to increase supplies. This is even more evident given the region’s largest producer, Saudi Arabia, has little more to offer other than unwanted sour, heavy oil to add to the global supply mix.

At the same time, emerging power shortages sweeping across Asia will boost oil demand even when most major Asian economies are slowing, including the continent’s largest two economies, China and Japan. While an economic slowdown normally tames oil demand, both countries now face acute power shortages that will compel them to burn more diesel fuel to compensate for reductions in other forms of power generation.

In China, widespread drought earlier in the year has constrained hydroelectric power, while nearly two thirds of Japan’s nuclear power plants are currently, and for the foreseeable future, off-line, boosting that country’s appetite for diesel by hundreds of thousands of barrels a day.

With Brent crude prices having crossed into triple digit territory since the beginning of the year, fuel and power shortages are popping up around the world with increasing frequency. And they are beginning to exact a heavy economic toll.

In Pakistan, power shortages have ground the economy to a literal halt. Meanwhile, Japanese companies have already been ordered to cut back their power consumption by 15% this summer. And China is bracing itself for the worst power shortages since 2004, which triggered widespread economic disruption.

With the prospect of even a tighter oil market over the balance of the year, the IEA is warning motorists in member countries to get ready to pay more at the pumps. And the IEA has already suggested it might release additional oil from its strategic reserves to moderate further price increases.

But considering the recent release of 60 million barrels from member countries’ strategic stockpiles could barely hold down Brent world oil prices for more than a week, the IEA may have to come up with something a little more substantial the next time than the fuel equivalent for another 16 hours of world oil demand .

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.

It’s the kind of low margin manufacturing that is never supposed to come back after it leaves North America for cheaper labour abroad.

But wage costs are no longer everything they were cranked up to be. In today’s world of soaring energy costs, power rationing and export taxes on key commodities such as wood, wage gaps are less important. When the power goes off, it suddenly doesn’t matter if your labor is expensive.  Factories don’t run on sweat alone.

As the price of the bunker fuel that transports those ice creams sticks to customers around the world tracks soaring world oil prices, the distance between your factory in Dalian and North American kids lining up at their neighborhood ice cream store,  becomes more expensive every day.

When the price and availability of energy start to dominate your business plan, you say goodbye to your inexpensive Chinese labor force, and pack up and leave.

Of course, not everybody can leave. Those that stay are bracing for what China’s Electricity Association is warning will be the nation’s largest power shortage in years this summer.  As many as 20 provinces and territories have already been put on power rationing, including the country’s industrial heartland.

The provincial government in Zhejiang, a manufacturing hub close to Shanghai, has notified 44 major industries about limits on their power consumption. Companies that exceed these limits face prohibitive power tariffs that would threaten much of the region’s low margin manufacturing. The story isn’t any different in Guangdong, south China’s manufacturing hub. Its industries must also cope with limits on power usage.

It won’t be long before all that power rationing starts to curb economic growth, particularly in the power-intensive centers of China’s  industrial production such as aluminum and steel.

The failure of regulated power prices to keep pace with soaring world coal prices lies at the heart of the China’s power crisis (as well as in similar power crisis sweeping neighbouring India and Pakistan.). Chinese power prices have gone up as little as 1/10 as the rise in world oil prices.

Not only is this practice economically untenable for coal fired power generators, who supply over three quarters of China’s power but it encourages unsustainable rates of coal consumption.  Last year, the power hungry Chinese economy burnt a staggering 3.2 billion tons of coal.

Beijing has already warned the country may soon hit peak coal production, forcing greater reliance on ever-more costly imports. In the meantime, China has banned the export of diesel fuel, which may soon be needed for power generation.

As China’s power crisis worsens this summer look for more firms such as Global Sticks to relocate production and come back home.

Higher prices are supposed to encourage more world supply. It’s standard textbook economics. But what happens when instead of export-oriented global firms, it’s governments that control supply. They may not respond to price signals the same way as profit maximizing companies. n fact, they may respond in the exact opposite way.

Instead of soaring food and energy prices encouraging food and energy producers to export more, they may export less and divert more of their output to domestic markets. The reason is simple: to keep domestic prices from matching soaring world prices.

When it is luxury consumer good prices, governments aren’t compelled to intervene But when it is food and energy prices, the political pressures become immense.  They are so immense you can toss your economics textbook out the window.

During the food crisis of 2007 and 2008, record grain prices should have pulled food supplies out of world granaries like never before. Instead, no less than 29 food-exporting countries responding by banning food exports and kept their crop production for a hungry domestic market. As a result of that diversion from export markets, food price increases in those countries lagged well behind the ascent in world prices. Economists may not have approved but the populace did.

Of course, the loss of supply from those countries made world food prices climb that much higher. And food-importing countries that secured supplies, quickly started to hoard them in anticipation that more food exporters would decide to keep their crops at home.

Now we are starting to see the same pattern of export restrictions emerge in the energy industry.

Growing fuel shortages in Russia have prompted the world’s largest oil producer to effectively ban gasoline exports, imposing a prohibitive 44% export tariff on them. Meanwhile, Beijing has suspended exports of diesel fuel indefinitely in anticipation of surging domestic fuel demand during the coming peak summer season. That means places like Singapore and Vietnam have to look elsewhere for their fuel.

In April, China’s largest refiner, state-owned Sinopec, halted all exports of refined oil products. This month, China’s state planning agency, the National Development and Reform Commission, told all state oil companies to stop exporting diesel. The official reason was “to maintain social stability and promote economic development”. Apparently refinery margins aren’t part of the equation.

The export restrictions in both countries are designed to prevent domestic refineries from taking advantage of much more attractive refinery spreads for gasoline and diesel elsewhere in the world.

So far, these restrictions have only affected refined products such as gasoline or diesel. But it leaves you wondering where this is heading as energy supplies becomes scarcer.

Will triple digit prices soon halt the free flow of crude oil the same way soaring crop prices halted the free flow of food?

The obvious answer is it will take a big chunk out of the 19 million barrels the U.S. economy burns every day. And China doesn’t have to build a blue water navy or engage in an arms race to take a big slice of the U.S.’s energy pie . All it has to do is stop showing up at the U.S. Treasury auction, and Washington’s massive budget deficit will do the rest.

Despite all the bashing China takes in Congress, it’s big bad China that finances Washington’s massive one trillion dollar plus budget deficit. It has for some time. Almost two thirds of the Peoples Bank of China’s $2.85 trillion foreign reserves are in U.S. dollar assets.

These investments have not been an act of benevolence towards U.S. taxpayers. China’s central bank felt compelled to become the largest holder of U.S. Treasury bonds to keep its Yuan from rising and undermining the competitiveness of Chinese exports in the U.S. marketplace. But that was in a world of cheap oil.

We live in a different world now. Not only will triple digit oil prices sever those trans-oceanic trade links through soaring transportation costs but they will throw the U.S. economy back into recession. Contracting economies, particularly those also burdened with huge fiscal deficits, don’t make great trading partners.

Without access to the huge pool of Chinese savings, the U.S. is no more capable of financing its fiscal deficit than the PIGS (Portugal, Ireland, Greece or Spain) are capable of financing theirs. If China stops funding the Treasury market, Treasury yields will soar, pulling mortgage rates with them.

The Federal Reserve Board could always respond by switching the printing presses to overdrive and monetize even more of Washington’s deficit than it is already doing. But the more money the Fed prints, the lower the value of the U.S. dollar, and the higher the US dollar-denominated price of a barrel of oil.

That just puts the price of oil that much farther out of U.S. motorists’ reach, while a soaring Yuan would give China’s motorists a big currency-adjusted discount at their pumps.

Alternatively, China’s exit from the Treasury market might just prod Washington into real action on cutting its deficit. But if that path is taken the actions needed to reduce the one trillion dollar budget deficit will become as much a yoke around its economy as the PIGS deficits are on their economies.

PIGS don’t get to burn 19 million barrels a day of oil because their economies are shrinking. If China wants to burn more oil, all it has to do is walk away from the U.S. Treasury auction and take what the U.S. economy will no longer be able to afford to burn.