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China, not U.S., key to global oil demand

A coal-burning power plant can be seen behind a factory in the city of Baotou, in China's Inner Mongolia Autonomous Region October 31, 2010.

David Gray/Reuters

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 make 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.

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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 per cent 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.

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More and more, that place looks like America.

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