Filtering

The few news sources I follow are heavily filtered, and I like it that way as long as I stay mindful of that fact. I tend to make my own highly compressed mental summary of what I’m reading, to file away along with a note about the biases I’ve detected in that source. Often the source says exactly what I expect it to say, and I don’t bother noting it at all. But occasionally an item will trickle through which is so surprising that I’ll spend a fair amount of time learning in more detail about the matter. My recent reading about Peak Oil and the possibility of economic collapse is an example of that.

I like the Daily Reckoning email newsletter because it is generally a quick read, takes a jaded approach to the latest round of irrational exuberance, and once or twice a week offers a bit of information that surprises me enough that I spend some time trying to integrate it with the rest of what I’ve learned. Friday’s email contained an example of this:

  • Output from Chinese factories, mines, and utilities in May was 18% higher than it was a year ago.

  • Overall, the Chinese economy was growing at an 11.1% annual rate during the first quarter of 2007.

  • Honda’s Chinese plant will boost production by 71% this year.

  • China has $1 trillion in trade reserves, earning an additional $1 billion daily.

  • In India, industrial production has been growing at a 13.6% annual rate in 2007.

Not in this email, but something I remembered, is that the U.S. economy grew at a 0.6% annual rate in 1Q 2007.

Why be bothered that the Chinese and Indian economies are growing so much faster than ours? Well, another set of numbers has been haunting me for a couple of weeks, namely per-capita oil consumption by country, In the U.S. we consume 25 barrels per person per year, while in China it is 1.75 barrels, or 7% of U.S. consumption, and in India it is 0.8 barrels, or 3% of U.S. consumption.

Now, both China and India seem to be striving for Western levels of affluence, and their economic growth rate indicates they are off to a good start. Assuming that oil consumption is one measure of such affluence, to reach the U.S. level China will have to increase its consumption more than fourteen times, India more than thirty-three times. And keep in mind that both countries are about four times as populous as the U.S.

Right now the world consumes thirty billion barrels of oil per year, with the U.S. consuming 25% of that (7.5 billion barrels). If China were consuming at our level, it would use 32.5 billion barrels; for India, it would be 28 billion barrels. In other words, to operate at U.S. levels both of those countries would require what is currently the world’s total annual output.

So, in order for India and China to join us in our affluence, the world oil fields will need to triple their current output. Even setting aside the peak oil scenario, which says that we are currently or soon will be at the point where oil output cannot be increased, it is reasonable to assume that tripling world production is not likely. Which means that there will be competition between nations for what oil the world is capable of producing. How fierce the competition might be depends on how far short we fall of tripling output.

One of the surprises that set me to pondering the oil situation was James Howard Kunstler’s observation that current oil prices are lower than they might be because of “demand destruction,” a polite way of saying that some poorer nations have simply been priced out of the oil market and are no longer adding to market demand for oil. Which leads me to the punchline of today’s post: will the U.S. eventually become one of those countries that is priced out of the oil market? When you think about how many U.S. dollars are floating around, it seems unlikely that there won’t be some price at which we can buy oil. But that only works as long as the world has a taste for dollars. If we think instead in terms of stuff that people want, it looks like China and India are producing an awful lot of it, while we aren’t producing much of it at all. If the oil producers begin demanding stuff (or currency backed by stuff) in payment, we may find ourselves hard pressed to come up with anything they’ll take in exchange.

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