Some of you may know that over the last 3 or 4 years, I wrote extensively about our precarious oil supply. Since then I've broadened my outlook in so far as it's hard to choose among all the potential disasters on our doorstep. See my post Bombs Away! I continue to do "serious" work related to oil. For example, see my Economic Growth and Climate Change — No Way Out? and pay particular attention to section 4, Is Business As Usual Likely in a Peak Oil Scenario? Complexity warning! This paper is long and technical, but it's worth the pain if you care about the subject.

I still keep up with oil stuff. So, when I saw the New York Times' Demand For Oil Set to Rise Anew, I'd thought I'd take a look-see. It started off with the usual blah, blah, blah—

NEW YORK — Chinese oil demand is once more growing fast, rebel militants are threatening to attack pipelines in Nigeria, and tensions are again rising in the Gulf. Recent headlines are increasingly making it seem like 2003 all over again.

In recent times, oil has taken a back seat while the world has focused on the recession. As economies slowed, oil demand fell for two consecutive years, the first time that has happened since the early 1980s.

Now, as much of the world emerges from recession and as geopolitics and threats to energy supplies return to the fore, oil consumption is expected to rebound again, driven mostly by Asia and the Middle East.

But the market is better equipped to handle the stresses this time around.

Thanks to the slowdown in energy consumption, OPEC producers now hold an estimated six million barrels a day of spare capacity, equal to roughly 7 percent of current demand, much of it in Saudi Arabia alone.

Better equipped? That got my attention. I seriously doubt there is 6 million barrels-per-day of spare capacity, but I've read this nonsense from reporter Jad Mouawad so many times before that my eyes glaze over whenever I see it again. If Jad knew anything about oil, he wouldn't be writing for the New York Times.

No, I was eager to skip down to the Daniel Yergin quote section—The Jadster always quotes Danny Boy—so I started skimming. And there it was—

This year, the International Energy Agency expects oil demand to grow by 1.4 million barrels a day, to 86.3 million barrels a day, or 1.7 percent higher than last year, mostly reversing a drop of 1.3 million barrels a day in 2009 and 300,000 barrels a day the previous year.

But none of this expected growth will come from consumers in the United States, Europe and Japan. For industrialized nations, which account for 60 percent of global oil demand, energy-saving measures, government subsidies for renewable fuels and declining populations mean that oil demand is unlikely ever to grow again.

“We’ve really hit peak demand in developed nations, and so the name of the game now is China,” said Daniel Yergin, the chairman of IHS
Cambridge Energy Research Associates. “In terms of the dynamism of the market, the vector of demand will be China and the dynamo of supplies is Iraq.” 

Well, OK. I guess we have hit peak demand in the OECD (developed) nations. Not mentioned is the reason for that historically significant change: many of those nations are, economically speaking, up shit creek without a paddle. But what about this "dynamism" of the market? If you've never read a Yergin "old hand" quote before, this is a perfect example of its type. He sounds so experienced, so erudite, and yet he says nothing at all. And there was also that suspicious the dynamo of supplies is Iraq part.

Let's zero in on what's being assumed here. Jaddie continues—

More than ever, what happens in the next few years to China will be central to the direction of the oil markets. From 2003 to 2008, more than half the growth in oil demand came from China, according to analysts at Raymond James. Even last year, when demand in most of the world shrank, China was the only major economy to see strong growth, with its oil consumption rising 5.7 percent. This year, analysts expect Chinese oil demand to grow at an even faster pace.

In 2009, more cars were sold in China than in the United States, something most analysts did not expect to see before 2018 or 2020, said Mr. Yergin. If China continues at its current pace, he said, it will be consuming more oil than the United States by the end of the decade.

“That will happen unless they step up on the gas in terms of energy efficiency and electric cars,” Mr. Yergin said.

Now, if someone says to you that China will be consuming more oil than the United States by the end of the decade, what comes to mind? Can you literally see the CO₂ spilling out into the air? Do you have nightmarish visions of traffic jams in Shanghai?

The United States consumes about 19 million barrels-per-day now. China consumes about 8. The difference is 11. If we stay at 19, and China requires 11 more, for a total of 38, that dynamo of supply called Iraq will have to produce most of the difference, because I can assure you, nobody else will (net of global production declines).

I may not know much—the Bilderbergers, including Danny Yergin, would certainly agree — but I do know one thing, and I think you will agree with me on this: if your future supply dynamo is Iraq, you are in some deep, deep shit.

Can Iraq produce anywhere close to the required 11 million barrels-per-day? Of course not. Here I've got to give the Jadster some credit. He actually spoke to sombody other than Yergin.

“Iraq’s return changes the market’s dynamics,” said David Kirsch, an energy analyst at PFC Energy, a consulting firm in Washington.

The government aims to raise output rapidly and to rival Saudi Arabia by the end of the decade, with production increasing to 12 million barrels a day, from about 2.4 million barrels a day currently.

Petroleum executives do not believe in this optimistic scenario. In private, they point to Iraq’s lack of pipeline infrastructure and export terminal capacity to accommodate such a rapid growth, and a shortage of workers with the skills to sustain the planned ramp-up in production. And though the security environment has been getting better, there remains huge uncertainty about the country’s political stability.

But if Iraq and its foreign partners manage to increase production by just 1.5 million barrels a day over the next five years, a modest but possibly achievable target, that extra output would greatly relieve the long term pressures that pushed oil prices into triple-digit territory just a few years ago. Even at these relatively low levels, Iraq would account for half of the expected growth in oil needed from OPEC producers, Mr. Kirsch said.

Ideally, if every damn thing goes right that must go right, you might expect Iraq to double its output (to about 5 million barrels-per-day) by 2015. But everything must go exactly according to plan for this to happen, so in reality we'll probably get that extra 1.5 million Jad refers to.

Here's the deal. Once we run through the current spare capacity, the oil supply then and for the rest of your life is essentially a Zero Sum Game. If China uses more, someone else must use less. Future prices will determine who the Biggest Losers will be if China's demand grows as expected.

Now you understand it. This is the no-frills explanation.