Paul Krugman meet Matthew Simmons: Welcome Aboard the China Express

Today, Paul Krugman makes a prima facie case for peak oil: The Oil Nonbubble:

The only way speculation can have a persistent effect on oil prices, then, is if it leads to physical hoarding — an increase in private inventories of black gunk. This actually happened in the late 1970s, when the effects of disrupted Iranian supply were amplified by widespread panic stockpiling.

But it hasn’t happened this time: all through the period of the alleged bubble, inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth.

In Twilight in the Desert, Simmons asserted the obvious: Oil is a non-renewable resource. The age of oil will end. The question is when. Because of the importance of oil to the global economy, Simmons asked that OPEC, particularly Saudi Arabia, open its oil books: What are the facts concerning the great oil fields in the desert? Have they peaked or are they close to peaking? How much time do we have?

Or has the demand for oil–particularly from emerging economies like China–meant that production is barely keeping pace with demand? How long can this continue before the price of oil moves even higher.

None of these questions have been answered. Production capacity remains a state secret, despite the fact that George Bush, hat in hand, has asked the Saudis to increase production, not much has happened.

Certainly, the actual cost of production has risen. Even the tar sands looks increasingly expensive–and we have yet to factor in fully the environmental cost. That we even need to tap the tar sands should tell us something. Or that we now talk about Montana shale should tell us more. Windmill farms are becoming increasingly popular. Windmills are on the move, quite literally. The roofs of some European countries are now studded with solar panels.

China, however, is the place to watch…not the U.S. The great dragon is thirsty. According to a Bloomberg article:

Economic growth of more than 8 percent in China and India, coupled with increasing car ownership among the countries’ combined populations of 2.45 billion people, will more than compensate for falling U.S. demand. Oil use worldwide will increase 2 percent this year because of growth in emerging markets, the Paris-based IEA says.

Has the U.S. mattered for the last few years? It is debatable. As far as the oil market is concerned, demand growth is going to be continued to be driven by China and the Middle East.

And note the difference in per capita consumption–and these are 2005 numbers:

• China consumed 5 barrels of oil/per day for every 1000 people
• America consumed 70 barrels of oil per day for every 1000 people.

Imagine China consuming 70 barrels of oil per day for every 1000 people. Where will the oil be found and at what price?

In discussing China’s blueprint for rapid industrialization, I have always been fond of saying that China simply will not meet its goal of becoming a frontier nation by 2100: No white picket fences and two-car garages for China.

Instead of moving rapidly towards 21st century technology, China foolishly laid its plans based on conventional sources of energy: coal and oil. And, we, of course, continued to pick our noses while driving SUV’s. The only hope for China, India, and the rest of us is that we can tap vast quantities of alternative and renewable sources of energy…soon.

Car pool if you want–or ride the aging transit system. Demand destruction in the West may not mean much. The question is: What will it mean for China? Meanwhile, crunch time approaches.