TEN years ago China was a net oil exporter. Today it is the world’s third largest oil importer, behind the USA and Japan, and the second largest oil consumer. Ten years ago China produced around 250,000 cars per year. Last year the country churned out more than three million. Committed factory expansions and developments will take capacity to five million cars next year.

China’s oil consumption this year will exceed 6 million barrels per day. Assuming a rate of growth similar to that experienced by other industrialising Asian economies, China will consume 12.6 million barrels per day by 2015.

For every point of growth, emerging economies consume more oil than advanced economies. China’s economic boom will boost oil demand far more than westerners may be prepared for ? our economies actually experience declining intensity of oil use as they grow.

In the 14 years from 1982 and 1996, global oil demand grew around 12 million barrels per day, from 58 to 70 million barrels. In the seven years to 2003, demand grew a further 12 million barrels per day.

Surprisingly, only one-third of the demand increase over the last seven years was due to China. Big rises in other developing countries plus a surge in US demand were also factors.

One wonders whether the ubiquitous Sports Utility Vehicle, which now accounts for almost half of US car sales, is behind the surge in US oil demand.

Rapid oil demand growth has until recently been met by rapid supply growth. But there are increasing concerns about our ability to pump more oil. Never mind demand in 2015, many oil analysts are worried about finding enough new production to cope with demand growth over the next three or four years.

The problem of supply growth is best illustrated by the world’s largest oilfield, Saudi Arabia’s Ghawar field.
Ghawar is the Don Bradman of oil. Between 1948 and 1952 a series of wildcats proved around 170 billion barrels in the field. Early explorers thought they had made several discoveries over a 200 kilometre long stretch of desert, until they realised their finds were all the same giant structure.

Ghawar has provided between 55-60% of Saudi production since 1951. It currently produces almost five million barrels per day, more than half Saudi Arabia’s output. Led by Ghawar, just five fields account for 90% of Saudi production.

Matthew Simmons, one of President Bush’s oil industry advisors, has studied technical reports on Ghawar going back to the 1960s. Although none of these reports provide a meaningful conclusion by themselves, by piecing all the data together Simmons has concluded Ghawar may soon enter terminal decline.

Almost by definition, decline at Ghawar would mean the beginning of the end for Saudi Arabia’s oil production. The country’s undeveloped oil fields couldn’t get close to matching Ghawar’s immense size and productivity, so even a massive oilfield development program would not offset terminal decline at Ghawar.

Simmons’ Texas-based investment bank is championing the view that the world is perilously close to passing the point when demand for oil exceeds the world’s ability to supply.

Of course, oil demand cannot actually exceed supply, but excessive competition for the resource will be reflected in a rising price.

The oil crises of the 1970s and 1980 prompted western consumers to switch electricity-generating capacity from oil to coal, nuclear and gas. The rising price forced consumers to confine oil use to its highest value applications ? notably, as a transport fuel.

Today, the transport industry has little choice but to pay a higher oil price. It will take decades to manufacture sufficient hybrid and fuel cell vehicles to replace the existing oil-driven fleet, never mind the vexing question of an alternative fuel for aircraft.

In other words, demand elasticity will be much lower than the 1970s, when the world responded to rising prices by curbing demand. Few westerners will drive less just because oil is more expensive; mobility is too important and most of us will just pay the price.

More than 70 percent of the world’s oil comes from fields discovered prior to 1970.

Despite all the technological advances of the last 30 years, we still rely on legacy oil assets for most of our production. Just 120 fields, many in OPEC states and over 50 years old, account for 53 percent of the world’s oil production.

Ghawar is the world’s largest, but questions about its future productivity can be repeated for many of OPEC’s super-giant fields.

OPEC is as secretive as the old Soviet Union when it comes to the true size of its reserves.

In an information vacuum, western experts are left to piece together small clues in an attempt to verify OPEC’s calm assertions that it can meet all our future requirements.

These assurances do not ring true. OPEC’s oil barons are no more credible than the miscreant government’s they represent.

China’s future demand and OPEC’s longer-term ability to meet demand are the two giant questions on which the long-term oil price hinges.

There are plenty of reasons to be positive on China and plenty of reasons to doubt OPEC. The balance of probabilities suggests the oil price could rise much further.