It's Peak Oil For U.S. As China Takes Greater Share

by: Jason Tillberg

The China Association of Automobile Manufacturers recently estimated that passenger vehicle sales were up 11% in August year over year to 1.35 million passenger vehicles.

For perspective, in 1995, just a year before I graduated high school, there were only 1.14 million privately owned passenger vehicles on the road in all of China.

These days, China's car fleet is up to around 93 million privately owned passenger vehicles and rising fast.

The folks at China Sign Post, a website that provides China analysis, put this chart together as they made a case for why China's rising car ownership paves the way for greater gasoline demand.

While Chinese cities like Xiaman and Suzhou already have higher car ownership rates per 100 residents than NYC does, they show that there are many 2nd and 3rd tier cities that still have far more capacity to add car owners in the years ahead.

When the Chinese buy cars, they are in most cases buying a new gas tank and adding to their overall gasoline demand. When we buy cars in the U.S., we are only replacing a gas tank and may even be reducing gas demand if the new engine is more efficient than the old one. At the same time, Americans are simply driving less, especially on a per capita basis.

Doug Short provides this chart of miles driven growth adjusted for population:

While global oil production has been consistently rising over the last 100+ years now, the population of the world has risen along with it.

Here is a chart showing the number of barrels of oil produced per year per capita in the world going back to 1980 up to 2012:

Source: EIA, World Bank

What we can tell by this chart is we've reached somewhat of a plateau around 4.6 barrels of oil produced per year per capita since the early 1980's.

Oil is so critical to an economy due to it's dense form and the energy we get from it to improve our productivity.

One study suggests that each gallon of gas is equal to 500 hours of human work output. The same study suggests then that in 1 barrel of oil, 23,200 hours of human work output can be had.

With global oil production per capita stagnant, there is great competition amongst all the nations economies of the world to get their share of the oil.

The U.S. has enjoyed a substantial benefit of consuming high amounts of oil per capita per year. This chart below is the amount of oil consumed in the U.S. per year per capita:

Source: EIA, World Bank

In 2004, per capita oil consumption was 26.84 barrels. Since about then, we've been in a steady decline in the U.S. that by 2012, we consumed 22.23 barrels of oil per capita. That is a decline of nearly 4.6 barrels per capita in just 8 years!

That means that those barrels were consumed by another economy or nation and it's easy to guess whose nation's economy that is: China!

Here is a chart I put together showing the number of barrels of oil consumed per year per capita in China:

Source: EIA, World Bank

In 2004, China consumed 1.81 barrels of oil per capita. In 2012, the consumption went up to 2.78 barrels of oil per capita.

China's population in 2012 was 1.35 billion while the U.S. population was 314 million. So China has about 4.3 times as many people as the U.S..

For every 1 barrel per capita increase in oil consumption in China, that's equivalent to 4.3 barrels of oil consumption per capita for the U.S.

So therefore, that 1 barrel per capita increase in China is where 4.3 of the 4.6 barrel decline went to.

China is eating more of the share of the global oil production pie that used to be enjoyed by the U.S. and that trend is continuing to this day.

In essence, we live in a world where global per capita oil production is flat. For every nation that increases their per capita oil consumption, that increase has to be offset by a decrease from another nation.

What this means is that from here on out, assuming Chinese demand for oil will continue to rise rapidly, the U.S. will face greater and greater competition for access to oil. It may well mean that elevated oil prices in U.S. dollars are here to stay too.

Americans and their respected State, Local and Federal Government organizations will simply need to practice being real actual "economists" and "economize" their use of energy the best they can.

Opportunistic companies that come to mind that are filling this need and demand include Cree (NASDAQ:CREE), which makes the highly efficient LED light bulbs that I have concluded to be the most economical on the market. Their 60 watt equivalent LED bulb that last 25,000 hours uses just 9.5 watts of electricity while the long life of the bulb easily justifies the $12.97 price of each bulb.

We must consider Tesla (NASDAQ:TSLA) and the advances they are making with their Model-S electric car. According to their charging cost calculator, I could charge the battery to go 100 miles for $3.96 based on an electric rate of 12 cents per kwh. My Camry gets about 34 miles per gallon of gas which sometimes cost $3.96 a gallon upstate NY.

In Conclusion:

Americans have grown accustomed to living standards based on consumption of 22-26 barrels of oil per year. If in 10 years from today, we're consuming 17-19 barrels of oil per capita due to greater share going from the Western nations economies to those in the East, unless we can improve the efficiency and productivity of each barrel of oil consumed, our living standard may well drop.

When we're retired, we want to avoid having to keep the thermostat at 55 degrees in the winter because we can't afford the heating oil.

The name of the game will be to be more efficient and or consume less energy but maintain the same standard of living. Smaller homes to cool and heat (and clean), shorter travel times to work, burning wood for heat Vs. heating oil, growing more of own food in garden are just some lifestyle ideas that will curtail what could be very high costs of energy in the future.

Companies that can help solve these problems like the two mentioned above may well have very bright futures ahead of them and investors should keep eyes open for such opportunities as they come.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.