Where will China find the oil to power its economy?

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With OPEC tapped out, where will China find the oil to power future economic growth?

The obvious answer is it will take a big chunk out of the 19 million barrels the U.S. economy burns every day. And China doesn't have to build a blue water navy or engage in an arms race to take a big slice of the U.S.'s energy pie . All it has to do is stop showing up at the U.S. Treasury auction, and Washington's massive budget deficit will do the rest.

Despite all the bashing China takes in Congress, it's big bad China that finances Washington's massive 1-trillion-dollar-plus budget deficit. It has for some time. Almost two thirds of the Peoples Bank of China's $2.85-trillion foreign reserves are in U.S. dollar assets.

These investments have not been an act of benevolence towards U.S. taxpayers. China's central bank felt compelled to become the largest holder of U.S. Treasury bonds to keep its yuan from rising and undermining the competitiveness of Chinese exports in the U.S. marketplace. But that was in a world of cheap oil.

We live in a different world now. Not only will triple-digit oil prices sever those trans-oceanic trade links through soaring transportation costs, but they will throw the U.S. economy back into recession. Contracting economies, particularly those also burdened with huge fiscal deficits, don't make great trading partners.

Without access to the huge pool of Chinese savings, the U.S. is no more capable of financing its fiscal deficit than the PIGS (Portugal, Ireland, Greece or Spain) are capable of financing theirs. If China stops funding the Treasury market, Treasury yields will soar, pulling mortgage rates with them.

The Federal Reserve Board could always respond by switching the printing presses to overdrive and monetize even more of Washington's deficit than it is already doing. But the more money the Fed prints, the lower the value of the U.S. dollar, and the higher the US dollar-denominated price of a barrel of oil.

That just puts the price of oil that much farther out of U.S. motorists' reach, while a soaring yuan would give China's motorists a big currency-adjusted discount at their pumps.

Alternatively, China's exit from the Treasury market might just prod Washington into real action on cutting its deficit. But if that path is taken, the actions needed to reduce the budget deficit will become as much a yoke around its economy as the PIGS deficits are on their economies.

PIGS don't get to burn 19 million barrels a day of oil because their economies are shrinking. If China wants to burn more oil, all it has to do is walk away from the U.S. Treasury auction and take what the U.S. economy will no longer be able to afford to burn.