Impact of energy consumption in the major industrialized countries on Saudi Arabian oil production

Impact of energy consumption in the major industrialized countries on Saudi Arabian oil production

Energy Vol. 18, No. 9, pp. 933-938, 1993 Printed in Great Britain. All rights reserved 0360-5442/93 $6.00+ 0.00 Copyright© 1993 Pergamon Press Ltd I...

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Energy Vol. 18, No. 9, pp. 933-938, 1993 Printed in Great Britain. All rights reserved

0360-5442/93 $6.00+ 0.00 Copyright© 1993 Pergamon Press Ltd

IMPACT OF ENERGY CONSUMPTION IN THE MAJOR INDUSTRIALIZED COUNTRIES ON SAUDI ARABIAN OIL PRODUCTION JAMAL A . AL=ZAYER, ABDULLA A . AL-IBRAHIM,'~ a n d TAQI N. AL-FARAJ King Fahd University of Petroleum & Minerals, KFUPM Box 795, Dhahran 31261, Saudi Arabia (Received 1 June 1992; received for publication 18 January 1993) Abstract--Saudi Arabia is the world's largest oil exporter and an important trade partner to the major industrialized countries (MICs), which include the United States, United Kingdom, Japan, Italy, Germany and France. Energy-production and other data for these countries have been collected and analysed. A n econometric model has been developed to estimate the impacts of variables such as energy consumption and production, the price of crude oil, and OPEC and non-OPEC oil exports on Saudi oil production. The major finding is that the price of oil is not important in determining Saudi oil-production policy. Total oil production in the MICs, oil exports of major non-OPEC and OPEC members excluding Saudi Arabia, and the G D P of Saudi Arabia are found to be the important determinants. Our model may help the country's national planners to make better estimates of annual budgets and improve economic and management planning.

INTRODUCTION

For the past decade, Saudi Arabia has been the World's third largest producer and primary exporter of crude oil. Proven oil reserves in the country have remained around 25% of total global reserves. Saudi Arabia is a dominant member of OPEC and has played an important role in determining OPEC pricing and production policies. Consequently, Saudi Arabia plays a critical role in meeting the industrialized world demand for energy. Saudi Arabia has an oil-based economy. The dominance of oil in the country's foreignexchange earnings, government revenue, and as a source of growth of national income is the most obvious characteristic of the economic system. The oil sector is responsible for more than 50% of the country's GDP. In view of the heavy dependence on oil revenues, it has become essential for national economic planners to determine, with reasonable precision, factors that influence oil production. In this paper, we develop a statistical model to determine the impacts of consumption and production of energy in the MICs and to estimate the marginal effects of various energy sources on Saudi production. Collectively, the MICs import about 50% of the annual Saudi oil production. We proceed to discuss the nature of the data employed in the estimation process, trends of energy consumption, and model formulation and analysis.

D A T A E M P L O Y E D IN THE M O D E L

We have collected data on oil consumption, coal, gas, electricity in metric tons of coal equivalent (mtce), and the GDP in current dollars for the MICs for the period 1960-1988. International Financial Statistics ~ of the International Monetary Fund were used to provide economic statistics. Energy-consumption and production data were obtained from Ref. 2. Oil production in Saudi Arabia and exports of OPEC and major non-OPEC countries were also collected. The major non-OPEC oil exporters considered are Mexico, Egypt, Oman, Norway, tTo whom all correspondence should be addressed. 933

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JAMAL A. AL-ZAYER et al 1800

300

1400-~ 1600

~250

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~ 800 6OO 1000

150 o_ n-

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° 1960

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1988

YEAR ~COAL

CONSUMPTION

~ G A S CONSUMPTION

~ O I L CONSUMPTION

ELECTRICIW CONSUMPTIOW ~ OIL PRICE

Fig. 1. Total consumption of coal, gas, oil, electricity and oil prices for the period 1960-1988 for the MICs; coal consumption i gas consumption + , oil consumption * , electricity consumption I--l, oil price ~ .

China and the U.S.S.R. The price of Arabian light per metric ton (mt) was used as a bench mark for the crude oil price. There are 28 observations for each variable. TRENDS

OF ENERGY

CONSUMPTION

Figure 1 shows the price of Arabian light crude, consumption of coal, gas, oil and electricity, from 1960 to 1988 in the MICs.

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+~

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~ 1964

1968

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1976

50

4

.............

1980

0 1984

1988

YEAR 4-MICs OIL CONSUMPTION -~-SAUDI OIL PRODUCTION ~ OIL PRICES

Fig. 2. Saudi oil production, oil consumption in the MICs and oil prices for the period 1960-1988; oil consumption in the MICs O, Saudi oil production + , oil prices ~ .

Energy consumption impact on Saudi Arabian oil production 1200

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-250

1000800E

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-150 !

~o 400-

-ii°°

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1960

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1968 1972

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1984

1988

YEAR NON-OPEC EXPORTS -q- OPEC EXPORTS -~ OIL PRICES Fig. 3. Oil prices and exports of non-OPEC and OPEC (excluding Saudi Arabia) countries for the period 1960-1988; non-OPEC exports II, OPEC exports + , oil prices • .

Oil consumption in the MICs increased steadily from 1960 to 1973 when the first oil-price shock occurred. Conservation measures caused a temporary decrease in oil consumption from 1973 to 1975. Since the second oil-price shock took off in 1979, oil consumption decreased steadily to the mid-1980s. Prices decreased dramatically, especially after 1984. A sharp drop in oil prices occurred during the period 1981-1985, which was mainly due to a glut of oil. Figure 2 shows the trend of Saudi oil production, oil consumption in the MICs and the price of oil. As is shown in Fig. 2, Saudi oil production increased steadily from 1960 to 1981 with oil consumption in the MICs. There is a positive correlation with energy consumption (r = 0.771) and with oil prices (r -- 0.5764). Figure 3 shows export trends for oil of OPEC (excluding Saudi Arabia) and major non-OPEC countries together with oil prices. Exports of non-OPEC producers increased steadily while oil prices fluctuated. OPEC strategy is to stabilize oil prices by lowering members exports when prices are falling. As shown in Fig. 3, Saudi Arabia behaves in the same manner 300 250 2O0 5150 IO0

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YEAR CURRENT OIL PRICES -~-CONSTANT OIL PRICES Fig. 4. Current and constant-dollar (1980) oil prices; current oil prices l , constant oil prices + .

936

JAMAL A. AL-ZAYER et al 600

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YEAR SAUDI

GDP

+- S A U D I

OIL PRODUCTION

Fig. 5. Saudi oil production and G D P for the period production + .

1960-1988; Saudi G D P

II, Saudi oil

as other O P E C members. On the other hand, non-OPEC exporters act individually and aim to enlarge their market share in order to increase oil revenues to meet domestic financial needs, i.e. oil prices seem not to be a determining factor in the export policies of these countries. Figure 4 shows oil prices in constant (1980 US dollars) and current terms. As may be seen from Fig. 4, the current prices show positive correlations. Figure 5 shows the relation between Saudi G D P and oil production. The weak correlation between these two factors is r = 0.5532.

MODEL

DEVELOPMENT

AND

ANALYSIS

A great deal of attention has been directed in recent years toward energy demand from the perspective of consuming nations. 3 Estimating energy- and oil-demand functions is discussed by Ibrahim and Hurst. 4 Demands for energy in O P E C countries were studied by AI-Janabi. 5 A survey of optimization models concerning future oil-price behaviors of O P E C and Saudi Arabia is presented by H a m m o u d e h . 6 Manne and his colleagues 7 have published summaries of polled responses concerning the world oil market and future prices. Kavrakoglu 8 developed an economic equilibrium model to simulate the world oil market. Based on data analyses and results obtained from trial models, six variables were examined by us in the first regression model, namely, total energy consumption and total oil production in the MICs, the price of oil in current U.S. dollar, O P E C exports excluding Saudi Arabia, major n o n - O P E C exports and the Saudi GDP. In the second regression model, we disaggregate total energy consumption in the MICs into oil and other sources of energy. The method of ordinary least squares (OLS) has been applied to the data. The regression results for the two models are shown in Tables 1 and 2. The first model is Y = 0.229X1 - 0.902X2 + 270.621X3 + 0.228X4 - 0.485X5 + 2.086X6, (0.0008)

(0.0001) r2=

0.99,

(0.2957)

(0.0066)

D.W. = 1.65,

(0.0044)

(0.0011)

F = 344.68,

where Y = annual Saudi oil production in mt, X1---annual total energy consumption in the MICs in 103 mtce, X 2 = annual total oil production in the MICs in 103 mtCe, X3 = price of Saudi

Energy consumption impact on Saudi Arabian oil production

937

Table 1. Results for the first model. Independent variable Xl X2 X3 X4 X5 X6

Coefficient

-

-

r2 =

Standard error

0.23 0.90 270.6 0.23 0.48 2.09

0.99,

t-value

0.06 0.18 252.7 0.08 0.15 0.55 F =

344.7,

Significant level

3.88 4.91 1.07 3.00 3.18 3.77

-

-

Durbin-Watson

0.0008 0.0001 0.2957 0.0066 0.0044 0.0011 =

1.65

crude oil in $/mt, X4 = OPEC (excluding Saudi Arabia) oil exports, X5 = oil exports of the major non-OPEC countries, X6 = gross domestic product of Saudi Arabia. The second model has two additional variables and is defined by Y = -0.86X2 + 317.97X3 + 0.038X4 - 0.679X5 + 1.741X6 + 0.422X7 + 0.115X8, (0.0002)

(0.231)

(0.838)

(0.0101)

(0.0123)

(0.0543)

(0.3906)

r 2 = 0.99, D.W. = 1.59, F = 296.37, where X 7 = a n n u a l total oil consumption in the MICs in 103mtce, X 8 = a n n u a l total consumption of coal, gas and electricity in the MICs in 103 mtce. It is clear from the r 2 and the F values that both models yield statistically significant results. Values of the Durbin-Watson statistical test are either inconclusive or suggest the absence of serial correlations. Oil prices have, however, been found to be insignificant in both models. Additionally, the consumptions of oil, gas, coal and electricity were found to be insignificant when these were included separately in the trial models. Therefore, their consumption was aggregated into a single variable in the first model and was found to be highly significant. In the second model, total energy consumption in the MICs was disaggregated into oil and other sources of energy (i.e. coal, gas and electricity). All variable coefficients have the expected signs. One would expect the coefficient for total annual oil consumption in the MICs, X7, to be positive, indicating that an increase in oil consumption will result in an increase in the quantity of Saudi oil production. The coefficient for OPEC oil exports excluding Saudi Arabian exports, X4, is positive, which indicates that when OPEC exports increase, the production of each member (including Saudi Arabia) increases according to the OPEC quota policy. The coefficient for the major non-OPEC exports, X5, is negative, which is due to the fact that there is strong competition between OPEC and non-OPEC exporters in the global oil market. Hence, if the non-OPEC countries increase their aggregate oil exports, OPEC members (including Saudi Arabia) tend to lower their production level. The coefficient for annual oil production in the MICs, X2, is negative, indicating that an increase in their oil production will result in a decrease in imported oil and thus a decrease in the quantity of Saudi crude demanded. Table2. R e s u l t s ~ r t h e s e c o n d model. Independent variable X2 X3 X4 X5 X6 X7 X8

Coefficient

-

-

r2 =

0.99,

0.86 317.9 0.04 0.68 1.74 0.42 0.ii

Standard error 0.19 257.9 0.19 0.24 0.64 0.21 0.13

F =

296.4,

t-value

-

-

Significant level

4.52 1.23 0.21 2.83 2.74 2.04 0.88

Durbin-Watson

0.0002 0.2312 0.8384 0.0101 0.0123 0.0543 0.3906 =

1.59

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JAMAL A. AL-ZAYERet al

Lagged variables were included in the two regression models to test for dynamic adjustments. However, the coefficients for the lagged variables were found to be statistically insignificant, which suggests that Saudi oil production reacts instantaneously to immediate market changes. The models were tested for stability and structural shifts by introducing a dummy variable using a value of 1 for 1961-1973 and a value of 0 for 1974-1988. The dummy variable was found to be statistically insignificant in both models, indicating that there has been no structural change. Hence, the dummy variable was dropped. In addition, the data were split to cover the two periods. Separate regressions over the two time periods were performed. Chow test 9 was applied for the hypothesis that there is no significant difference between the regression models. The F value was found to be insignificant and we concluded therefore that the two regression models are structurally stable.

REFERENCES 1. IMF, "International Financial Statistics", various issues, Bureau of Statistics of the International Monetary Fund, Washington, DC (1986-1990). 2. United Nations, "World Energy Statistics Yearbook", various issues, Department of Economic and Social Affairs, Statistical Office, New York, NY (1979-1986). 3. R. Pindyck, Structure of World Energy Demand, M.I.T. Press, Cambridge, MA (1979). 4. I. B. Ibrahim and C. Hurst, Energy Econ. 12, 93 (April 1990). 5. A. AI-Janabi, Energy Econ. 1, 87 (April 1979). 6. S. Hammoudeh, Energy Econ. 1, 156 (July 1979). 7. A. S. Manne and L. Schrattenholzer, The Energy J. 5, 45 (January 1984). 8. I. Kavrakoglu, Omega Int. J. Management Sci. 16, 439 (1988). 9. G. C. Chow, Econometrics 28, 591 (1960).