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World supplies of petroleum in the 1980s
Ewgy Vol. 6. No. 8. pp. 661675. Printed in Great Britain.
1981
WORLD SUPPLIESOF PETROLEUM IN THE 1980s FEREIDUN FESHARAKI ResourceSystemsInstitute, East-West Center, Honolulu,HI%&48, U.S.A. (Receiued 25 February 1980) Abstmct-During the 1970sthe non-communistworld has weathered,without profound economic dis-
turbance,the oil crisis whichdevelopedfollowingthe formationof OPEC.This was to a largeextent due to the fact that, althoughthe marketprice of crude had sharplyincreased,its cost in real terms had remained stable. The factors which mitigatedthe economicconsequencesof the oil situation during the last decadeare not likelyto last throughoutthe 1980s.It is thereforeanticipatedthat the oil dependentcountrieswig bc in a much more dithcuh position in the immediatefuture. The conventionalapproachin studyingworldenergy problemsis to begin with the assessmentof future energy requirementsof individual countries on the one hand and of their energy production based on domesticresourceson the other. It is then assumedthat, hopefully,the differencebetweenthe two figures will be coveredby importsof crude. This study tackles the problem the other way around, using as a starting point an estimateof what is likely to be exportedby the OPECgroup in the 1980s. The conclusionarrived at from an analysis of the politicaland economicforces operatingwithinOPEC is that OPEC will drasticallycurtail its exports,maybeby as muchas 40%.As a result, the non-communist oil-dependentworld will face much more acute and diicult energy problemsduring the 1980sthan it did during the 1970s. I. INTRODUCTION
The 1970sproved to be a decade of fundamental changes in the world petroleum market. The price of crude oil increased from US$1.80per barrel (S/b)in 1970to an average of US$32.OO/b in 1980.Moreover, the multinational oil companies found their previously easy access to cheap and abundant oil either partially or completely blocked. In short, the balance of power shifted radically in the 1970saway from the oil companies and consuming nations and in favor of the producing nations. Fears about the catastrophic effects of these changes have proved to be unfounded. For example, it was said that growing surplus revenues in the hands of oil exporting nations would bring about world-wide monetary collapse. On the contrary, the international banking system remained intact and successfully channelled the surplus capital to both developed and developing deficit countries. Furthermore, it was predicted that higher oil prices would induce a massive switch to alternative energy sources. This prediction also failed to materialize. Environmental objections to coal and nuclear power, suspicion of the oil companies, excessive energy regulations and short-sighted electioneering all effectively hampered the development of alternative energy sources. The ability of the industrial and developing nations to successfully cope with these rapid changes in the world petroleum market can be attributed to a number of factors. First, the real price of oil actually decreased between 1974and 1978.A recent study has shown that as a result of U.S. dollar devaluation and world-wide inflation, the real cost of crude oil for Japan and West Germany fell by as much as 20%in the four-year period.’ It was only by the third quarter of 1979 that nominal price increases fully compensated for the real price declines of the preceding years. In the third quarter of 1979,the real price of oil, at US$7-11/b,finallyequalled the real price level of 1974.t Second, the large OPEC trade surplus of USRiObillion in 1974,dwindled rapidly to only US$l billion by the end of 1978.2Finally between 1970 and 1980 economic growth in the industrial countries (at an average annual rate of 3%), and in the developing countries (at an average annual rate of 4-6%)’ showed that most countries managed to escape the anticipated problems of the rapid petroleum market changes. Wee Ref. 1. 661
662
F. FESHARAKI
By the end of 1978, an environment was created in which the earlier sense of urgency about petroleum supplies and prices gave way to a sense of complacency reminiscent of the earlier decades of cheap and abundant oil. The Iranian Revolution of February 1979, however, was a rude awakening for those who thought the oil problem would go away by itself. Once again the vulnerability of the world economy to political upheavals in the Middle East became evident. In just one year, from January 1979 to January 1980, nominal oil prices increased by more than 120%, to an average price of US$30/b!+ The OPEC surplus of LJS$l billion in 1978 rose to around US$60 billion in 1979 and is expected to reach US$lOO-120billion in 198O.t To assume that the oil price/supply situation in the 1980s can be handled with the same relative degree of ease as in the 1970s may prove to be a grave mistake. The circumstances surrounding the world petroleum market are structurally different from those in the 1970s. The problem of supply shortages, as we shall argue later, is likely to become a major one. These will be due not only to physical shortages, but also to policy decisions by the major oil exporters to cut back their production. Oil exporters are going to ensure that oil prices will not fall again in real terms. Indeed, production cutbacks are likely to lead to further real price increases. Prospects for unified petroleum prices and an organized petroleum market are dim. This time the situation is far more complicated and far less predictable than in 1973-74. The stakes are very high and miscalculations may prove disastrous. The world economy in general, and the developing world in particular, must be aware of the magnitude of the problems they are going to face in the 1980s.
II. WORLD PETROLEUM
SUPPLIES
IN THE 1980s
The relationship between total energy consumption and petroleum consumption will now be considered by examining various energy supply/demand projections. The prospects of petroleum supplies from OPEC and non-OPEC sources, as well as petroleum price implications will also be discussed. Finally, a brief discussion of the impact of these developments on the balance of trade of a number of countries will be provided. The share of oil in total energy consumption In 1978, total world primary energy consumption was estimated at 135 million barrels per day (b/d) of oil equivalent, 46% of which came from oil and 18% from natural gas (the non-Communist world’s reliance on oil was 53%).’ Table 1 shows a comparison of various projections of energy supply and demand for 1985. All projections consider oil as a major source of energy, providing nearly one-half of the world energy consumption. Projections for 1990 indicate a slight decline in the contribution of oil to the total world energy demand, to around 40-45%. OPEC oil as a residual factor The projections show that OPEC oil production ought to be about 35-45 million b/d to supply world energy needs in 1985. However, these forecasts suffer from a common methodological problem. All consider OPEC oil as a residual factor: world energy demand is first estimated, then all oil and non-oil anticipated indigenous supplies, as well as non-OPEC imports, are deducted to reach the figure which OPEC “must” produce to balance world energy supply and demand. Since the OPEC residual is about one-third of total world energy demand, an error of 10% in forecasting total energy demand would translate into an error in estimating OPEC oil supply requirements of 30%. So far very few attempts have been made to look at the problem in reverse order, which would be far more realistic. This would involve analyzing the OPEC nations’ oil policies in order to arrive at an estimate of OPEC supply. This estimate would indicate the options for adjusting energy demand to oil supply from the OPEC nations. Indeed, it will be the OPEC supply that will determine the world’s need for other energy sources and not vice versa. ?See also Refs. 5 and 6. Bee Ref. 2.
World supplies of petroleum in the 1980s III. OPEC SUPPLY
663
POLICY
Table 1 lists a number of reputable projections for energy supply/demand of the nonCommunist world. All projections indicate that a relatively high level of OPEC production must be maintained in order to fill the gap between supply and demand for energy. The estimates of OPEC oil production in 1985 range from 35.5 million b/d (Frankel) to 44.6 million bid (PetrovenlPetrocanada). However, to put this into a realistic perspective it is necessary to examine the prospects of OPEC supply through analysis of the policy plans or policy trends. As the OPEC nations began to consolidate their control over their oil industries during the 197Os,they became increasingly concerned with the inevitable exhaustion of their oil resources. Although, a formal production pro-rationing program was never adopted by OPEC, by the turn of the decade many of its member-countries had become convinced that conservation of their resources through production cutbacks was the most sensible politico-economic choice available to them. A number of factors contributed to the development of this attitude: (1) National governments, not multinational oil companies, now have the responsibility of deciding production levels. Thus, the general rules of global supply and demand followed by private oil companies are not necessarily relevant. (2) Oil is an exhaustible resource. Once depleted, the producing countries may be thrown back into the dark ages of poverty and domination by industrial powers. Reserve/production ratios are falling and the possibility of additional large-scale oil discoveries is low. (3) Hopes for rapid modernization and industrialization through the use of oil income have been eroded by the experience of Iran. It has become clear to oil exporting countries that the injection of oil money into their economies will not by itself bring about rapid development. Self-sustained growth is an evolutionary process and for that reason the life span of the oil revenues must be extended to ensure a steady flow of foreign exchange, synchronized with the overall pace of economic growth. (4) Countries with surplus funds invested abroad have suffered losses due to inflation and the declining value of the dollar, while making themselves hostage to the holders of their assets. The freezing of Iranian assets by the U.S. has had a major negative psychological impact on other oil exporters. The idea of keeping their wealth in underground storage under their sovereign control has an attraction far greater than many other alternatives. (5) Political pressures are mounting in many of these countries in favor of conservation. At the same time, they fear that as in the case of Iran, excessive investments may disrupt the social order in their countries. Even without revolutions or changes of government, many of the conservative regimes are likely to cut production to appease internal opposition. (6) OPEC nations are aware of the low level of energy conservation in the industrial world. They conclude that the price of oil has not gone far enough to induce a resolute conservation policy. They find it unacceptable to deplete their dwindling assets to appease the appetites of industrial nations. (7) Rising domestic demand for oil products is another major consideration in reducing oil exports. OPEC domestic demand rose from 770,000b/d in 1970 to around 2.2 million b/d by the end of the 1970s. It is expected to reach 3.9 million b/d in 1985, 6.3 million in 1990 and 16.7 million b/d by the turn of the century. (8) The oil exporters realize that there are no major substitutes for their oil in the next 10-20 years. They also know that supply reduction is the key to price increases. Reducing supply also gives them enormous political power, which they can exercise to their own benefit, as well as obtaining some concessions for other LDCs. (9) Oil exporters can obtain the value added in petroleum refining and petrochemical production by extending their activities in these areas. Recently a number of OPEC countries have publicly declared their intention to cut back crude production. Many others are likely to do so in the near future. A number of countries, particularly Saudi Arabia, have exceeded their production ceiling to cushion the impact on the industrial world of supply interruptions and rising prices. Their position is likely to change in the future because of domestic political pressures and their inability to influence the oil market in a significant way. Table 2 shows the position of oil exports in 1980. There is no country in OPEC today which does not have some kind of restriction on production. The five large Persian Gulf exporters,
F. FESHARAKI
Table 1. Worldenergy demandand Lichrb1.u’ cam
B/c!
1976
Pranke12 1978
SRI2 1976
Won 1978
120.5 (255.0)
123.9 (262.3)
4.2
4.0
0.81
0.86
Bawl& willion b/d oil eq. (Quadrillion BTlls 1
122.4 (259.1)
Annual GNP Growth Rata
t
8
1.0 -
E/Gw Multiplier
t
Oil
Million
b/d oil
and NCiL (Non-OPK):
N,tursl
Coal:
Gas:
Nuclear:
a eq.
Nillion
oil
eq.
b/d
oil eq. * cubic ft. )
Nillion (Trillion
Nillion (nillion
b/d
b/d oil eq. Short Tona)
Mllion
I Ciyawsttr
b/d oil eq. ceprcity )
ttyilro/~;fo/Othar: Million b/d oil eq. ( ~wc~rl1 lion BTlls ) NcaL
Non-Oil
Nillion (Trillion
t;irn:
COrlI :
nillion (HillIon
WE’ Wul Oil Huoidul Nillioll oil
:
lqaortu
N~Ltrlol
4.5
0.9 - 0.0
~noryy DemandGrowth Rate: supply
120.3 (254.0)
3.7
3.0
3.4
3.5
83.9
84.3
120.5
82.?
24.4
24.5
58.9 (incl. GE)
24.6
21.1 (43.5)
21.4 (44.2)
22.1 (47.0)
18.9 (39.0)
22.6 (2175)
21.0 (2020)
23.4 (2250)
23.4 (2225)
8.1 1270)
1.5 (250)
6.2 (206)
7.7 (16.3)
cl:::,
8.1 (17.2)
Nillioll b/d oil eq. b/d oil eq. cubic ft. )
(25:; 5
,1:::, 1.1
b/d oil eq. short tona ) ImlXJKts~
Domaid for b/d oil
MilliOll
b/d
oil
(
oq. OPEC.Oil
i
-0.5
-0.5
-1
-1.1
38.0
35.5
U.A.
40.1
51
47
rq.
as d % of energy demand
49
NowCowullist Yorld. Figures do not add due to rounding. sow etudies bcw I’resented. Patrol*ur ‘LicbLbAa : Petroleum Industry Research Foundationa Prankdf Alternative Energy Sources. 3
52
projact
two
Bconcmico Ltd.;
665
World supplies of petroleum in the 1980s
supply in
19854arious forecasts.’
PBtrocBn/
Patrovm
nAes/lu3 CaHDKz
1917
1979
131.2
(277.91 4.4
114.1 - 123.2 (241.5) - (260.9) 3.4
OgCD W
AM SUPPLY
ONLY
CIA 1979
OUD
1977
99.0 (207.5)
101.9 (216)
5.2
4.2
3.9
1.0
-
1.0
--
0.94
3.4
-
5.2
--
3.3
95.2
76.7
-
87.1
59.4
65.9
25.5
22.4
-
23.5
17.0
17.1
22.2 145.9)
14.1 129.1)
15.5 (32.0)
21.7 (44.9)
19.7 (40.7)
21.7 (2038)
19.9 (1909)
(3:;'
10.1 036)
,1x,
21.6 -(20761
15.4 (1492)
17.3 (1662)
12.0 (400)
6.3 (210)
(3l:i'
-
u:::, -
Cl%,
u:::,
(1:::)
3.1
3.4
S,
2.2 (4.6)
1.3 12.8)
di'
2.5
-0.1 44.6
36.0 -
39.0
53
49
51
-
-1
34.9 omxl 2.3 Mon-OPU! =Jip. 1.3 1.0 45.0
35.0 -0.9
Othu
D.Ca 1.2
OPRC
3.5
m-1 37.9 demand rot OPXZ 011
666
F. FESHARAKI Table 2. 1980anticipated OPEC production level (million b/d). Sustainable Capacfty 1979'
Expected ly Production
Decline fras 197g2
Type of Rcstrictfon
Algeria
l.l- 1.2
1.0
0.14
Resource Constrained
Ecuador
0.25
0.23
+o.oz
Resource Constrained
Cbon
0.25
0.20
0.01
Resource Constrained
Venezuela
2.4
2.13
0.21
Resource/Policy Constrained
Indonesia
1.65
1.56
0.04
Resource Constrained
Nigeria
2.4
2.15
0.18
Resource/Policy Constrained
Libya
2.1
1.7
0.4
Resource/Policy Constrained
Iran3
4.5
1.8
1.2
Policy Constrained
Iraq’
4.0
3.5
+0.1
Policy Constrafned
Kuwait'
2.5
1.5
Saudi Arabia6
9.5-10.5
9.5
United Arab Emirates
2.48
1.75
0.07
Policy Constrained
Qatar
0.65
0.48
0.03
Rerource Constrained
Neutral Zone7
0.6
0.56
TOTAL OPEC'
34.38-35.48
28.06
0.75 +0.3
Policy Constralned Policy Constrained
Resource Constrained 2.61
2.43
Oorrstic consumption Export Availability
25.63
2.65
'Capacity which can be malntained for several months. Ooes not necessarily reflect the maximus production rate wfthout damage to the fields. Gsnerally 90 to 95 percent of installed capacity. 28ased on official and unofficial declaration of production levels and available data canpared to the first nine months of 1979. For countries where no declaration is made, the average 1980 production level for the first six months is dSSUIICd. 3 Iran's capacity has declined from 7 to 4.5 million b/d after the Revolution, due to fdll in pressure and ldck of necessary maintenance. Iran's stated target for 1979 was 4 million b/d. In the second half of 1979 it produced between 3.5-4 millfon b/d. Although no official announcement is made regarding 1980 production level, political dnd technical factors Strongly Suggest 2 million b/d cutback from 1979 target. 'Iraq has hinted d few times that it will reduce production by 600.000 b/d in 1980. Still the government It is assumed here thdt in fact is noncomnittdl, saying dny cutback will depend on xmrket devclomnts. production will not be reduced In 1980. 5 Kuwaft has hdd a production celling of 2 million b/d for several years. It has declared its intention to reduce productlon to 1.5 million b/d. %dudi Arabid's previously anticipated expansion of reserves to 14-20 million b/d hds not mdteridlized due to the Sdudj's lack of desfre to invest heavily in such expansion as well ds some technical difficulties. The Sustainable capacity is estfxmted by CIA to be 9.5 dnd Petroleum Intelligence Weekly to be 10.5 million b/d. However, more recent testing of cdpacity suggests a figure of 10.2 millfon b/d. The Saudi of1 productfon cefling of 8.5 millfon b/d was lffted for part of 1979 to cushion the impact of disruptions from Iran and reduce the rise in prices. It has been announced that production ceiling will not be operational for 1980. It is assumed here that production will be xmintained in 1980 at 9.5 million b/d. 7Equdlly shared ‘8dsed
between
SdUdi
Arabia dnd Kuwait.
on estimates from reference 13.
which account for 70% of OPEC capacity, 68% of OPEC production and 62% of the world petroleum trade, are all producing below capacity for policy reasons. In 1980, OPEC’s production is expected to decline by 2.61 million b/d and its exports by around 2.65 million b/d. Many oil experts, as well as Saudi Arabia, have publicly forecasted a glut for 1980. They expect the large stockpiles in industrial countries to be drawn down and recessionary forces to reduce demand significantly. While it is likely that demand for oil will fall in 1980, creating a glut, it must fall by more than the 2.65 million b/d which OPEC is expected to take out, or major additions to supply must come from Mexico and the North Sea. Even if a glut develops, it will be shortlived: production will fall to adjust supply to demand, with a six month lag. Because Iranian oil is overpriced compared to similar crudes in the Gulf, Iran’s oil will be the first to suffer a decline in offtake. Yet, a glut, no matter how temporary, may once again serve to distract attention from the major problem which is long-term supply. Table 3 considers the prospects of exports from OPEC in the next ten years. It shows that except for Iraq, the major Persian Gulf producers are expected to reduce production. Saudi Arabia and to a lesser extent Kuwait, face a floor in their production schedule below which their costly gas production systems remain under-utilized (see footnotes to Tables 2 and 3). It also shows the large increase in domestic consumption within OPEC which severely limits
World supplies of petroleum in the 1980s
667
exportable oil. OPEC exports are expected to decline from 28.28 million b/d in 1979 to 22 million in 1985 and to 17.29 million b/d by 1990. This indicates a nearly 40% cutback in available OPEC supply. When considering that OPEC accounted for 83% of the world trade oil in 1979, it can be seen that the impact on the world market will be colossal. Still, this forecast is relatively optimistic, since it assumes increasing Iraqi production, relatively steady Iranian production and a large Saudi production. Any Iran-type political upheaval could again disrupt production and further reduce supply. In the aftermath of the Iranian Revolution, the balance of power within OPEC changed drastically. Unlike 1975, when a Saudi threat to flood the oil market was sufficient to stop excessive price increases, today Saudi Arabian power as the “swing producer” has been severely curtailed. By stretching Saudi production nearly to the limit, the other members have partially taken the initiative away from the world’s largest exporter. When Saudi Arabia deliberately priced its oil $4/b below similar crudes at the June 1979 OPEC Ministerial Conference, in the hope of checking the price spiral, this was seen as the test of power within OPEC. As it happened, prices rose even further and spot prices reached $45/b. The greater portion of the price difference increased the profits of the oil companies which make up Aramco, the principal purchaser of Saudi oil. Non-OPEC exporters, notably the British, Norwegians, Soviets, Mexicans and Chinese, sold their oil at the higher tier price. Consumers had to pay the higher tier price. The current underpricing of Saudi crude by $2/b is going to prove to be yet another futile exercise. The Saudis appreciate that they can no longer affect developments in the market, but they might hope that this experience can finally persuade their allies, particularly the United States, not to expect them to perform miracles. Once this fact is accepted by the Western world, then the Saudis may have little reason to keep production at such high levels. In the current situation, any small OPEC exporter can influence the course of developments in the oil market, by even temporarily reducing production by 0.5 to 1 million b/d at the right psychological time. Panic buying and large stockpiling will start again, pushing up spot prices. The same 1979-type price spiral will emerge. Today, the majority of OPEC producers believe that their production policy should correspond to their own economic development planning and not to the international demand for petroleum. This means extending the production life of their resource by reducing exports. This group has, for the first time, been placed in a position to translate its thoughts into action. OPEC as an institution may well survive through the l98Os, but its functions are likely to be different from what they were in the past. The price fixing function through the well publicized bi-annual conferences may be the first to go. OPEC may become a consultative body devoted to research, and coordination of general trade and economic relations with both the industrial and developing nations. OPEC’s weakened position as an organization does not mean that its member countries will be weakened. Indeed, the changing circumstances underscore the even greater influence and power that OPEC members will be able to exercise without having to take collective decisions under an OPEC umbrella. To put the international petroleum supply situation in perspective, a brief discussion of the export potential of the major non-OPEC exporters may be useful. As can be seen from Table 4, the non-OPEC petroleum export potential is no more encouraging than the OPEC potential. Current exports from those countries, which account for only 6% of the total world trade, are not likely to increase in the 1980s. In the early 1980s the industrial countries’ production of petroleum is expected to increase only slightly. The increase in the North Sea production will partially be offset by the decline in US. production (Table 5). The net oil import position of the developing countries as a whole (excluding OPEC) is not expected to change in the next three years. Altogether they are likely to import 2.6 million b/d in 1982 as compared with 2.8 million b/d in 1978. Most projections, however, anticipate that growing LDC indigenous oil supplies during the 1980s will bring domestic supply into balance with demand. Other more optimistic projections envisage a net export of l-l.5 million b/d from LDCs by 1990. The short term prospects of oil demand and supply of LDCs are shown in Table 6. Treating the non-OPEC LDCs as one unit greatly masks individual variations. While Mexico and Egypt together add 1.2 million b/d to LDC supplies, the increase in demand in the LDCs will more than offset the increased supply. High income LDCs, such as Brazil, Taiwan, South
4.0
7.0
Proven
70
69
445
1.2
5.7 __-
465.6
2.0
1.1
40
16 -
26
15
17
32
21
21
48
32 -
47
22
81
26
54
49
1979 9.20
50
30.58
0.21
0.21
1.14
1.60
2.06
2.33
2.34
20.69
0.56
1.82
0.50
2.25
3.38
2.98
2.30 a3
28.28
0.15
0.19
0.02 0.06 --
1.0
1.24
1.98
2.17
2.05
19.5
0.56
1.77
0.49
2.21
3.18
2.34
8.95
0.14
0.36
0.08
0.16
0.29
1.19
--
0.05
0.01
0.04
0.20
0.64
0.25
19792
25.9
0.2
0.2
0.9
1.6
1.6
1.9
1.9
17.6
0.5
1.8
0.5
1.5
4.0
3.0
6.3
3.9
0.09 -
0.03
0.27
0.59
0.17
0.27
0.5,
1.90
__
0.07
0.01
0.06
0.34
1.04
0.46
19853
22.0
0.11 --
0.17
0.63
1.01
1.43
1.63
1.4
15.6
0.5 --.
1.73
0.49
1.44
3.66
1.96
5.84
lwestic Production CansunptlonExports (million bldl
likely exportsin the 1981)s.
mmest$c Production ConsqtionExports (alllion b/d)
23.6
0.2 _-
0.2
0.9
1.5
1.2
l.a
1.3
16.5
0.5 .-.
1.0
0.5
1.0
4.5
2.7
6.3
6.31
0.12
0.05
0.45
0.92
17.29
0.08
0.15
0.45
0.58
1.38 0.89
0.31
0.51
13.25
0.5
0.89
0.48
0.91
3.97
1.04
5.46
0.42
0.79
3.25
-.-
0.11
0.02
0.09
0.53
1.66
0.84
19903
Dawstic Production ConsunPtionExport! (million b/d)
reserves denote reserves which can be recoverul at current prices and technologies. Excludes secondaryand tertiary rewveries. Secondary recovery alone can boost reserves in the Middle East by at The proven reserve figures widely guoted in the literatureare questionableto say the least. least 505. Often fields of SO-500 million barrels which have a wst of production of over Sl/b are considered too small, too expensiveand are not included in reserve figures. The figures for Iraq and Kuwait are generallybelieved to be WIonq. Iraqi reserves are believed to be 4 to 5 tiau luger than the quoted figure- second only to Saudi Arabia, while, Kuwaiti figures ar8 thought to be exaggerated. ma OPEC nations as a matter of policy do not declare their reeerve figuru md tlu information i8 generally provided by the oil cogurims. 2 ReflectsJanuary-octobu 1979 production. 3 Productionestimates are based on the autbur's wctations of production cutbacks due to political/ewnaic Domestic and technicalreasons. These estimate8 exclude thm possibilityof major political uphewals. wmunption foreceses ere quoted from the OPEC Secretariat.
1
OPEC as 2 of World
TOTAL: OPEC
Ecuador
Gabon
6.3
10.2
10.0
Algeria
47.0
30.4
Libya
9
24.3
15.0
Nigeria'
Indonesia
18.0
la.2
13.7
Venezuela
6.5
31.3
364.8
16.0 --
342.7
TOTAL: Persian Gulf
Neutral Zone
United Arab Emirates*
22.8
66.2
64.9
Qatar
Kwfait'
32.1
29
Iraq6
59
165.7
65
138
1979
Iran'
Saudi Arabia'
1973
Proven Reserves1 [billion barrels)
Reserve to Production Ratio
Table 3. Current reserves and production and
,,,
lllny powerful voices in the Saudi Royal fluily prefu
9
8
Increasing tension5 betue5n oil producing and non-oil-producing emirates, together vith uneven distrfhition of oil incow within the seven sheihdoms which for5 UAE, will not allow a sharp cutback in If the federation is to continue in one piece, oil inwill have production in the next five years. Still, by 1990 the lower production level to be channelled to pooru sheikdoms in larger guantities. of 1 million b/d is thought to generate sufficient infor WE's ne&s.
income in the 1980s.
its intention to cutback production to 1.5 million h/d in the short term and oaintain a 1OO:l reserve/praiuctionratio in the long term. Like Saudi Arabia, Kuwait's flexibility is restricted to so55 extent by its associated gas facilities. The difference with Saudi Arabia is that all the gas is used domstically: 33% for desalination: 251 for oil coqany use) and 9A for reinjection. Together with LPG plans, idsally 3 5illion b/d production are required for full capacity utilisation, a Still, production is espected to decline, lut only gradually. production level long abandoned by Kuwait. Like Saudi Arabia, UAE and Libya, accumlated surplus inve5taants abroad will brihg in large interest
Kuwait has expressed
,,
,,
As the t%m most populous u&ions of OPRC, these countrier' need for ever increasing oil income is expected to remain high. Indohesia, the poorest OPEC country, is expected to maintain production at full capacity, while Nigeria is expected to reduce production by only 215,000 b/d coapared to its declared target of 2.15 million b/d for 1980. Recent reports indicate an expansion in the production capacity of both nations is likely in the 1980s. According to The Oil Daily (reference 141 Indonesia's exploration and development efforts have increased substantially and a production capacity of 2 million b/d by 1965 is likely. During 1990-2000 a capacity of 2.5 million b/d is not impossible. For Nigeria, a recent report by the U.S. Department of Energy and U.S. geological Survey (reference 1s) indicates that with increased drilling, prospects for capacity expansion to 3.5 million b/d is there. The report. howev@r, anticipates a production range of 2-2.5 million b/d could be maintained during the latter part of the 1980s through the year 2000. In the case of both countries the available production capability will not necessarily mean that they will produce at those levels.
7
a cutback in production to I-4.5 million b/d. Nevertheless,barring major political changem, one can ammum that the Saudi production preference in the 19809 will bs at a level with which its umofve gam gathuiag project for ammociated gas can operate at full capacity. Thm gam-gatheringprojects uhich is estiuted to comt between S14-21 billion has a collectiontargetof 3.3 billion cubic feet a day a& will be remdy by 19S2. m feed thm nmw systr. oil production lewel of 5.7 eillion b/d fror Shmmr and Abqaiq field8 togethu with 550,000 Wd fra Bmrri field are mufffciult. Therefore, a production level of 6.3 million b/d are asmwal here to be likely production for the l%Om. It is highly unlikmly tlbstthm Saudis invemt heavily in expanmion of capacity as a larger c-city will place thruWer intunationalpresmure to incrume pmduction. 5 Iran's production is expected to remain relatively steady during the 19SOs. although an increasing share will go to Qwstic cotlmuqtion. It is ammund thatby1990, Iranwill try to exportonemillionb/d to pay for its import nmedm. Technical problu by this tin will serioumlycurtailadditionalproduction. 6 Ths poor relationship between the post-revolutionary goverments of Iraq and thm oil Bern in the Indeed, the 1960s was the reamon behind ignoring the developwnt of Iraqi oil remuvem and capacity. expansion in production of a ne of other hiddle Samt producum c8mm at the sapenseof Iraq. Ths situationwas reversed in the 1970m when Iraq, nationalizingits oil, heavily expanded capacity and production. In 1975, when OPEC production aa a whole f 811 by 11 percent due to declining dB, Iraqi Despite tvrary cutbacks occasionally,it is cleu that the Ba'athist govermont erports rose by 1%. of Iraq in its quest for influence and pauer in thm region will push production and capacity higher in the 1980s. This 5eans that Iraq will probably bm the only ccuntry in OPEC erpa&ing production. Iraqi capacity in 1990 is -ted to be around 5-6 million b/d.
4
Communist
Countries
32
19.9
0.4 1.5 1.6 1.4 0.5 0.2 0.3 1.9 12.1 11.7 0.4
17.7
0.2 1.9 1.8 0.9 0.2 0.1 Negligible 1.7 10.9 8.4 2.3 0.2
19791 Consumption
6
2.2
0.2 -0.4 -0.2 0.5 0.3 0.1 0.3 0.2 1.2 3.3 -1.9 -0.2
Exports
23.2-24.2
l-l.5 0.5 0.3 3.5 10.5 10 0.5
3.5
0.7 2.0 1.7
Production
1990
22.2
1.6 0.6 0.2 Negligible 3.0 12.8 10 2.5 0.3
0.3 1.9 1.8
Consumption
1.8-2.3
0.4 0.1 -0.1 1.9 1.7-l-2 0.3 0.3 0.5 -2.3 0 -2.0 -0.3
Exports
Resource Resource Resource Resource Resource Resource Resource
Constraint Constraint Constraint Constraint Constraint Constraint Constraint
Policy Constraint Policy/Resource Constraint (cxllectcd Resource Constraint Policy Constraint (expected) Policy/Resource Constraint
Type of Restriction
6 Egypt's production is expected to reach 1 million b/d by 1982. It may wish to follow other producers by imposing a ceiling or stretch itself to the limit by producing 1.5 million b/d. No official or unofficial hints on future policy. 7 The Soviet Union is expected to be able to produce 10 million b/d, at most, between 1985 and 1990. If its domestic demand grows at over 5% as in 1973-78, domestic demand will reach nearly 14 million b/d making the USSR a major oil importer. It is assumed optimistically here that the Soviet Union will restrict the growth of demand to 2% annually. The same goes for Eastern Europe: a traditional demand growth of 5.56 would imply imports of nearly 4 million b/d. It is assumed here, that demand growth is held down to 2% a year.
Source: references 1,7,9,10 and 11. 1 1979 figures are for the first half of the year. 2 Norway has impoeed a production ceiling for reasons of "social policy." The ceiling is expected to be maintained during the 1980s. 3 UK and Canada are assumed to maintain domestic demand at current levels. 4 UK output of oil is expected to peak by 1982 at 2.8 million b/d before it begins to decline, unless unexpected new fields are found. There are strong indications that the government will impose production ceiling on output in the early 1980s in order to increase the life span of of its exports and avoid becoming a net importer of oil in less than a decade. Another consideration is flaring of the associated gas which the government wishes to avoid. Already, the government has ordered reduction of output from 185,000 to 100,000 b/d for Esso/Shell's Brent oilfield to avoid flaring. Also, a now radicalized Labour Party victory at the next elections is sure to result in some kind of production ceiling. It is assumed here that production will be steadily maintained at 2 million b/d for 1980s. 5 The government Mexico is expected to impose production ceiling in the mid - 1980s. The limit is likely to be in a 3-4 million b/d range. has often hinted that its production policy will be based on "domestic economic needs with a view to spreading the life span of reserves--a borrowed OPEC catch phrase.
of world
TOTAL
I%
Other
China SovieS Bloc USSR East Europe
Oman
Unitedflngdom3'4 Canada5 Mexico6 Egypt Malaysia
Norway
Production
Fig. 4. Present and future extort Dotential of major non-OPEC oil exporters (million b/d).
671
World supplies of petroleum in the 1980s Table 5. Industrial countries oil production (million b/d). 1978
1980
1982
10.3
9.9
9.2
1.6
1.7
1.7
Norway
0.1
0.5
0.7
United Kingd0m
1.1
2.0
2.8
others
0.3
0.4 -
0.4
13.7
14.5
14.8
Australia
0.5
0.5
0.5
New Zealand/Island
0.06
0.06
0.06
14.26
15.06
15.36
United States
lbtal oE4m
South Africa lbtal
SOUPX:
reference
9.
Korea consume a major portion of LDCs oil demand and will compete with poorer LDCs for the shrinking oil supply. IV. FUTURE OIL PRICES
The analysis in the preceding pages indicated that the supply of petroleum from OPEC and non-OPEC sources is likely to decline drastically during the course of the 1980s. While the projections in Table 1 called for OPEC production of 35-45 million b/d, the likely production level is expected to be around 26 million b/d. With OPEC domestic demand for petroleum rising to 4 million b/d in 1985 and 6.3 million b/d in 1990, available crude for export will be reduced Table 6. Projected net oil import requirements of non-OPEC LDCs (million b/d). 1979-w 1978
1980
1982
'rOduction
4.6
5.6
6.7
zons*i.on
7.4
8.3
9.3
*t 4-iortS
2.8
2.7
2.6
-licit
RatOOfQiPGXWth
of which: Aw=tina
0.1
Brazil
0.6
Mexico
Negligible
Negligible
4.0
1.0
1.0
6.0
-0.3
-0.7l
-1.1
8.0
Peru
Negligible
-0.1
-0.1
5.2
Egypt
-0.3
-0.4
-0.7
7.0
India
0.4
0.3
0.4
4.0
Philippines
0.2
0.2
0.2
6.0
South lbraa
0.5
0.5
0.7
9.0
Taiwan
0.3
0.4
0.6
10.0
-0.1
-0.1
-0.1
8.1
Malaysia S.XUCe:
reference 9.
1 Actual emrts half of 1980.
of patroleum from Maxim
wua
at 1.1 million
b/d
in the first
Anal&
612
F. FESHARAKI
even further. Indeed, OPEC exports are expected to decline from 28.8 million b/d in 1979to 17.3million b/d in 1990-a drop of nearly 40%. Conventional wisdom for dealing with the supply shortages now calls for a reduction in petroleum demand through conservation, as well as through fiscal and administrative procedures to lessen the impact of oil prices during the transition period to alternative energy sources. However, demand considerations may not be a determining factor in setting future price levels. Since the OPEC nations’ propensity to reduce production is limited only by the prospects of a catastrophic impact on the world economy andfor a threat of military action, a cutback in demand for oil will be more than matched by a production cutback. Regardless of the importance of conservation and demand reduction, this is a realistic assessment of the current mood within OPEC. If the world economy takes no measures to reduce demand, the supply cutbacks are likely to lead to major price increases. However, if demand for oil is gradually reduced, the price increases would be small but regular. The projections in Tables 2 and 3 are based on a set of policy measures which are likely to be adopted by the OPEC exporters. However, external demand considerations may speed up or reduce the pace of implementation of such policies. Indeed, reductions in world demand for petroleum serve as guidelines for OPEC nations to adjust their export level downwards. The 1980swill probably witness a permanent tight market for petroleum and large price increases. Rut how fast the prices are increased would depend in part on how energy demand is managed by the world economy. It would be a mistake to assume that high petroleum prices will lead to a glut which would weaken prices. The excess of supply over demand does not necessarily mean a weakening of prices. In the first two months of 1980,supplies exceeded demand by one million b/d, while oil stocks were at a peak of 700 million tons. Yet official prices have been increasing and spot prices were still $2-5/b above officialprices. Any glut in petroleum supply will be temporary. It will be eliminated by production cutbacks with a time lag of three to six months. In fact, in some instances petroleum prices are expected to determine production levels. Prices wiii be increased while decline in demand will result in reduced liftings from producing areas, Any reduced lifting may well become the new ceiling for production. The possibility of a decline in the real price of petroleum, as was the case during 1973-78,is extremely unlikely. The rate of real price increases is likely to remain in the range of 510% annually (Table 7). Again, it should be emphasized that demand considerations are likely to have far less influence in OPEC’s pricing policy, than their assessment of the economic and political impact of oil supply on the world economy and/or OPEC’s own security problems. An argument often used by OPEC ministers to justify oil price increases is the cost of alternative energy sources. Without going into the pros and cons of the validity of this argument, one may simply note that the average cost of alternatives have gone up from $7/b of oil equivalent in 1973-74to between $35 and $60/b.t In fact, estimated increases in the cost of alternatives have overtaken and exceed crude price increases. However, it can be argued that the cost of alternative energy sources has not been and will not be a major factor in the OPEC decision-makingon prices. Oil prices and the importing nations’ economies
Oil prices will have a major impact on the economies of importing nations. The magnitude of their impact on inflation, balance of payments, investment, unemployment, etc., requires further studies. However, a number of general observations can be made. First, the oil import bills of the importing nations are expected to increase dramatically. Starting from their current trade balances, it is possible to get an idea of the order of magnitudes by which exports will have to be increased to cover their growing oil import bills. Table 8 provides an indication of how increased oil import bills affect the trade balances of selected countries in the Asia-Pacific region. The net oil bills of this sample of eight countries is likely to increase from $7.3 billion in 1978to $28.4billion in 1982-a fourfold increase. Except for Malaysia, which is an oil exporter, and Taiwan, all other countries had a trade deficit in TBechtel Corporation estimates costs of synfuels at $4040/b oil equivalent. An OPEC Economic Commission Report indicated a cost of $35-56/b oil equivalent for alternatives (see Ref. 8).
World suppliesof petroleuminthe 1980s
613
Table 7. Expectedoil prices in the 1980s(U.S. S/b). iSEd I&w
Average
Price 1980
~iCU
Pbm2 (current pricu
with
(aNtMt
Avuage
mdiu
Iiiqh
La
19901 mdiuB
High
30
38
40
30
49
78
42
53
66
59
93
144
7% averageannual inflation)
/ 1 5b annualreal price increase; Ire*: no raal prfco incmue; mdiur high: 101 annualreal price iacreue. 27% inflation rate ia buad on the World E~ank'a mtpectadamual inflation rata ln tbo 196OB.
1978.Assuming that all non-oil imports would not be allowed to increase, exports would have to rise by 36% to cover the higher oil import bill-a very difficulttask indeed. For the industrial countries the situation is also serious, although they have far better prospects for export increases, particularly to OPEC countries, compared to the developing world. The United States oil import bill was $7.5billion in 1973and $41.6billion in 1978.In 1980 the US. oil import bill is expected to be around $85 billion reaching $110billion by 1982.The OECD nations’ oil imports increased from 25.7 million b/d in 1978to around $117 billion in 1980.By 1982their oil imports are expected to reach 23.1 million b/d9 and their oil import bill could amount to $316billion. Second, the rising price of oil brings into question the overall future economic strategy of the oil importing nations. The problem of economic strategy is particularly acute for the fastest growing LDCs namely, Brazil, Taiwan, South Korea, and to a lesser extent the Philippines and India. The export-oriented economic strategy that they followed in the 1960sand 1970sserved to protect them from the increased oil prices of 1973-74.While the world economy was in recession during 1975,the GNP of Brazil, Taiwan, and South Korea grew at an average annual rate of 8-9%. (In the case of Brazil this growth was possible through debt accumulation, which has now reached $50 billion.)There are no guarantees that this strategy can be repeated. While real oil prices fell in the 197Os,the next decade promises ever growing real prices. These countries will have to decide very soon whether they wish to slow down the rate of their economic growth, so that their oil import bill will not rise as fast, or to continue their traditional fast growth policy. Reducing growth rates may have serious political implicationsat home, both on employment in the export sector and on the rate of growth of aggregate demand. On the other hand, following the export strategy/fast growth policy might lead to disastrous consequences, if the nation is unable to expand its exports sufficientlyto cover its oil import bill. At least one nation, Taiwan, seems to have decided on a lower rate of economic growth and a more conservative export approach. The price of petroleum products, long kept artificiallylow to help energy-intensive exports flourish, has been now significantlyincreased. While the high-income LDCs are faced with critical decisions, the low-income LDCs are facing even more difficult problems. Not only do they face all their traditional problems but in the 1980s they also face fiercer competition from high-income LDCs for international credit/borrowing, export markets, and state-to-state deals with OPEC nations. The prospects of additional aid from the OECD nations are not bright, though OPEC aid is expected to increase significantly. But even some additional aid will not come close to covering their future oil import bills. V. CONCLUSION
The world petroleum market of the 1980sis expected to be seriously affected by supply problems. Not only are OPEC nations expected to reduce their supply by 40% but non-OPEC exporters are also unlikely to increase exports. Indeed, non-OPEC exports are also expected to decline.
Oil Production
830
486
695
Taiwan
south Korea
375
880
229 -
525
260
5595
Price
f.0.b. values
4 Estimated by the author.
Actual
3
c.i.f.
based on medium scenario in Table VII.
ActlId
2.
1
Source: references 9 and 12.
151 .Total selected Asia-Pacific 4028
Malaysia
1050
5
300
235
Philippines
India
5
60
70
50
Sinqapore
100
31
290
225
Thailand
360
248
2515
1981
40
12
280
205
Pakistan
Net Volume of Oil Imports
1605
2030
5391 62143
7412 58555
-1778
-2161 28409
-583 -7335
-140
-88 --
14259
12715
8891
10808
2210
700
455
10442
12704
7367
8955
1595
580
339
4726
3332
2413
2934
907
190
220
12340
10214
889
1081
297
70
50
4864
4082
2413
2934
812
7091
190
194
395
6603
5017
6098
168E4
370
25784
572
3030
-3588
t2021 ---
-1544
t2262
-1394
-2126
- 782
- 4HH
-1537
Exports3 Imports3 TrcldcR,al‘,rl<~e (millions of current U.S.SI
1978 International Trade
1493
694
45
409
65
19822
19822
Oil Import Bill Oil Import Bill (Millions of .(Millions of Current U.S.$) Constant 1980 U.S.$) 1978l
(thousands of barrels per day of oil equivalent) 1982 1978 1978 1982 1982 1978
Energy Consumption
Table 8. Energy consumphon, oil production and imports forselected Asia-Pacific nations.
World supplies of petroleum in the 1980s
675
The oil market of the 1980spromises to be tight, with continuous shortages in petroleum availabilityand pressure on oil prices to rise, in real terms, to perhaps around $80/bin constant 1980prices and over $140/bin current prices by 1990. The impact of the increased prices and tight market conditions is likely to be extremely serious for the world economy in general and for the developing world in particular. The high-income LDCs face the critical choice of changing their high-growth strategy to a lowgrowth strategy, or risk the danger of major trade gaps, with consequent political problems at home. The low-income LDCs are likely to face an additional burden that is likely to wipe out what they might have achieved in the 1970s. The trade profile of our sample of eight Asia-Pacific nations shows the magnitude of the problem the LDCs are going to face in the next ten years, Given the bias against LDCs inherent in world trade, these growing economic problems will not be solved through additional aid, international borrowing, or major improvements in export performance. They are left with no choices other than reliance on their own ability to reduce their dependence on imported oil and to direct their efforts, even at the cost of diverting resources from productive sectors, toward the development of non-oil energy sources, both for commercial and non-commercial energy production.
REFERENCES I. Petroleum Intelligence Weekly 18 (19 Nov. 1979).
World Financial Markets. Morgan Guaranty Trust Company, New York, NY lnOl5 (Nov. 19793. War/dDeuelopmenfReports. World Bank, Washington, DC 20433(1979). 4: F. Fesharaki, “Iran’s Energy Picture After the Revolution”, Petroleum Inrelligence Week/y 18, Supplement (24 Sept. 1979). 5. The Middle East Economic Survey 22, Supplement (3 Sept. 1979). 6. F. Fesharaki, Reuolufion and Energy PO/icy in Iran. Economist Intelligence Unit, London (1980). 7. BP SrarisGcalReview of the World Oil Industry.British Petroleum Co. Ltd., London (1978). 8. ne Economist 273, 1701(6 Oct. 1979). 9. WorldPetroleum Markets in the Years Ahead. National Foreign Assessment Center, U.S. Central Intelligence Agency, Washington, DC 20505(1979). IO. Intemafional Energy Sralistical Review. U.S. Central Intelligence Agency, Washington, DC 20505(27 June 1979). 11. Petroleum and Gas in the Non-OPEC DevelopingCountries.World Bank, Washington, DC 20433(1978). 12. IntemoGonal Financial Statistics. International Monetarv Fund. Washintion. DC 20431(Jan. 1980). 13. S. A. R. Kadhim and A. AI-Janabi, “Domestic Energy Requirements of-OPEC Membe; Countries”, presented at the OPEC seminar, OPEC and Future Energy Markets, Vienna, Austria (Oct. 1979). 14. The Oil Daily. Jakarta, Indonesia (1 Nov. 1979). 15. Report on the Petroleum Resources of the Federal Republic of Nigeria. U.S. Department of Energy and U.S. Geological Survey, Washington, DC 20461(Oct. 1979). :
EGY Vol. 6, No. 8-C
1981
WORLD SUPPLIESOF PETROLEUM IN THE 1980s FEREIDUN FESHARAKI ResourceSystemsInstitute, East-West Center, Honolulu,HI%&48, U.S.A. (Receiued 25 February 1980) Abstmct-During the 1970sthe non-communistworld has weathered,without profound economic dis-
turbance,the oil crisis whichdevelopedfollowingthe formationof OPEC.This was to a largeextent due to the fact that, althoughthe marketprice of crude had sharplyincreased,its cost in real terms had remained stable. The factors which mitigatedthe economicconsequencesof the oil situation during the last decadeare not likelyto last throughoutthe 1980s.It is thereforeanticipatedthat the oil dependentcountrieswig bc in a much more dithcuh position in the immediatefuture. The conventionalapproachin studyingworldenergy problemsis to begin with the assessmentof future energy requirementsof individual countries on the one hand and of their energy production based on domesticresourceson the other. It is then assumedthat, hopefully,the differencebetweenthe two figures will be coveredby importsof crude. This study tackles the problem the other way around, using as a starting point an estimateof what is likely to be exportedby the OPECgroup in the 1980s. The conclusionarrived at from an analysis of the politicaland economicforces operatingwithinOPEC is that OPEC will drasticallycurtail its exports,maybeby as muchas 40%.As a result, the non-communist oil-dependentworld will face much more acute and diicult energy problemsduring the 1980sthan it did during the 1970s. I. INTRODUCTION
The 1970sproved to be a decade of fundamental changes in the world petroleum market. The price of crude oil increased from US$1.80per barrel (S/b)in 1970to an average of US$32.OO/b in 1980.Moreover, the multinational oil companies found their previously easy access to cheap and abundant oil either partially or completely blocked. In short, the balance of power shifted radically in the 1970saway from the oil companies and consuming nations and in favor of the producing nations. Fears about the catastrophic effects of these changes have proved to be unfounded. For example, it was said that growing surplus revenues in the hands of oil exporting nations would bring about world-wide monetary collapse. On the contrary, the international banking system remained intact and successfully channelled the surplus capital to both developed and developing deficit countries. Furthermore, it was predicted that higher oil prices would induce a massive switch to alternative energy sources. This prediction also failed to materialize. Environmental objections to coal and nuclear power, suspicion of the oil companies, excessive energy regulations and short-sighted electioneering all effectively hampered the development of alternative energy sources. The ability of the industrial and developing nations to successfully cope with these rapid changes in the world petroleum market can be attributed to a number of factors. First, the real price of oil actually decreased between 1974and 1978.A recent study has shown that as a result of U.S. dollar devaluation and world-wide inflation, the real cost of crude oil for Japan and West Germany fell by as much as 20%in the four-year period.’ It was only by the third quarter of 1979 that nominal price increases fully compensated for the real price declines of the preceding years. In the third quarter of 1979,the real price of oil, at US$7-11/b,finallyequalled the real price level of 1974.t Second, the large OPEC trade surplus of USRiObillion in 1974,dwindled rapidly to only US$l billion by the end of 1978.2Finally between 1970 and 1980 economic growth in the industrial countries (at an average annual rate of 3%), and in the developing countries (at an average annual rate of 4-6%)’ showed that most countries managed to escape the anticipated problems of the rapid petroleum market changes. Wee Ref. 1. 661
662
F. FESHARAKI
By the end of 1978, an environment was created in which the earlier sense of urgency about petroleum supplies and prices gave way to a sense of complacency reminiscent of the earlier decades of cheap and abundant oil. The Iranian Revolution of February 1979, however, was a rude awakening for those who thought the oil problem would go away by itself. Once again the vulnerability of the world economy to political upheavals in the Middle East became evident. In just one year, from January 1979 to January 1980, nominal oil prices increased by more than 120%, to an average price of US$30/b!+ The OPEC surplus of LJS$l billion in 1978 rose to around US$60 billion in 1979 and is expected to reach US$lOO-120billion in 198O.t To assume that the oil price/supply situation in the 1980s can be handled with the same relative degree of ease as in the 1970s may prove to be a grave mistake. The circumstances surrounding the world petroleum market are structurally different from those in the 1970s. The problem of supply shortages, as we shall argue later, is likely to become a major one. These will be due not only to physical shortages, but also to policy decisions by the major oil exporters to cut back their production. Oil exporters are going to ensure that oil prices will not fall again in real terms. Indeed, production cutbacks are likely to lead to further real price increases. Prospects for unified petroleum prices and an organized petroleum market are dim. This time the situation is far more complicated and far less predictable than in 1973-74. The stakes are very high and miscalculations may prove disastrous. The world economy in general, and the developing world in particular, must be aware of the magnitude of the problems they are going to face in the 1980s.
II. WORLD PETROLEUM
SUPPLIES
IN THE 1980s
The relationship between total energy consumption and petroleum consumption will now be considered by examining various energy supply/demand projections. The prospects of petroleum supplies from OPEC and non-OPEC sources, as well as petroleum price implications will also be discussed. Finally, a brief discussion of the impact of these developments on the balance of trade of a number of countries will be provided. The share of oil in total energy consumption In 1978, total world primary energy consumption was estimated at 135 million barrels per day (b/d) of oil equivalent, 46% of which came from oil and 18% from natural gas (the non-Communist world’s reliance on oil was 53%).’ Table 1 shows a comparison of various projections of energy supply and demand for 1985. All projections consider oil as a major source of energy, providing nearly one-half of the world energy consumption. Projections for 1990 indicate a slight decline in the contribution of oil to the total world energy demand, to around 40-45%. OPEC oil as a residual factor The projections show that OPEC oil production ought to be about 35-45 million b/d to supply world energy needs in 1985. However, these forecasts suffer from a common methodological problem. All consider OPEC oil as a residual factor: world energy demand is first estimated, then all oil and non-oil anticipated indigenous supplies, as well as non-OPEC imports, are deducted to reach the figure which OPEC “must” produce to balance world energy supply and demand. Since the OPEC residual is about one-third of total world energy demand, an error of 10% in forecasting total energy demand would translate into an error in estimating OPEC oil supply requirements of 30%. So far very few attempts have been made to look at the problem in reverse order, which would be far more realistic. This would involve analyzing the OPEC nations’ oil policies in order to arrive at an estimate of OPEC supply. This estimate would indicate the options for adjusting energy demand to oil supply from the OPEC nations. Indeed, it will be the OPEC supply that will determine the world’s need for other energy sources and not vice versa. ?See also Refs. 5 and 6. Bee Ref. 2.
World supplies of petroleum in the 1980s III. OPEC SUPPLY
663
POLICY
Table 1 lists a number of reputable projections for energy supply/demand of the nonCommunist world. All projections indicate that a relatively high level of OPEC production must be maintained in order to fill the gap between supply and demand for energy. The estimates of OPEC oil production in 1985 range from 35.5 million b/d (Frankel) to 44.6 million bid (PetrovenlPetrocanada). However, to put this into a realistic perspective it is necessary to examine the prospects of OPEC supply through analysis of the policy plans or policy trends. As the OPEC nations began to consolidate their control over their oil industries during the 197Os,they became increasingly concerned with the inevitable exhaustion of their oil resources. Although, a formal production pro-rationing program was never adopted by OPEC, by the turn of the decade many of its member-countries had become convinced that conservation of their resources through production cutbacks was the most sensible politico-economic choice available to them. A number of factors contributed to the development of this attitude: (1) National governments, not multinational oil companies, now have the responsibility of deciding production levels. Thus, the general rules of global supply and demand followed by private oil companies are not necessarily relevant. (2) Oil is an exhaustible resource. Once depleted, the producing countries may be thrown back into the dark ages of poverty and domination by industrial powers. Reserve/production ratios are falling and the possibility of additional large-scale oil discoveries is low. (3) Hopes for rapid modernization and industrialization through the use of oil income have been eroded by the experience of Iran. It has become clear to oil exporting countries that the injection of oil money into their economies will not by itself bring about rapid development. Self-sustained growth is an evolutionary process and for that reason the life span of the oil revenues must be extended to ensure a steady flow of foreign exchange, synchronized with the overall pace of economic growth. (4) Countries with surplus funds invested abroad have suffered losses due to inflation and the declining value of the dollar, while making themselves hostage to the holders of their assets. The freezing of Iranian assets by the U.S. has had a major negative psychological impact on other oil exporters. The idea of keeping their wealth in underground storage under their sovereign control has an attraction far greater than many other alternatives. (5) Political pressures are mounting in many of these countries in favor of conservation. At the same time, they fear that as in the case of Iran, excessive investments may disrupt the social order in their countries. Even without revolutions or changes of government, many of the conservative regimes are likely to cut production to appease internal opposition. (6) OPEC nations are aware of the low level of energy conservation in the industrial world. They conclude that the price of oil has not gone far enough to induce a resolute conservation policy. They find it unacceptable to deplete their dwindling assets to appease the appetites of industrial nations. (7) Rising domestic demand for oil products is another major consideration in reducing oil exports. OPEC domestic demand rose from 770,000b/d in 1970 to around 2.2 million b/d by the end of the 1970s. It is expected to reach 3.9 million b/d in 1985, 6.3 million in 1990 and 16.7 million b/d by the turn of the century. (8) The oil exporters realize that there are no major substitutes for their oil in the next 10-20 years. They also know that supply reduction is the key to price increases. Reducing supply also gives them enormous political power, which they can exercise to their own benefit, as well as obtaining some concessions for other LDCs. (9) Oil exporters can obtain the value added in petroleum refining and petrochemical production by extending their activities in these areas. Recently a number of OPEC countries have publicly declared their intention to cut back crude production. Many others are likely to do so in the near future. A number of countries, particularly Saudi Arabia, have exceeded their production ceiling to cushion the impact on the industrial world of supply interruptions and rising prices. Their position is likely to change in the future because of domestic political pressures and their inability to influence the oil market in a significant way. Table 2 shows the position of oil exports in 1980. There is no country in OPEC today which does not have some kind of restriction on production. The five large Persian Gulf exporters,
F. FESHARAKI
Table 1. Worldenergy demandand Lichrb1.u’ cam
B/c!
1976
Pranke12 1978
SRI2 1976
Won 1978
120.5 (255.0)
123.9 (262.3)
4.2
4.0
0.81
0.86
Bawl& willion b/d oil eq. (Quadrillion BTlls 1
122.4 (259.1)
Annual GNP Growth Rata
t
8
1.0 -
E/Gw Multiplier
t
Oil
Million
b/d oil
and NCiL (Non-OPK):
N,tursl
Coal:
Gas:
Nuclear:
a eq.
Nillion
oil
eq.
b/d
oil eq. * cubic ft. )
Nillion (Trillion
Nillion (nillion
b/d
b/d oil eq. Short Tona)
Mllion
I Ciyawsttr
b/d oil eq. ceprcity )
ttyilro/~;fo/Othar: Million b/d oil eq. ( ~wc~rl1 lion BTlls ) NcaL
Non-Oil
Nillion (Trillion
t;irn:
COrlI :
nillion (HillIon
WE’ Wul Oil Huoidul Nillioll oil
:
lqaortu
N~Ltrlol
4.5
0.9 - 0.0
~noryy DemandGrowth Rate: supply
120.3 (254.0)
3.7
3.0
3.4
3.5
83.9
84.3
120.5
82.?
24.4
24.5
58.9 (incl. GE)
24.6
21.1 (43.5)
21.4 (44.2)
22.1 (47.0)
18.9 (39.0)
22.6 (2175)
21.0 (2020)
23.4 (2250)
23.4 (2225)
8.1 1270)
1.5 (250)
6.2 (206)
7.7 (16.3)
cl:::,
8.1 (17.2)
Nillioll b/d oil eq. b/d oil eq. cubic ft. )
(25:; 5
,1:::, 1.1
b/d oil eq. short tona ) ImlXJKts~
Domaid for b/d oil
MilliOll
b/d
oil
(
oq. OPEC.Oil
i
-0.5
-0.5
-1
-1.1
38.0
35.5
U.A.
40.1
51
47
rq.
as d % of energy demand
49
NowCowullist Yorld. Figures do not add due to rounding. sow etudies bcw I’resented. Patrol*ur ‘LicbLbAa : Petroleum Industry Research Foundationa Prankdf Alternative Energy Sources. 3
52
projact
two
Bconcmico Ltd.;
665
World supplies of petroleum in the 1980s
supply in
19854arious forecasts.’
PBtrocBn/
Patrovm
nAes/lu3 CaHDKz
1917
1979
131.2
(277.91 4.4
114.1 - 123.2 (241.5) - (260.9) 3.4
OgCD W
AM SUPPLY
ONLY
CIA 1979
OUD
1977
99.0 (207.5)
101.9 (216)
5.2
4.2
3.9
1.0
-
1.0
--
0.94
3.4
-
5.2
--
3.3
95.2
76.7
-
87.1
59.4
65.9
25.5
22.4
-
23.5
17.0
17.1
22.2 145.9)
14.1 129.1)
15.5 (32.0)
21.7 (44.9)
19.7 (40.7)
21.7 (2038)
19.9 (1909)
(3:;'
10.1 036)
,1x,
21.6 -(20761
15.4 (1492)
17.3 (1662)
12.0 (400)
6.3 (210)
(3l:i'
-
u:::, -
Cl%,
u:::,
(1:::)
3.1
3.4
S,
2.2 (4.6)
1.3 12.8)
di'
2.5
-0.1 44.6
36.0 -
39.0
53
49
51
-
-1
34.9 omxl 2.3 Mon-OPU! =Jip. 1.3 1.0 45.0
35.0 -0.9
Othu
D.Ca 1.2
OPRC
3.5
m-1 37.9 demand rot OPXZ 011
666
F. FESHARAKI Table 2. 1980anticipated OPEC production level (million b/d). Sustainable Capacfty 1979'
Expected ly Production
Decline fras 197g2
Type of Rcstrictfon
Algeria
l.l- 1.2
1.0
0.14
Resource Constrained
Ecuador
0.25
0.23
+o.oz
Resource Constrained
Cbon
0.25
0.20
0.01
Resource Constrained
Venezuela
2.4
2.13
0.21
Resource/Policy Constrained
Indonesia
1.65
1.56
0.04
Resource Constrained
Nigeria
2.4
2.15
0.18
Resource/Policy Constrained
Libya
2.1
1.7
0.4
Resource/Policy Constrained
Iran3
4.5
1.8
1.2
Policy Constrained
Iraq’
4.0
3.5
+0.1
Policy Constrafned
Kuwait'
2.5
1.5
Saudi Arabia6
9.5-10.5
9.5
United Arab Emirates
2.48
1.75
0.07
Policy Constrained
Qatar
0.65
0.48
0.03
Rerource Constrained
Neutral Zone7
0.6
0.56
TOTAL OPEC'
34.38-35.48
28.06
0.75 +0.3
Policy Constralned Policy Constrained
Resource Constrained 2.61
2.43
Oorrstic consumption Export Availability
25.63
2.65
'Capacity which can be malntained for several months. Ooes not necessarily reflect the maximus production rate wfthout damage to the fields. Gsnerally 90 to 95 percent of installed capacity. 28ased on official and unofficial declaration of production levels and available data canpared to the first nine months of 1979. For countries where no declaration is made, the average 1980 production level for the first six months is dSSUIICd. 3 Iran's capacity has declined from 7 to 4.5 million b/d after the Revolution, due to fdll in pressure and ldck of necessary maintenance. Iran's stated target for 1979 was 4 million b/d. In the second half of 1979 it produced between 3.5-4 millfon b/d. Although no official announcement is made regarding 1980 production level, political dnd technical factors Strongly Suggest 2 million b/d cutback from 1979 target. 'Iraq has hinted d few times that it will reduce production by 600.000 b/d in 1980. Still the government It is assumed here thdt in fact is noncomnittdl, saying dny cutback will depend on xmrket devclomnts. production will not be reduced In 1980. 5 Kuwaft has hdd a production celling of 2 million b/d for several years. It has declared its intention to reduce productlon to 1.5 million b/d. %dudi Arabid's previously anticipated expansion of reserves to 14-20 million b/d hds not mdteridlized due to the Sdudj's lack of desfre to invest heavily in such expansion as well ds some technical difficulties. The Sustainable capacity is estfxmted by CIA to be 9.5 dnd Petroleum Intelligence Weekly to be 10.5 million b/d. However, more recent testing of cdpacity suggests a figure of 10.2 millfon b/d. The Saudi of1 productfon cefling of 8.5 millfon b/d was lffted for part of 1979 to cushion the impact of disruptions from Iran and reduce the rise in prices. It has been announced that production ceiling will not be operational for 1980. It is assumed here that production will be xmintained in 1980 at 9.5 million b/d. 7Equdlly shared ‘8dsed
between
SdUdi
Arabia dnd Kuwait.
on estimates from reference 13.
which account for 70% of OPEC capacity, 68% of OPEC production and 62% of the world petroleum trade, are all producing below capacity for policy reasons. In 1980, OPEC’s production is expected to decline by 2.61 million b/d and its exports by around 2.65 million b/d. Many oil experts, as well as Saudi Arabia, have publicly forecasted a glut for 1980. They expect the large stockpiles in industrial countries to be drawn down and recessionary forces to reduce demand significantly. While it is likely that demand for oil will fall in 1980, creating a glut, it must fall by more than the 2.65 million b/d which OPEC is expected to take out, or major additions to supply must come from Mexico and the North Sea. Even if a glut develops, it will be shortlived: production will fall to adjust supply to demand, with a six month lag. Because Iranian oil is overpriced compared to similar crudes in the Gulf, Iran’s oil will be the first to suffer a decline in offtake. Yet, a glut, no matter how temporary, may once again serve to distract attention from the major problem which is long-term supply. Table 3 considers the prospects of exports from OPEC in the next ten years. It shows that except for Iraq, the major Persian Gulf producers are expected to reduce production. Saudi Arabia and to a lesser extent Kuwait, face a floor in their production schedule below which their costly gas production systems remain under-utilized (see footnotes to Tables 2 and 3). It also shows the large increase in domestic consumption within OPEC which severely limits
World supplies of petroleum in the 1980s
667
exportable oil. OPEC exports are expected to decline from 28.28 million b/d in 1979 to 22 million in 1985 and to 17.29 million b/d by 1990. This indicates a nearly 40% cutback in available OPEC supply. When considering that OPEC accounted for 83% of the world trade oil in 1979, it can be seen that the impact on the world market will be colossal. Still, this forecast is relatively optimistic, since it assumes increasing Iraqi production, relatively steady Iranian production and a large Saudi production. Any Iran-type political upheaval could again disrupt production and further reduce supply. In the aftermath of the Iranian Revolution, the balance of power within OPEC changed drastically. Unlike 1975, when a Saudi threat to flood the oil market was sufficient to stop excessive price increases, today Saudi Arabian power as the “swing producer” has been severely curtailed. By stretching Saudi production nearly to the limit, the other members have partially taken the initiative away from the world’s largest exporter. When Saudi Arabia deliberately priced its oil $4/b below similar crudes at the June 1979 OPEC Ministerial Conference, in the hope of checking the price spiral, this was seen as the test of power within OPEC. As it happened, prices rose even further and spot prices reached $45/b. The greater portion of the price difference increased the profits of the oil companies which make up Aramco, the principal purchaser of Saudi oil. Non-OPEC exporters, notably the British, Norwegians, Soviets, Mexicans and Chinese, sold their oil at the higher tier price. Consumers had to pay the higher tier price. The current underpricing of Saudi crude by $2/b is going to prove to be yet another futile exercise. The Saudis appreciate that they can no longer affect developments in the market, but they might hope that this experience can finally persuade their allies, particularly the United States, not to expect them to perform miracles. Once this fact is accepted by the Western world, then the Saudis may have little reason to keep production at such high levels. In the current situation, any small OPEC exporter can influence the course of developments in the oil market, by even temporarily reducing production by 0.5 to 1 million b/d at the right psychological time. Panic buying and large stockpiling will start again, pushing up spot prices. The same 1979-type price spiral will emerge. Today, the majority of OPEC producers believe that their production policy should correspond to their own economic development planning and not to the international demand for petroleum. This means extending the production life of their resource by reducing exports. This group has, for the first time, been placed in a position to translate its thoughts into action. OPEC as an institution may well survive through the l98Os, but its functions are likely to be different from what they were in the past. The price fixing function through the well publicized bi-annual conferences may be the first to go. OPEC may become a consultative body devoted to research, and coordination of general trade and economic relations with both the industrial and developing nations. OPEC’s weakened position as an organization does not mean that its member countries will be weakened. Indeed, the changing circumstances underscore the even greater influence and power that OPEC members will be able to exercise without having to take collective decisions under an OPEC umbrella. To put the international petroleum supply situation in perspective, a brief discussion of the export potential of the major non-OPEC exporters may be useful. As can be seen from Table 4, the non-OPEC petroleum export potential is no more encouraging than the OPEC potential. Current exports from those countries, which account for only 6% of the total world trade, are not likely to increase in the 1980s. In the early 1980s the industrial countries’ production of petroleum is expected to increase only slightly. The increase in the North Sea production will partially be offset by the decline in US. production (Table 5). The net oil import position of the developing countries as a whole (excluding OPEC) is not expected to change in the next three years. Altogether they are likely to import 2.6 million b/d in 1982 as compared with 2.8 million b/d in 1978. Most projections, however, anticipate that growing LDC indigenous oil supplies during the 1980s will bring domestic supply into balance with demand. Other more optimistic projections envisage a net export of l-l.5 million b/d from LDCs by 1990. The short term prospects of oil demand and supply of LDCs are shown in Table 6. Treating the non-OPEC LDCs as one unit greatly masks individual variations. While Mexico and Egypt together add 1.2 million b/d to LDC supplies, the increase in demand in the LDCs will more than offset the increased supply. High income LDCs, such as Brazil, Taiwan, South
4.0
7.0
Proven
70
69
445
1.2
5.7 __-
465.6
2.0
1.1
40
16 -
26
15
17
32
21
21
48
32 -
47
22
81
26
54
49
1979 9.20
50
30.58
0.21
0.21
1.14
1.60
2.06
2.33
2.34
20.69
0.56
1.82
0.50
2.25
3.38
2.98
2.30 a3
28.28
0.15
0.19
0.02 0.06 --
1.0
1.24
1.98
2.17
2.05
19.5
0.56
1.77
0.49
2.21
3.18
2.34
8.95
0.14
0.36
0.08
0.16
0.29
1.19
--
0.05
0.01
0.04
0.20
0.64
0.25
19792
25.9
0.2
0.2
0.9
1.6
1.6
1.9
1.9
17.6
0.5
1.8
0.5
1.5
4.0
3.0
6.3
3.9
0.09 -
0.03
0.27
0.59
0.17
0.27
0.5,
1.90
__
0.07
0.01
0.06
0.34
1.04
0.46
19853
22.0
0.11 --
0.17
0.63
1.01
1.43
1.63
1.4
15.6
0.5 --.
1.73
0.49
1.44
3.66
1.96
5.84
lwestic Production CansunptlonExports (million bldl
likely exportsin the 1981)s.
mmest$c Production ConsqtionExports (alllion b/d)
23.6
0.2 _-
0.2
0.9
1.5
1.2
l.a
1.3
16.5
0.5 .-.
1.0
0.5
1.0
4.5
2.7
6.3
6.31
0.12
0.05
0.45
0.92
17.29
0.08
0.15
0.45
0.58
1.38 0.89
0.31
0.51
13.25
0.5
0.89
0.48
0.91
3.97
1.04
5.46
0.42
0.79
3.25
-.-
0.11
0.02
0.09
0.53
1.66
0.84
19903
Dawstic Production ConsunPtionExport! (million b/d)
reserves denote reserves which can be recoverul at current prices and technologies. Excludes secondaryand tertiary rewveries. Secondary recovery alone can boost reserves in the Middle East by at The proven reserve figures widely guoted in the literatureare questionableto say the least. least 505. Often fields of SO-500 million barrels which have a wst of production of over Sl/b are considered too small, too expensiveand are not included in reserve figures. The figures for Iraq and Kuwait are generallybelieved to be WIonq. Iraqi reserves are believed to be 4 to 5 tiau luger than the quoted figure- second only to Saudi Arabia, while, Kuwaiti figures ar8 thought to be exaggerated. ma OPEC nations as a matter of policy do not declare their reeerve figuru md tlu information i8 generally provided by the oil cogurims. 2 ReflectsJanuary-octobu 1979 production. 3 Productionestimates are based on the autbur's wctations of production cutbacks due to political/ewnaic Domestic and technicalreasons. These estimate8 exclude thm possibilityof major political uphewals. wmunption foreceses ere quoted from the OPEC Secretariat.
1
OPEC as 2 of World
TOTAL: OPEC
Ecuador
Gabon
6.3
10.2
10.0
Algeria
47.0
30.4
Libya
9
24.3
15.0
Nigeria'
Indonesia
18.0
la.2
13.7
Venezuela
6.5
31.3
364.8
16.0 --
342.7
TOTAL: Persian Gulf
Neutral Zone
United Arab Emirates*
22.8
66.2
64.9
Qatar
Kwfait'
32.1
29
Iraq6
59
165.7
65
138
1979
Iran'
Saudi Arabia'
1973
Proven Reserves1 [billion barrels)
Reserve to Production Ratio
Table 3. Current reserves and production and
,,,
lllny powerful voices in the Saudi Royal fluily prefu
9
8
Increasing tension5 betue5n oil producing and non-oil-producing emirates, together vith uneven distrfhition of oil incow within the seven sheihdoms which for5 UAE, will not allow a sharp cutback in If the federation is to continue in one piece, oil inwill have production in the next five years. Still, by 1990 the lower production level to be channelled to pooru sheikdoms in larger guantities. of 1 million b/d is thought to generate sufficient infor WE's ne&s.
income in the 1980s.
its intention to cutback production to 1.5 million h/d in the short term and oaintain a 1OO:l reserve/praiuctionratio in the long term. Like Saudi Arabia, Kuwait's flexibility is restricted to so55 extent by its associated gas facilities. The difference with Saudi Arabia is that all the gas is used domstically: 33% for desalination: 251 for oil coqany use) and 9A for reinjection. Together with LPG plans, idsally 3 5illion b/d production are required for full capacity utilisation, a Still, production is espected to decline, lut only gradually. production level long abandoned by Kuwait. Like Saudi Arabia, UAE and Libya, accumlated surplus inve5taants abroad will brihg in large interest
Kuwait has expressed
,,
,,
As the t%m most populous u&ions of OPRC, these countrier' need for ever increasing oil income is expected to remain high. Indohesia, the poorest OPEC country, is expected to maintain production at full capacity, while Nigeria is expected to reduce production by only 215,000 b/d coapared to its declared target of 2.15 million b/d for 1980. Recent reports indicate an expansion in the production capacity of both nations is likely in the 1980s. According to The Oil Daily (reference 141 Indonesia's exploration and development efforts have increased substantially and a production capacity of 2 million b/d by 1965 is likely. During 1990-2000 a capacity of 2.5 million b/d is not impossible. For Nigeria, a recent report by the U.S. Department of Energy and U.S. geological Survey (reference 1s) indicates that with increased drilling, prospects for capacity expansion to 3.5 million b/d is there. The report. howev@r, anticipates a production range of 2-2.5 million b/d could be maintained during the latter part of the 1980s through the year 2000. In the case of both countries the available production capability will not necessarily mean that they will produce at those levels.
7
a cutback in production to I-4.5 million b/d. Nevertheless,barring major political changem, one can ammum that the Saudi production preference in the 19809 will bs at a level with which its umofve gam gathuiag project for ammociated gas can operate at full capacity. Thm gam-gatheringprojects uhich is estiuted to comt between S14-21 billion has a collectiontargetof 3.3 billion cubic feet a day a& will be remdy by 19S2. m feed thm nmw systr. oil production lewel of 5.7 eillion b/d fror Shmmr and Abqaiq field8 togethu with 550,000 Wd fra Bmrri field are mufffciult. Therefore, a production level of 6.3 million b/d are asmwal here to be likely production for the l%Om. It is highly unlikmly tlbstthm Saudis invemt heavily in expanmion of capacity as a larger c-city will place thruWer intunationalpresmure to incrume pmduction. 5 Iran's production is expected to remain relatively steady during the 19SOs. although an increasing share will go to Qwstic cotlmuqtion. It is ammund thatby1990, Iranwill try to exportonemillionb/d to pay for its import nmedm. Technical problu by this tin will serioumlycurtailadditionalproduction. 6 Ths poor relationship between the post-revolutionary goverments of Iraq and thm oil Bern in the Indeed, the 1960s was the reamon behind ignoring the developwnt of Iraqi oil remuvem and capacity. expansion in production of a ne of other hiddle Samt producum c8mm at the sapenseof Iraq. Ths situationwas reversed in the 1970m when Iraq, nationalizingits oil, heavily expanded capacity and production. In 1975, when OPEC production aa a whole f 811 by 11 percent due to declining dB, Iraqi Despite tvrary cutbacks occasionally,it is cleu that the Ba'athist govermont erports rose by 1%. of Iraq in its quest for influence and pauer in thm region will push production and capacity higher in the 1980s. This 5eans that Iraq will probably bm the only ccuntry in OPEC erpa&ing production. Iraqi capacity in 1990 is -ted to be around 5-6 million b/d.
4
Communist
Countries
32
19.9
0.4 1.5 1.6 1.4 0.5 0.2 0.3 1.9 12.1 11.7 0.4
17.7
0.2 1.9 1.8 0.9 0.2 0.1 Negligible 1.7 10.9 8.4 2.3 0.2
19791 Consumption
6
2.2
0.2 -0.4 -0.2 0.5 0.3 0.1 0.3 0.2 1.2 3.3 -1.9 -0.2
Exports
23.2-24.2
l-l.5 0.5 0.3 3.5 10.5 10 0.5
3.5
0.7 2.0 1.7
Production
1990
22.2
1.6 0.6 0.2 Negligible 3.0 12.8 10 2.5 0.3
0.3 1.9 1.8
Consumption
1.8-2.3
0.4 0.1 -0.1 1.9 1.7-l-2 0.3 0.3 0.5 -2.3 0 -2.0 -0.3
Exports
Resource Resource Resource Resource Resource Resource Resource
Constraint Constraint Constraint Constraint Constraint Constraint Constraint
Policy Constraint Policy/Resource Constraint (cxllectcd Resource Constraint Policy Constraint (expected) Policy/Resource Constraint
Type of Restriction
6 Egypt's production is expected to reach 1 million b/d by 1982. It may wish to follow other producers by imposing a ceiling or stretch itself to the limit by producing 1.5 million b/d. No official or unofficial hints on future policy. 7 The Soviet Union is expected to be able to produce 10 million b/d, at most, between 1985 and 1990. If its domestic demand grows at over 5% as in 1973-78, domestic demand will reach nearly 14 million b/d making the USSR a major oil importer. It is assumed optimistically here that the Soviet Union will restrict the growth of demand to 2% annually. The same goes for Eastern Europe: a traditional demand growth of 5.56 would imply imports of nearly 4 million b/d. It is assumed here, that demand growth is held down to 2% a year.
Source: references 1,7,9,10 and 11. 1 1979 figures are for the first half of the year. 2 Norway has impoeed a production ceiling for reasons of "social policy." The ceiling is expected to be maintained during the 1980s. 3 UK and Canada are assumed to maintain domestic demand at current levels. 4 UK output of oil is expected to peak by 1982 at 2.8 million b/d before it begins to decline, unless unexpected new fields are found. There are strong indications that the government will impose production ceiling on output in the early 1980s in order to increase the life span of of its exports and avoid becoming a net importer of oil in less than a decade. Another consideration is flaring of the associated gas which the government wishes to avoid. Already, the government has ordered reduction of output from 185,000 to 100,000 b/d for Esso/Shell's Brent oilfield to avoid flaring. Also, a now radicalized Labour Party victory at the next elections is sure to result in some kind of production ceiling. It is assumed here that production will be steadily maintained at 2 million b/d for 1980s. 5 The government Mexico is expected to impose production ceiling in the mid - 1980s. The limit is likely to be in a 3-4 million b/d range. has often hinted that its production policy will be based on "domestic economic needs with a view to spreading the life span of reserves--a borrowed OPEC catch phrase.
of world
TOTAL
I%
Other
China SovieS Bloc USSR East Europe
Oman
Unitedflngdom3'4 Canada5 Mexico6 Egypt Malaysia
Norway
Production
Fig. 4. Present and future extort Dotential of major non-OPEC oil exporters (million b/d).
671
World supplies of petroleum in the 1980s Table 5. Industrial countries oil production (million b/d). 1978
1980
1982
10.3
9.9
9.2
1.6
1.7
1.7
Norway
0.1
0.5
0.7
United Kingd0m
1.1
2.0
2.8
others
0.3
0.4 -
0.4
13.7
14.5
14.8
Australia
0.5
0.5
0.5
New Zealand/Island
0.06
0.06
0.06
14.26
15.06
15.36
United States
lbtal oE4m
South Africa lbtal
SOUPX:
reference
9.
Korea consume a major portion of LDCs oil demand and will compete with poorer LDCs for the shrinking oil supply. IV. FUTURE OIL PRICES
The analysis in the preceding pages indicated that the supply of petroleum from OPEC and non-OPEC sources is likely to decline drastically during the course of the 1980s. While the projections in Table 1 called for OPEC production of 35-45 million b/d, the likely production level is expected to be around 26 million b/d. With OPEC domestic demand for petroleum rising to 4 million b/d in 1985 and 6.3 million b/d in 1990, available crude for export will be reduced Table 6. Projected net oil import requirements of non-OPEC LDCs (million b/d). 1979-w 1978
1980
1982
'rOduction
4.6
5.6
6.7
zons*i.on
7.4
8.3
9.3
*t 4-iortS
2.8
2.7
2.6
-licit
RatOOfQiPGXWth
of which: Aw=tina
0.1
Brazil
0.6
Mexico
Negligible
Negligible
4.0
1.0
1.0
6.0
-0.3
-0.7l
-1.1
8.0
Peru
Negligible
-0.1
-0.1
5.2
Egypt
-0.3
-0.4
-0.7
7.0
India
0.4
0.3
0.4
4.0
Philippines
0.2
0.2
0.2
6.0
South lbraa
0.5
0.5
0.7
9.0
Taiwan
0.3
0.4
0.6
10.0
-0.1
-0.1
-0.1
8.1
Malaysia S.XUCe:
reference 9.
1 Actual emrts half of 1980.
of patroleum from Maxim
wua
at 1.1 million
b/d
in the first
Anal&
612
F. FESHARAKI
even further. Indeed, OPEC exports are expected to decline from 28.8 million b/d in 1979to 17.3million b/d in 1990-a drop of nearly 40%. Conventional wisdom for dealing with the supply shortages now calls for a reduction in petroleum demand through conservation, as well as through fiscal and administrative procedures to lessen the impact of oil prices during the transition period to alternative energy sources. However, demand considerations may not be a determining factor in setting future price levels. Since the OPEC nations’ propensity to reduce production is limited only by the prospects of a catastrophic impact on the world economy andfor a threat of military action, a cutback in demand for oil will be more than matched by a production cutback. Regardless of the importance of conservation and demand reduction, this is a realistic assessment of the current mood within OPEC. If the world economy takes no measures to reduce demand, the supply cutbacks are likely to lead to major price increases. However, if demand for oil is gradually reduced, the price increases would be small but regular. The projections in Tables 2 and 3 are based on a set of policy measures which are likely to be adopted by the OPEC exporters. However, external demand considerations may speed up or reduce the pace of implementation of such policies. Indeed, reductions in world demand for petroleum serve as guidelines for OPEC nations to adjust their export level downwards. The 1980swill probably witness a permanent tight market for petroleum and large price increases. Rut how fast the prices are increased would depend in part on how energy demand is managed by the world economy. It would be a mistake to assume that high petroleum prices will lead to a glut which would weaken prices. The excess of supply over demand does not necessarily mean a weakening of prices. In the first two months of 1980,supplies exceeded demand by one million b/d, while oil stocks were at a peak of 700 million tons. Yet official prices have been increasing and spot prices were still $2-5/b above officialprices. Any glut in petroleum supply will be temporary. It will be eliminated by production cutbacks with a time lag of three to six months. In fact, in some instances petroleum prices are expected to determine production levels. Prices wiii be increased while decline in demand will result in reduced liftings from producing areas, Any reduced lifting may well become the new ceiling for production. The possibility of a decline in the real price of petroleum, as was the case during 1973-78,is extremely unlikely. The rate of real price increases is likely to remain in the range of 510% annually (Table 7). Again, it should be emphasized that demand considerations are likely to have far less influence in OPEC’s pricing policy, than their assessment of the economic and political impact of oil supply on the world economy and/or OPEC’s own security problems. An argument often used by OPEC ministers to justify oil price increases is the cost of alternative energy sources. Without going into the pros and cons of the validity of this argument, one may simply note that the average cost of alternatives have gone up from $7/b of oil equivalent in 1973-74to between $35 and $60/b.t In fact, estimated increases in the cost of alternatives have overtaken and exceed crude price increases. However, it can be argued that the cost of alternative energy sources has not been and will not be a major factor in the OPEC decision-makingon prices. Oil prices and the importing nations’ economies
Oil prices will have a major impact on the economies of importing nations. The magnitude of their impact on inflation, balance of payments, investment, unemployment, etc., requires further studies. However, a number of general observations can be made. First, the oil import bills of the importing nations are expected to increase dramatically. Starting from their current trade balances, it is possible to get an idea of the order of magnitudes by which exports will have to be increased to cover their growing oil import bills. Table 8 provides an indication of how increased oil import bills affect the trade balances of selected countries in the Asia-Pacific region. The net oil bills of this sample of eight countries is likely to increase from $7.3 billion in 1978to $28.4billion in 1982-a fourfold increase. Except for Malaysia, which is an oil exporter, and Taiwan, all other countries had a trade deficit in TBechtel Corporation estimates costs of synfuels at $4040/b oil equivalent. An OPEC Economic Commission Report indicated a cost of $35-56/b oil equivalent for alternatives (see Ref. 8).
World suppliesof petroleuminthe 1980s
613
Table 7. Expectedoil prices in the 1980s(U.S. S/b). iSEd I&w
Average
Price 1980
~iCU
Pbm2 (current pricu
with
(aNtMt
Avuage
mdiu
Iiiqh
La
19901 mdiuB
High
30
38
40
30
49
78
42
53
66
59
93
144
7% averageannual inflation)
/ 1 5b annualreal price increase; Ire*: no raal prfco incmue; mdiur high: 101 annualreal price iacreue. 27% inflation rate ia buad on the World E~ank'a mtpectadamual inflation rata ln tbo 196OB.
1978.Assuming that all non-oil imports would not be allowed to increase, exports would have to rise by 36% to cover the higher oil import bill-a very difficulttask indeed. For the industrial countries the situation is also serious, although they have far better prospects for export increases, particularly to OPEC countries, compared to the developing world. The United States oil import bill was $7.5billion in 1973and $41.6billion in 1978.In 1980 the US. oil import bill is expected to be around $85 billion reaching $110billion by 1982.The OECD nations’ oil imports increased from 25.7 million b/d in 1978to around $117 billion in 1980.By 1982their oil imports are expected to reach 23.1 million b/d9 and their oil import bill could amount to $316billion. Second, the rising price of oil brings into question the overall future economic strategy of the oil importing nations. The problem of economic strategy is particularly acute for the fastest growing LDCs namely, Brazil, Taiwan, South Korea, and to a lesser extent the Philippines and India. The export-oriented economic strategy that they followed in the 1960sand 1970sserved to protect them from the increased oil prices of 1973-74.While the world economy was in recession during 1975,the GNP of Brazil, Taiwan, and South Korea grew at an average annual rate of 8-9%. (In the case of Brazil this growth was possible through debt accumulation, which has now reached $50 billion.)There are no guarantees that this strategy can be repeated. While real oil prices fell in the 197Os,the next decade promises ever growing real prices. These countries will have to decide very soon whether they wish to slow down the rate of their economic growth, so that their oil import bill will not rise as fast, or to continue their traditional fast growth policy. Reducing growth rates may have serious political implicationsat home, both on employment in the export sector and on the rate of growth of aggregate demand. On the other hand, following the export strategy/fast growth policy might lead to disastrous consequences, if the nation is unable to expand its exports sufficientlyto cover its oil import bill. At least one nation, Taiwan, seems to have decided on a lower rate of economic growth and a more conservative export approach. The price of petroleum products, long kept artificiallylow to help energy-intensive exports flourish, has been now significantlyincreased. While the high-income LDCs are faced with critical decisions, the low-income LDCs are facing even more difficult problems. Not only do they face all their traditional problems but in the 1980s they also face fiercer competition from high-income LDCs for international credit/borrowing, export markets, and state-to-state deals with OPEC nations. The prospects of additional aid from the OECD nations are not bright, though OPEC aid is expected to increase significantly. But even some additional aid will not come close to covering their future oil import bills. V. CONCLUSION
The world petroleum market of the 1980sis expected to be seriously affected by supply problems. Not only are OPEC nations expected to reduce their supply by 40% but non-OPEC exporters are also unlikely to increase exports. Indeed, non-OPEC exports are also expected to decline.
Oil Production
830
486
695
Taiwan
south Korea
375
880
229 -
525
260
5595
Price
f.0.b. values
4 Estimated by the author.
Actual
3
c.i.f.
based on medium scenario in Table VII.
ActlId
2.
1
Source: references 9 and 12.
151 .Total selected Asia-Pacific 4028
Malaysia
1050
5
300
235
Philippines
India
5
60
70
50
Sinqapore
100
31
290
225
Thailand
360
248
2515
1981
40
12
280
205
Pakistan
Net Volume of Oil Imports
1605
2030
5391 62143
7412 58555
-1778
-2161 28409
-583 -7335
-140
-88 --
14259
12715
8891
10808
2210
700
455
10442
12704
7367
8955
1595
580
339
4726
3332
2413
2934
907
190
220
12340
10214
889
1081
297
70
50
4864
4082
2413
2934
812
7091
190
194
395
6603
5017
6098
168E4
370
25784
572
3030
-3588
t2021 ---
-1544
t2262
-1394
-2126
- 782
- 4HH
-1537
Exports3 Imports3 TrcldcR,al‘,rl<~e (millions of current U.S.SI
1978 International Trade
1493
694
45
409
65
19822
19822
Oil Import Bill Oil Import Bill (Millions of .(Millions of Current U.S.$) Constant 1980 U.S.$) 1978l
(thousands of barrels per day of oil equivalent) 1982 1978 1978 1982 1982 1978
Energy Consumption
Table 8. Energy consumphon, oil production and imports forselected Asia-Pacific nations.
World supplies of petroleum in the 1980s
675
The oil market of the 1980spromises to be tight, with continuous shortages in petroleum availabilityand pressure on oil prices to rise, in real terms, to perhaps around $80/bin constant 1980prices and over $140/bin current prices by 1990. The impact of the increased prices and tight market conditions is likely to be extremely serious for the world economy in general and for the developing world in particular. The high-income LDCs face the critical choice of changing their high-growth strategy to a lowgrowth strategy, or risk the danger of major trade gaps, with consequent political problems at home. The low-income LDCs are likely to face an additional burden that is likely to wipe out what they might have achieved in the 1970s. The trade profile of our sample of eight Asia-Pacific nations shows the magnitude of the problem the LDCs are going to face in the next ten years, Given the bias against LDCs inherent in world trade, these growing economic problems will not be solved through additional aid, international borrowing, or major improvements in export performance. They are left with no choices other than reliance on their own ability to reduce their dependence on imported oil and to direct their efforts, even at the cost of diverting resources from productive sectors, toward the development of non-oil energy sources, both for commercial and non-commercial energy production.
REFERENCES I. Petroleum Intelligence Weekly 18 (19 Nov. 1979).
World Financial Markets. Morgan Guaranty Trust Company, New York, NY lnOl5 (Nov. 19793. War/dDeuelopmenfReports. World Bank, Washington, DC 20433(1979). 4: F. Fesharaki, “Iran’s Energy Picture After the Revolution”, Petroleum Inrelligence Week/y 18, Supplement (24 Sept. 1979). 5. The Middle East Economic Survey 22, Supplement (3 Sept. 1979). 6. F. Fesharaki, Reuolufion and Energy PO/icy in Iran. Economist Intelligence Unit, London (1980). 7. BP SrarisGcalReview of the World Oil Industry.British Petroleum Co. Ltd., London (1978). 8. ne Economist 273, 1701(6 Oct. 1979). 9. WorldPetroleum Markets in the Years Ahead. National Foreign Assessment Center, U.S. Central Intelligence Agency, Washington, DC 20505(1979). IO. Intemafional Energy Sralistical Review. U.S. Central Intelligence Agency, Washington, DC 20505(27 June 1979). 11. Petroleum and Gas in the Non-OPEC DevelopingCountries.World Bank, Washington, DC 20433(1978). 12. IntemoGonal Financial Statistics. International Monetarv Fund. Washintion. DC 20431(Jan. 1980). 13. S. A. R. Kadhim and A. AI-Janabi, “Domestic Energy Requirements of-OPEC Membe; Countries”, presented at the OPEC seminar, OPEC and Future Energy Markets, Vienna, Austria (Oct. 1979). 14. The Oil Daily. Jakarta, Indonesia (1 Nov. 1979). 15. Report on the Petroleum Resources of the Federal Republic of Nigeria. U.S. Department of Energy and U.S. Geological Survey, Washington, DC 20461(Oct. 1979). :
EGY Vol. 6, No. 8-C