The crude oil market was wracked with turbulence during 1998, as prices fell by one-third on average from 1997 levels. Even without adjusting for inflation, the world oil price in 1998 was the lowest since 1973. The declining oil prices were influenced by an unexpected slowdown in the growth of energy demand worldwideless than any year since 1990and by increases in oil supply, particularly in 1997. Although the increase in world oil production in 1998 was smaller than in any year since 1993, efforts to bolster prices by imposing further limits on production were unsuccessful.
Oil consumption in 1998 was lower than anticipated largely because the recession in Southeast Asia proved to be more severe than expected early in the year. Significant reductions in gross domestic product (GDP) were experienced in Korea, Thailand, and Malaysia. Depression and political turmoil struck Indonesia. Japan, the regions largest economy, moved from slow or no economic growth to decline. Although the Chinese economy continued to grow, it was hampered by a reduction in trade with neighboring countries. As a consequence, a decade-long string of annual increases in oil demand was broken, and Asian oil requirements fell by about 100,000 barrels per day in absolute terms  and by more than 1 million barrels per day relative to expectations . Production geared to the earlier expectations created a supply glut, which was exacerbated by a mild winter and lower weather-related demand as well as Iraqs return as a crude oil exporter.
By mid-1998, declining prices set in motion renewed efforts to manage oil supplies under sponsorship of the Organization of Petroleum Exporting Countries (OPEC). Agreements were sought to restrict production within OPEC, and initiatives were launched to gain cooperation from non-OPEC producers. In both March and June, OPEC (excluding Iraq) and key non-OPEC producers Mexico and Norway announced plans to cut oil production. In the remaining months of 1998, however, announced and realized production cuts were not clearly synchronized, and production management efforts had at best only modest success.
By the end of 1998, other constraints on oil supply became increasingly evident. Stripper production in the United States was in decline. Exploration and development spending was being slashed. Rig utilization rates, especially for onshore equipment, had fallen by 30 percent. Announced spending plans worldwide were reduced. Oil-producing countries faced severe fiscal deficits, causing national oil companies to cut capital spending. Private-sector restructuring entered a new stage as mergers involving leading multinational oil companies were announced or consummated. A prime objective of the mergers was to rationalize corporate operations, reducing employment needs and eliminating investment activities with low profit prospects.
How should these developments be factored into the construction of an intermediate- and long-term oil market outlook? One perspective might feature an expectation of continued low oil prices in 1999 and beyond, sustained in part by expectations that economic recovery in Asia will be slow in coming, increasing adverse economic pressures in the rest of the world and causing oil demand to remain flat or decline. This perspective could be further sustained by a view that oil supply development continues even in the context of low oil prices because of technology being applied to highly prospective frontier areas, or because resource-rich OPEC producersincluding especially Saudi Arabia are opening up their countries to high levels of exploration and development activity.
While the risk that such a scenario might transpire is perhaps greater now than a year ago, it is not this reports reference case. Oil prices in the International Energy Outlook 1999 (IEO99) reference case are expected to recover over the next several years as oil demand growth resumes in Asia and is sustained over the next two decades at high levels in developing countries throughout the world. By 2005, oil prices are projected to be in the range of the reference case track presented last year in the International Energy Outlook 1998 (IEO98). Oil demand is expected to reach 110 million barrels per day by 2020, requiring an increment to world production capability of 30 to 40 million barrels per day relative to current capacity. OPEC producers are expected to be the major beneficiaries of increased production requirements, but non-OPEC supply is expected to remain highly competitivewith major increments to supply coming from deepwater resources, especially in West Africa.
Some argue that recent and projected trends in growth for oil production are not sustainable and that within a decade or so we could face severe oil price escalation (see discussion on "Are We Running Out of Oil"). Over the past 25 years, oil prices have been highly volatile. In the future one can expect volatile behavior to recur principally because of unforeseen political and economic circumstances. It is well recognized that tensions in the Middle East, for example, could give rise to serious disruptions in normal oil production and trading patterns. On the other hand, significant excursions from the reference price trajectory are not likely to be long sustained. High real prices deter consumption and encourage the emergence of significant competition from marginal but large sources of oil and non-oil energy supplies. Persistently low prices have the opposite effects. Limits to long-term oil price escalation include substitution of other fuels (such as natural gas) for oil, marginal sources of conventional oil that become reserves when prices rise, and nonconventional sources of oil that become reserves at still higher prices. Advances in exploration and production technologies are likely to bring down prices when such additional oil resources become part of the reserve base.
Highlights of the IEO99 projection for the world oil market are as follows:
Oil currently accounts for about 40 percent of world commercial energy supplies. The reference case projection anticipates rising demand, by about 1.8 percent per year, causing oil requirements to reach 110 million barrels per day by 2020.
In 2020, oil is expected to represent 37 percent of total energy supply. The decline in the energy share reflects primarily a trend toward switching to natural gas and other types of fuel particularly for power generation in many industrialized and developing countries. Oil demand in industrialized countries is projected to increase at only about 1 percent per year over the next two decades. Thus, the region that accounted for about 60 percent of oil demand in 1996 will account for only about one-third of anticipated demand growth between 1996 and 2020. The other two-thirds of demand growth (about 26 million barrels per day) is projected for developing countries. In Eastern Europe and the former Soviet Union (EE/FSU), domestic production and oil consumption have been in continuous decline since the late 1980s. A gradual turnaround is expected beyond 2000, but overall recovery expectations have been scaled back to less than 5 percent of the projected increase in world demand.
In all regions of the world, the largest increases in oil consumption are expected to result from oils use as transportation fuel. After 2011, the use of oil used for transportation is projected to top all other uses combined (Figure 20). By 2020, transportation is expected to account for 52 percent of world oil consumption, up from a 44-percent share in 1996. The sources of growth in end-use consumption differ greatly between industrialized and nonindustrialized economies (Figure 21). In industrialized countries, oil demand growth stems almost exclusively from developments in transportation. In other areas, growing demand for petroleum fuels in electricity generation, heating, manufacturing, and other uses accounts for about one-third of the increment in oil consumption.
Figure 20. Petroleum Use for Transportation and Other Purposes, 1980-2020
Sources: History: Derived from Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).
Figure 21. Projected Changes in Oil Consumption by Region, 2000-2020
Source: Energy Information Administration, World Energy Projection System (1999).
Trends in Industrialized Economies
By the mid-1980s, many industrialized nations had reduced their reliance on oil in those applications where practical alternatives were available, such as electric utility and industrial boilers and home heating. The United States led the way in this transformation. European countries are expected to continue moving away from oil for nontransportation uses. Much of their prospective power capacity development involves increased reliance on natural gas at the expense of both oil and coal.
More than half the growth in oil consumption in industrialized countries (Figure 22) is projected to occur in the United States, where per capita car ownership and travel continue to rise. Western Europe represents about 20 percent of the growth in oil consumption, and Mexico and industrialized Asia (Japan, Australia, and New Zealand) each account for about 10 percent of the growth in industrialized oil consumption. A small amount of growth is projected for Canada. The projected increase in oil consumption in Japan is smaller in IEO99 than it was in IEO98 as a result of less optimistic economic assumptions in the current forecast.
Figure 22. Oil Demand in Industrialized Countries, 1970, 1996, and 2020
Sources: 1970 and 1996: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).
Trends in the EE/FSU and Developing Countries
Regional economics are expected to produce a 3.2-percent annual rise in oil consumption in newly industrializing (developing) countries and a much slower increase of about 0.8 percent per year in the EE/FSU region. The developing world, which accounted for less than one-third of the worlds oil consumption in 1996, is expected to account for 44 percent of the oil market by 2020. Almost 50 percent of the growth in oil consumption in developing economies occurs in developing Asia (Figure 23). Although expectations for economic growth in developing Asia have been adjusted downward in IEO99 to reflect the lingering economic crisis, the reference case projection continues to reflect strong potential for sustained economic growth. As a result, oil consumption in developing Asia, which accounted for 17 percent of world demand in 1996, expands to a 22-percent market share by 2020, comparable to the U.S. level. Within developing Asia, China, India, and South Korea are expected to more than double their 1996 oil consumption.
Figure 23. Oil Demand in Nonindustrialized Regions, 1970, 1996, and 2020
Sources: 1970 and 1996: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).
China represents the largest growth area in developing Asia, with an increase of 5.2 million barrels per day between 1996 and 2020, slightly more than the combined increase for India and South Korea. Strong economic and population growth spur growth in oil consumption in the three countries. In China incremental oil demand is projected to come mostly from the transportation sector which is expected to grow at an annual average rate of 6.7 percent (compared with 1-percent annual growth in nontransportation uses). Demand for transportation fuels, especially diesel fuel, rise as railway and highway infrastructures are improved to allow for more personal and commercial travel. Road travel in China currently is limited by an underdeveloped roadway system and a level of per capita car ownership that is the lowest in Asia. Projected growth in oil demand is more evenly distributed between transportation and nontransportation uses in India and South Korea. In fact, nontransportation oil use, including consumption in the industrial, buildings, and electricity generation sectors, is projected to increase at a slightly faster rate than oil use for transportation in both India and South Korea.
Oil demand in Central and South America doubles over the forecast, but demand growth in the region is slightly slower than in other developing economies. As in other regions, transportation is the largest growth market in Central and South America, accounting for 70 percent of the projected increment in oil demand between 1996 and 2020. About 40 percent of the regions growth in total oil demand is expected in Brazil, which has the largest population and economy in the region. The reference case projection assumes that current Brazilian economic difficulties will soon ease.
Oil consumption patterns in the EE/FSU region are expected to continue the decline of the 1990s, set off by their transition to market economies. During the 1990s oil consumption declined along with gross domestic product in the EE/FSU nations, but it was forced even lower as supplies in oil-producing countries were exported to generate revenue. Consumption in the region is projected to begin to recover by 2005. By 2020, FSU consumption surpasses its 1996 levelsstill only about 60 percent of the pre-depression 1990 level. In Eastern Europe oil consumption is projected to exceed 1996 levels by 2020, returning to levels of the early 1990s. Virtually all the regions growth in petroleum use results from increased demand for transportation fuel, as reliance on rail travel is replaced by highway travel. Residual fuel or mazut, which is used heavily in industrial boilers and power plants, is expected to be replaced by inexpensive natural gas .
The Middle East and Africa account for 19 percent and 9 percent of the rise in oil demand within developing countries, respectively. Oil use for transportation rises rapidly in both regions. The transportation share of total petroleum demand rises from 27 percent to 33 percent in the Middle East and from 40 percent to 43 percent in Africa. The expected increases in nontransportation oil use in both regions are primarily for electricity generation.
World Oil Price
The near-term price trajectory in the IEO99 reference case is considerably different from that in IEO98. The plummeting oil prices of 1998 were not anticipated last year, and the timing and magnitude of an expected rebound in both oil demand and oil prices are the source of much uncertainty. On the other hand, current price movements have not much affected the IEO99 projections beyond 2005. Three possible long-term price paths are shown in Figure 24. The reference case forecast assumes rising real prices, at an annual rate of almost 6 percent from 1999 to 2007. After 2007, the IEO99 reference case oil prices are similar to those in the IEO98 reference case.
It should be noted that, regardless of the IEO99 price scenario, oil demand rises significantly over the projection period. In the high and low world oil price cases, the projected rise in oil consumption ranges from a low of 32 million barrels per day to as much as 46 million barrels per day. There is now widespread agreement that resources are not a key constraint on world oil demand to 2020. Rather more important are the political, economic, and environmental circumstances that could shape developments in oil supply and demand.
Figure 24. World Oil Prices in Three Cases, 1970-2020
Sources: History: Energy Information Administration (EIA), Annual Energy Review 1997, DOE/EIA-0384(97) (Washington, DC, July 1998). Projections: EIA, Annual Energy Outlook 1999, DOE/EIA-0383(99) (Washington, DC, December 1998).
The Composition of World Oil Supply
The IEO99 reference case projects an increase in world oil supply of more than 35 million barrels per day over the projection period. Gains in production are expected for both OPEC and non-OPEC producers; however, only about one-third of the production rise is expected to come from non-OPEC areas. Over the past two decades, the growth in non-OPEC oil supply has maintained OPECs market share substantially under its historic high of 52 percent in 1973. New exploration and production technologies, aggressive cost-reduction programs by industry, and attractive fiscal terms to producers by governments all contribute to the outlook for continued growth in non-OPEC oil production.
While the long-term outlook for non-OPEC supply remains optimistic, the current low-price environment has had a definite impact on exploration and development activity. By October 1998, drilling activity in the United States had fallen by one-fourth from its level a year earlier. The decline in Canada was even sharper. Only the Middle East region registered no decline in activity during that period. In general, onshore drilling has fallen more sharply than offshore. Offshore rig utilization rates were generally sustained at levels better than 80 percent of capacity on a worldwide basis .
The reference case projection anticipates that almost two-thirds of the increase in demand over the next two decades will be met by increases in production by members of OPEC rather than by non-OPEC suppliers. OPEC production in 2020 is projected to be almost 24 million barrels per day higher than it was in 1997 (Figure 25). The IEO99 estimate of OPEC production capacity for 2005 is more than 4 million barrels per day greater than that projected in IEO98, reflecting an unexpected shift away from non-OPEC supply projects in the current low-price environment to lower cost projects within OPEC areas (see discussion on "The Effects of Low Oil Prices on Worldwide Production Potential"). Some analysts suggest that OPEC might pursue significant price escalation through conservative capacity expansion decisions rather than undertake ambitious production expansion programs. The view in this outlook discounts such suggestions.
Figure 25. World Oil Production in the Reference Case by Region, 1970-2020
Sources: 1970: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database. 1997: EIA, International Petroleum Statistics Report, DOE/EIA-0520(98/11) (Washington, DC, November 1998). Projections: EIA, World Energy Projection System (1999).
Expansion of OPEC Production Capacity
It is generally acknowledged that OPEC members with large reserves and relatively low production capacity expansion costs can accommodate sizable increases in petroleum demand. In the IEO99 reference case, the production call on OPEC producers grows at a robust annual rate of 2.6 percent (Table 6 and Figure 26). OPEC capacity utilization is expected to increase sharply after 2000, reaching 95 percent by 2010 and remaining there for the duration of the projection period.
Figure 26. OPEC Oil Production in Three Oil Price Cases, 1970-2020
Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/ EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).
Iraqs role in OPEC will be particularly interesting to observe over the next half-dozen years. For the purposes of the IEO99 reference case, Iraq is expected to expand its oil production capacity to 2.8 million barrels per day by the year 2000, coinciding with the United Nations Security Council resolutions that allow Iraqi oil exports in excess of $5.2 billion in the first half of 1999. In the reference case, Iraqi oil exports are assumed to average between 1.8 and 2.0 million barrels per day through 2000. Iraq has indicated a desire to expand its production capacity aggressively, to about 6 million barrels per day, when U.N. sanctions are lifted and has held talks with outside investors (including France, Russia, and China) about exploration deals. Such a significant increase in Iraqi oil exports would more than offset any price stimulus associated with current OPEC production cutbacks and would most likely dampen the price rebound assumed in the reference case.
Given the requirements for OPEC production capacity expansion implied by the IEO99 estimates, much attention has been focused on the oil development, production, and operating costs of individual OPEC producers. With Persian Gulf producers enjoying a reserve- to-production ratio exceeding 80 years, substantial capacity expansion is obviously feasible.
Production costs in Persian Gulf OPEC nations are less than $1.75 per barrel. The capital investment required to increase production capacity by 1 barrel per day in Persian Gulf OPEC nations is less than $5,500 . Assuming the IEO99 low price trajectory, total development and operating costs over the entire projection period expressed as a percentage of gross oil revenues are less than 20 percent. Thus, Persian Gulf OPEC producers can expand capacity at a cost that is a relatively small percentage of projected gross revenues.
For OPEC producers outside the Persian Gulf, the cost to expand production capacity by 1 barrel per day is considerably greater, exceeding $10,000 in some member nations. However, even this group of producers can still expect margins in excess of 35 percent on investments to expand production capacity over the long term in even the low price case . Venezuela has the greatest potential for capacity expansion and has aggressive plans to increase its production capacity to 4.6 million barrels per day by 2005. It is unclear, however, whether the newly elected regime will support the outside investment that would be required for any substantial expansion of production capacity. Tables D1-D10 in Appendix D show the ranges of production potential for both OPEC and non-OPEC producers.
The reference case projection implies aggressive efforts by OPEC member nations to apply or attract investment capital to implement a wide range of production capacity expansion projects. If those projects were not undertaken, world oil prices could escalate; however, the combination of potential profitability and the threat of competition from non-OPEC suppliers argues for the pursuit of an aggressive expansion strategy.
In IEO99, the non-Persian Gulf component of OPEC has been bolstered somewhat over the IEO98 projections. There is still considerable optimism regarding Nigerian offshore production potential; however, such capacity is not likely to be developed until the middle to late part of the next decade. In addition, increased optimism regarding Algerian, Indonesian, and Venezuelan output has contributed to this reassessment. The non-Persian Gulf component of OPEC production is expected to show increases in output over the projection period that would result in a reduction in the worlds dependence on Persian Gulf oil of between 4 percent and 7 percent from the IEO98 estimates.
The growth in non-OPEC oil supplies played a significant role in the erosion of OPECs market share over the past two decades, as non-OPEC oil supply became increasingly diverse. North America dominated non-OPEC supply in the early 1970s, the North Sea and Mexico evolved as major producers into the 1980s, and much of the new production in the 1990s has come from the developing countries of Latin America and the non-OPEC Middle East as well as China. In the IEO99 reference case, non-OPEC supply from proven reserves is expected to increase steadily, from 44.1 million barrels per day in 1997 to 56.3 million barrels per day in 2020 (Table 7).
There are several important differences between the IEO99 production profiles and those published in IEO98:
In the IEO99 forecast, North Sea production reaches a peak in 2006, exceeding 8 million barrels per day. Production from Norway, Western Europes largest producer, is expected to peak at about 4.1 million barrels per day in 2005 and then gradually decline to about 3.3 million barrels per day by the end of the forecast with the maturing of some of its larger and older fields. The United Kingdom sector is expected to produce about 3.7 million barrels per day by the middle of the next decade, followed by a decline to about 2.5 million barrels per day by 2020.
Two non-OPEC Persian Gulf producers are expected to increase output gradually into the beginning of the next decade. Enhanced recovery techniques are expected to increase current output in Oman by almost 200,000 barrels per day, with only a modest production decline anticipated beyond 2005. Current oil production in Yemen could increase by at least 100,000 barrels per day early in the next century, and those levels could be maintained throughout the forecast period. Syria is expected to hold its production flat through most of the next decade but then reduce it steadily thereafter.
Oil producers in the Far East are beginning to reap the benefits of enhanced exploration and extraction technologies. India is expected to show a modest production increase into the next decade and exhibit very little decline in output thereafter. Deepwater fields offshore from the Philippines are expected to produce in excess of 200,000 barrels per day by 2004. There has been much optimism regarding the long-term production potential for Vietnam, where output is projected to exceed 450,000 barrels per day by 2020. Australian production is expected to peak at about 920,000 barrels per day by the middle of the next decade, but enhanced extraction technologies temper the production declines somewhat after 2005. Malaysias output peaks at about 830,000 barrels per day by the turn of the century and declines gradually to about 650,000 barrels per day in 2020. Papua New Guinea achieves production volumes approaching 200,000 barrels per day by the middle of the next decade, followed by a steady decline over the remainder of the projection period. Exploration and test-well activity have indicated some production potential for Bangladesh and Mongolia, but significant output is not expected until the turn of the century.
Oil producers in Central and South America have significant potential for increasing output over the next decade. Within 5 years, both Brazil and Colombia are expected to join the relatively short list of worldwide producers whose output exceeds 1 million barrels per day. Colombias output reaches almost 1.2 million barrels per day early in the next decade and remains at that level for the rest of the forecast. Brazil is viewed as having vast untapped production potential and, given a favorable climate for attracting foreign investment, could exceed 1.6 million barrels per day by 2020. Argentina is expected to raise its production levels by more than 100,000 barrels per day early in the next decade and could become a million barrel per day producer by 2005. Former OPEC member Ecuador is expected to increase its production capacity to allow additional output of more than 150,000 barrels per day.
Several West African producers (Angola, Cameroon, Chad, Congo, Gabon, Ivory Coast) could eventually reap the benefits of substantial offshore exploration activity when the oil price environment becomes more favorable. Angola is expected to more than double current output and be able to hold production levels of at least 1.7 million barrels per day over the projection period. The other West African producers are expected to increase output modestly for the remainder of the projection period. North African producers Tunisia and Egypt produce from mainly mature fields, which are likely to be in gradual decline after 2000. Sudan is expected to produce almost 200,000 barrels per day early in the next century. Other African producers with output potential that will probably not be fully realized before 2005 include Equatorial Guinea, Eritrea, Somalia, and South Africa.
In North America, falling U.S. output is expected to be more than offset by production increases in Canada and Mexico. Canadas projected output increases by more than 200,000 barrels per day by the end of the decade, mainly from Newfoundlands Hibernia oil project, which could produce 150,000 barrels per day at its peak, some time near the turn of the century. Canada adds an additional 600,000 barrels per day in output from a combination of frontier area offshore projects and oil from tar sands. Offshore discoveries in the Gulf of Mexico, incremental Alaskan production from Cook Inlet, and technological advances in extraction methods temper the projected decline in U.S. production. Mexico is expected to adopt energy policies that encourage the efficient development of its vast resource base, with expected production volumes approaching 4 million barrels per day by 2010 and showing very little decline for the remainder of the projection period.
Oil production in the FSU is expected to reach 7.6 million barrels per day by 20051.9 million barrels per day less than projected in IEO98 as a result of delays in the startup of many Caspian Basin projects as well as a pessimistic outlook for investment interest in Russia. Optimism remains high regarding long-term FSU production potential, and output is expected to exceed 13 million barrels per day by 2020. Thus, by the end of the forecast period, the FSU would be a net exporter of more than 7.9 million barrels per day. Much of the FSU export potential is in the resource-rich Caspian Sea region. While Chinas oil production is expected to increase steadily to more than 3.6 million barrels per day by 2015, it will find itself importing large volumes of petroleum to meet burgeoning domestic demand.
The estimates for non-OPEC production potential presented in this outlook are based on such parameters as numbers of exploration wells, finding rates, reserve-to-production ratios, advances in both exploration and extraction technologies, and the world oil price. It should be noted that non-OPEC production potential could be significantly greater if no constraints were placed on the exploration and development of undiscovered resources. For the purpose of the IEO98 reference case, low oil price, and high oil price assessments, no more than 15 percent of the mean USGS estimate of undiscovered oil was allowed to be developed over the forecast period. Tables D1-D10 in Appendix D show the ranges of production potential for both OPEC and non-OPEC producers.
The expectation in the late 1980s and early 1990s was that non-OPEC production in the longer term would remain stagnant or gradually decline in response to resource constraints. The relatively insignificant cost of developing oil resources within OPEC countries (especially those in the Persian Gulf region) was considered such an overwhelming advantage that non-OPEC production potential was viewed with considerable pessimism. In actuality, however, despite a relatively low oil price environment, non-OPEC production has risen every year since 1993, adding almost 4 million barrels per day during that period. In the coming decade it is expected that non-OPEC producers will continue to increase output, producing an additional 7.5 million barrels per day by 2010. Three factors are generally give credit for the impressive resiliency of non-OPEC production: development of new exploration and production technologies, efforts by the oil industry to reduce costs, and efforts by producer governments to promote exploration and development by encouraging outside investors with attractive fiscal terms. As has been the case with so many other forecasters of oil market attributes, the Energy Information Administration has found the estimation of future non-OPEC oil production to be particularly unstable over the past decade (Figure 27).
Figure 27. IEO Projections of 2010 Non-OPEC Oil Production, 1990-1999
Sources: Energy Information Administration, International Energy Outlook, DOE/EIA-0484 (Washington, DC, various years).
Alternative Non-OPEC Supply Cases
The only variable affecting the estimates of non-OPEC production potential in the alternative case described above is the world oil price assumption. As a result, the range in non-OPEC supply is modest, varying by only slightly more than 4.6 million barrels per day at the end of the forecast period. In fact, improved technology and better understanding of the underlying resource potential have been major factors sustaining non-OPEC supply in the recent past. To examine the effects of those factors, two additional casesthe high and low non-OPEC supply cases were developed for IEO99. Figure 28 compares OPEC and non-OPEC production estimates in the reference case with those in the two alternative non-OPEC supply cases. The alternative cases used reference case assumptions except for the following departures.
Figure 28. OPEC and Non-OPEC Oil Production in Three Cases, 1990-2020
Sources: History: Energy Information Administration (EIA), International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1999).
High Non-OPEC Supply Case:
Low Non-OPEC Supply Case:
The high non-OPEC supply case assumptions result in 1.5-percent annual growth in non-OPEC production over the forecast period, as compared with a 1.1-percent growth rate in the reference case. Non-OPEC oil production reaches a peak of 62.1 million barrels per day in the high case in 2020, compared with a peak of 56.3 million barrels per day in the reference case. Figure 29 compares peak production levels for six non-OPEC regions in the reference, high, and low non-OPEC supply cases.
Figure 29. Non-OPEC Oil Production by Region in Three Cases, 2020
Source: Energy Information Administration, World Energy Projection System (1999).
In the reference case, OPEC production peaks at 53.5 million barrels per day, and the OPEC share of worldwide production reaches almost 49 percent by 2020. In the high non-OPEC supply case, OPEC production peaks at 48.0 million barrels per day and never assumes a market share above 44 percent. The low non-OPEC supply case projects only modest 0.2-percent annual growth in non-OPEC production over the forecast period. Non-OPEC production peaks in 2015 at 46.7 million barrels per day. OPEC production reaches 64 million barrels per day in 2010, achieving a majority share of the world market, and exceeds 58 percent of the worlds total production in 2020.
Worldwide Petroleum Trade in the Reference Case
In 1995, industrialized countries imported 15.8 million barrels of oil per day from OPEC producers. Of that total, 9.4 million barrels per day came from the Persian Gulf region. Oil movements to industrialized countries represented more than two-thirds of the total petroleum exported by OPEC member nations and more than 60 percent of all Persian Gulf exports (Table 8). By the end of the forecast period, OPEC exports to industrialized countries are estimated to be almost 6 million barrels per day higher than their 1995 level, and more than half the increase is expected to come from the Persian Gulf region.
Despite such a substantial increase, the projected share of total petroleum exports in 2020 that goes to the industrialized nations is considerably lower than their 1995 share, at slightly over 54 percent. Their share of all Persian Gulf exports falls even more dramatically, to around 33 percent. This significant shift in the balance of OPEC export shares between the industrialized and nonindustrialized nations is a direct result of the robust economic growth anticipated for the developing nations of the world, especially those of Asia. OPEC petroleum exports to developing countries are expected to increase by almost 20 million barrels per day over the forecast period, with about half the increase going to the developing countries of Asia. China, alone, will most likely import about 4.6 million barrels per day from OPEC by 2020, virtually all of which is expected to come from Persian Gulf producers.
North Americas petroleum imports from the Persian Gulf are expected to increase by almost 90 percent over the forecast period (Figure 30). At the same time, more than half of total North American imports in 2020 are expected to be from Atlantic Basin producers and refiners, with significant increases in crude oil imports anticipated from Latin American producers, including Venezuela, Brazil, Colombia, and Mexico. West African producers, including Nigeria and Angola, are also expected to increase their export volumes to North America. Caribbean Basin refiners are expected to account for most of the increase in North American imports of refined products.
Figure 30. Imports of Persian Gulf Oil by Importing Region, 1995 and 2020
Sources: 1995: Energy Information Administration (EIA), Office of Energy Markets and End Use, Energy Markets and Contingency Information Division. 2020: EIA, Office of Integrated Analysis and Forecasting, WORLD Reference Model (1999).
With a moderate decline in North Sea production, Western Europe is expected to import increasing amounts from Persian Gulf producers and from OPEC member nations in both northern and western Africa. Substantial imports from the Caspian Basin are also expected. Industrialized Asian nations are expected to increase their already heavy dependency on Persian Gulf oil. The developing countries of the Pacific Rim are expected to more than double their total petroleum imports between 1995 and 2020.
Worldwide crude oil distillation refining capacity was 78.3 million barrels per day at the beginning of 1997. To meet the projected growth in international oil demand in the reference case, worldwide refining capacity will have to increase by more than 40 million barrels per day by 2020. Substantial growth in distillation capacity is expected in the Middle East, Central and South America, and especially in the Asia Pacific region. Refiners in North America and Europe, while making only modest additions to their distillation capacity, are expected to continue improving product quality and enhancing the usefulness of the heavier portion of the barrel through investment in downstream capacity. Likewise, future investments by developing countries are also expected to include more advanced configurations designed to meet the anticipated increase in demand for lighter products.
Several oil market analysis groups produce world oil price and oil production projections. Table 9 compares the IEO99 world oil price projections with similar forecasts from Standard and Poors DRI (DRI), the International Energy Agency (IEA), Petroleum Economics, Ltd. (PEL), Petroleum Industry Research Association, Inc. (PIRA), the Gas Research Institute (GRI), National Resources Canada (NRCan), WEFA Energy (WEFA), and BT Alex.Brown, Inc. (BTA).
The collection of forecasts includes a wide range of price projections, particularly for 2000doubtless because of differing views about when the world oil price will recover from the 10- to 20-year lows set in 1998. IEO99 and PEL expect world oil prices to remain low through 2000, at $13.11 and $14.31, respectively, in constant 1997 U.S. dollars per barrel. However, prices among the different series run into the $20s, with the highest being $20.76 for NRCan in 2000. The NRCan price expectations may be somewhat dated in comparison with the other forecasts, because they were published in April 1997, before the economic crisis hit Southeast Asia. On the other hand, the IEA prices for 2000 are also on the high side ($20.27 per barrel in 2000), and they were developed after the Asian recession began.
The IEA price projections are generally higher than the other forecasts throughout the projection period. IEO99 also tends to be on the high end of the price ranges. The oil price projections for 2005 vary from $13.42 constant 1997 U.S. dollars per barrel (PEL) to $20.76 (NRCan), with IEO99 at $19.25. In 2010, IEO99 has the highest world oil price of any of the forecasters at $21.30, compared with the low-end price from PEL of $12.03.
PEL (after 2000) and IEA (after 2010) may be considered outliers among the collection of forecasts. PELs price projections fall below the IEO99 low price case in every year between 2005 and 2015, when the PEL forecast ends. Similarly, after 2010, IEA price expectations exceed the IEO99 high oil price case. In 2015, the last year for which prices projections are available from both of these forecasters, the range between highest price (IEA at $29.81 per barrel) and lowest price (PEL at $10.12 per barrel) is almost $20. Omitting the IEA and PEL price series, the range of prices among the remaining forecasters is much smaller for the 2005-2020 period. In 2015, for example, the prices among the remaining forecasters range from GRIs low of $17.02 per barrel to IEO99s high of $21.91, a difference of $4.89. When PEL and IEA are included, the range is far greater at $19.69 (the difference between $10.12 per barrel for PEL and $29.81 for IEA).
The spread of world oil price projections grows after 2000, demonstrating the increasing uncertainty as the time horizon expands. Aside from PEL and IEA, all the forecasts fall within the bands defined by the IEO99 high and low price trajectories, with only two exceptions. In 2000, price projections for both NRCan (at $20.76 per barrel) and WEFA (at $18.27 per barrel) are higher than the IEO99 high case price ($17.90 per barrel).
The price forecasts are influenced by differing views of the projected composition of world oil production. Two factors are of particular importance: (1) expansion of OPEC oil production and (2) the timing of a recovery in EE/FSU oil production. All the forecasters agree that recovery in EE/FSU oil production will be fairly slow (Table 10). The share of EE/FSU oil production does not exceed 12 percent over the entire projection period in any forecast included here. DRI is least optimistic about recovery in this region, and its projection for the EE/FSU share of world oil production never exceeds 8 percent. Indeed, DRIs forecast of Russias share of world oil production (oil production estimates for the entire region are not available from DRI) falls to 7 percent after 2005 and remains there through 2020. PEL is the most optimistic about EE/FSU oil production, projecting an increase from 10 percent of world production in 2000 to 12 percent in 2010. IEO99 and BTA expect the EE/FSU share to increase to 12 percent by 2015, where it remains through 2020.
The forecasts that provide projections through 2020 (IEO99, DRI, BTA, and IEA) expect OPEC to provide an increment of between 20 and 30 million barrels per day between 1996 and 2020. There is more variation in expectations among these four forecast services for the other, non-OPEC suppliers. Only DRI expects other suppliers to provide a larger increment of oil over the 1996-2020 time period than the OPEC suppliers. In contrast, IEA expects production from other suppliers to decrease by about 5 million barrels per day over the projection period. IEA expects the other share of world oil production to fall to 35 percent by 2020, while OPECs share of world oil production grows to 55 percent. (The IEA estimate for the OPEC share is actually understated, because IEA does not publish oil production forecasts for the entire OPEC but only for Middle East OPEC. With non-Persian Gulf OPEC members supplying about 35 percent of OPECs current production, it can be assumed that the total OPEC share of world oil production in the IEA forecast is even higher in 2020 than the 55 percent shown in Table 10.) IEO99 and BTA similarly project that other non-OPEC supply will increase by around 7 million barrels per day by 2020.
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File last modified: April 6,
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