STATEMENT OF JAY HAKES

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION

DEPARTMENT OF ENERGY

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

COMMITTEE ON COMMERCE

U.S. HOUSE OF REPRESENTATIVES

MARCH 26, 1999

 

Summary Page

Mr. Chairman and members of the Committee, I wish to thank you for the opportunity to testify today on our short-term world oil outlook, paying particular attention to Iraq’s role in the international oil market.

The Energy Information Administration (EIA) has identified four factors that have influenced the world oil market since the end of 1996 which have lead to current weak oil prices. These are: Iraqi oil production (and exports) that have occurred since the beginning of the United Nations’ "oil-for-food" program; the dramatic slowdown in oil demand growth in Asia as a result of the economic crisis; warmer than normal winter weather in recent years; oil production increases from many countries outside of Iraq, particularly in 1997.

EIA thinks the oil market will recover somewhat in the short-term (through 2000). Now that OPEC and some non-OPEC countries have agreed to cut production, we would expect prices to increase.

EIA's outlook for Iraqi oil production: Iraq’s crude oil production has increased by about 2 million barrels per day since late 1996. However, we feel that they are currently producing at full capacity since their oil revenues are significantly less than allowed and would produce more if they could, and that their oil production capacity is not expected to increase substantially through 2000.

But even with current oil exports of about 2 million barrels per day, Iraq is still well below the ceiling of $5.256 billion imposed under the current phase of the "oil-for-food" program. In order for Iraq to approach the ceiling during the next year or two, the price of West Texas Intermediate crude oil would have to average about $19 per barrel during a 180-day phase of the United Nations’ "oil-for-food" program.

 

STATEMENT OF

JAY HAKES

ADMINISTRATOR, ENERGY INFORMATION ADMINISTRATION

DEPARTMENT OF ENERGY

BEFORE THE

SUBCOMMITTEE ON ENERGY AND POWER

COMMITTEE ON COMMERCE

U.S. HOUSE OF REPRESENTATIVES

MARCH 26, 1999

 

Short-Term World Oil Market Outlook

Mr. Chairman and members of the Committee, I wish to thank you for the opportunity to testify today on our short-term world oil outlook, paying particular attention to Iraq’s role in the international oil market. As Administrator for the Energy Information Administration (EIA), which is an independent analytical and statistical agency within the Department of Energy, I have been asked to provide an overview of the world oil market – how we got here and where we think we are headed. As part of this discussion, I will highlight Iraq’s oil production history thus far in the 1990s and provide our assessment of the short-term outlook for Iraqi crude oil production.

EIA has identified four factors that have influenced the world oil market since the end of 1996. The interaction between these factors makes it difficult to assess the impact of each individually. Nevertheless, I will discuss each factor separately and try to put the oil market impact of each in context.

One factor influencing the world oil market has been the increase in Iraqi oil production (and exports) that have occurred since the beginning of the United Nations’ "oil-for-food" program. Iraq’s oil production is currently 2.5 million barrels per day, which is about 2 million barrels per day higher than it was prior to the "oil-for-food" program, although it is still lower than it was just prior to their invasion of Kuwait in 1990 (figure 1). But even with current oil exports of about 2 million barrels per day, Iraq is still well below the ceiling of $5.256 billion imposed under the current phase of the "oil-for-food" program. In order for Iraq to approach the ceiling during the next year or two, the price of West Texas Intermediate crude oil would have to average about $19 per barrel during a 180-day phase of the United Nations’ "oil-for-food" program. I would like to point out, however, that EIA is not forecasting prices at this level in the short-term.

Another factor that is equally important in terms of its impact on the world oil market is the dramatic slowdown in oil demand growth in Asia as a result of the economic crisis, which began in the summer of 1997. Between 1991 and 1996, Asian oil demand was increasing on average by about 850,000 barrels per day each year (figure 2). If Asian oil demand had continued to grow at this pace, EIA would have expected oil demand to be about 2 million barrels per day more in 2000 than in our current forecast, which would have helped soak up the increased production from Iraq. Instead, EIA is estimating that Asian oil demand will grow by only 1.5 million barrels per day during the 1997-2000 period, instead of the 3.4 million barrels per day that would have been expected before the Asia crisis occurred.

Weather has also been a major factor influencing the world oil market in recent years. Oil demand typically peaks in the winter, along with the demand for heating oil. Weather patterns in the northeast United States and Western Europe are particularly important to the world oil market since these are the regions where oil is used significantly as a fuel for heating. The winters of 1996-97 and 1997-98 were particularly warm compared to "normal" temperatures, and now it is apparent that this winter will be the third significantly warmer than normal winter in a row. As a result, global oil inventories are much higher than they would have been had temperatures been more "normal" during the past three heating seasons.

The last major factor that EIA has identified as a major influence in the world oil market was oil production increases from many countries outside of Iraq, particularly in 1997. Global oil supply increased by about 2.3 million barrels per day in 1997, much more than the 1.7 million barrels per day of global oil demand growth that year. This followed a period of 32 months in which the price of West Texas Intermediate crude oil averaged above $17 per barrel each month. While oil production from Iraq increased more than any other single country in 1997 (about 600,000 barrels per day) as a result of the "oil-for-food" program which began in December 1996, other OPEC and non-OPEC countries also increased oil production significantly in 1997 (world production increased by 2.3 million barrels per day, making Iraq's increase about 25 percent of the total). Within OPEC, Saudi Arabia oil production increased by 370,000 barrels per day, Venezuela increased by 227,000 barrels per day, Qatar increased by 139,000 barrels per day, and Nigeria increased by 129,000 barrels per day. Outside of OPEC, most of the growth was in the Americas (North, Central, and South America, but excluding Venezuela, an OPEC member), which increased by over 500,000 barrels per day. Since demand growth did not keep pace with the supply growth in 1997, much of this oil found its way into inventories.

Turning to the future, let’s look at where EIA thinks the oil market is headed in the short-term (through 2000). In 1998, OPEC and some non-OPEC countries agreed to cut oil production in order to help increase oil prices. In part because of these agreements and the beginning of an expected gradual recovery in Asia, EIA’s most recent forecast had prices increasing by about $3.50 per barrel by December 1999 from the historical low point in December 1998, and by an additional $1-$1.50 by the end of 2000. Now that OPEC and some non-OPEC countries have agreed to cut production by about 2 million barrels a day (figure 3), we would expect prices to increase even more. EIA’s next Short-Term Energy Outlook, which is updated monthly, is scheduled for release on April 8, 1999. At that time, EIA will incorporate a detailed analysis of the new OPEC cuts into our price forecast. I can say now, however, that our forecast for oil prices will be higher. This forecast will be based on the assumption that demand growth will outstrip supply growth in both 1999 and 2000, even if producers only partially implement the planned cuts.

Let me spend a little time discussing our outlook for Iraqi oil production. As I stated before, Iraq’s crude oil production has increased by about 2 million barrels per day since late 1996. However, we feel that they are currently producing at full capacity since their oil revenues are significantly less than allowed and would produce more if they could, and that their oil production capacity is not expected to increase substantially through 2000. Our current forecast assumes that Iraqi crude oil production capacity increases by only 100,000-200,000 barrels per day between now and 2000 (figure 1). Currently, the United Nations is allowing Iraq to import $300 million worth of parts that are to be used to improve their oil infrastructure. How fast Iraq receives these parts and how well these parts are used will help determine how quickly Iraqi oil production capacity might increase. There are some analysts that expect Iraqi oil production capacity to be somewhat higher by the end of 2000 than EIA is estimating. However, most analysts expect Iraq’s oil production increases this year and next to be far less than what they were in 1997 and 1998.

This concludes my testimony before the Committee. I would be glad to answer questions at the appropriate time.

 

 

Figure 3