The world energy situation Pierre Desprairies

The oil crisis has ended on a worldwide scale. Risks of excessive price rises have dis- appeared. Between now and the year 2000, oil resources costing less than $15lbbl(1988 dollars) will be abundant. Twenty to 25% of the oil consumed in 2000 for thermal uses will be replaced by less costly natural gas and coal. Consumption of these last two energy sources will increase if the cost of oil rises above $20lbbl (1988 dollars). The cost of oil will rise sharply when it becomes reserved for the uses for which it is irreplaceable, ie transport, petrochemicals, the Third World and non- energy uses -probably after 2010.

This paper focuses on the oil portion of the world energy situation as for a long time to come oil will be the world’s leading source of energy in terms of the amount used and its ability to replace and compete with other energy forms. That said, what are we to make of the wild fluctuations in oil prices over the past 15 years? And what influence will oil prices have on the development of other types of energy? These are the main points addressed here.

Very briefly, this is how I believe one could view the energy picture between the year 1950 and the year 2000. From 1950 to 1972, oil prices were very low, in fact, using 1972 dollars to simplify our comparison, less than US$3/bbl. Oil prices rose from US$3 to US$18 per barrel (in 1972 dollars) between 1973, the year of the oil crisis, or ‘oil shock’, and 1983. Cur- rently, they have dropped back to US$7-8/bbl (still using 1972 dollars), or $15, if we use 1988 dollars. It appears quite likely that a price of $15 to $20 will remain stable for 10 or 15 years if one discounts panic, military crises and speculation -which could produce deviations of US$2-3 from the US$15-20 price range.

When oil prices were $3/bbl, it was not possible to develop alternative types of energy, ie gas, coal, nuclear power. However, after the 1973 price in- crease, the development of other energy forms accel- erated because the very high price of oil greatly encouraged it. Today, although oil prices have fallen by half in the past six years, oil continues to be rela-

The author is Honorary President of Institute FranGais du Petrole, 1 and 4, Avenue de Bois-prCau, 92506 Rueil- Malmaison Cedex, France.

tively expensive, costing today two and a half times what it did in 1972: $7, as opposed to $3.00. As a re- sult, oil has lost the competitive advantage it enjoyed before the crisis.

Thus current oil prices are favourable to the de- velopment of alternative types of energy, and if oil prices should increase, they would further accelerate the development of alternative types of energy.

This is very much a generalized overview of the situation. So, let us look at things more closely before focusing on issues of more particular interest.

Between 1950 and 1973, during the post-war period, the world experienced extraordinary econ- omic growth. This period was known as, if we stretch the dates a little, the ‘thirty glorious years’, which were marked by annual economic growth rates of 5-6% accompanied by comparable energy growth rates. Oil prices stayed quite low and this favoured a high rate of economic growth, a high rate of growth in oil consumption and economic dependence on oil.

When this extraordinary growth in oil consumption and dependency began, the oil companies wanted to control the energy market as far as they could: they possessed enormous low-cost reserves in the Middle East and decided to corner the energy market by keeping the price of oil low. This is in fact what they did, and all energy consumers enjoyed the benefits of this strategy for more than 20 years. But coal mines were shut or their development slowed, natural gas production was depressed and electrical power from nuclear energy never became a reality. Everything came to an abrupt halt in 1973 because the supply of oil could not keep up with the increasing demand. ‘We couldn’t keep asking OPEC for another 100 mil- lion tons of oil every year’, one economist wrote re-

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The world energy situation: P . Desprairies

cently. The possibility of nationalization which had been a common occurrence in the 1960s led ARAMCO to taper off its investments in Saudi Arabia, which produced a supply bottleneck in the spring of 1973; the Arab-Israeli war started up again in October; the result was the first oil crisis.

To understand the roots of the crisis we must look carefully at the real economic situation which has been obscured for too long by the political events which occurred at the same time and which acted as a trigger. The economic situation was that demand had outstripped supply because artificially low oil prices had caused oil consumption to grow abnormally. Oil became the energy ‘jack of all trades’, whereas until then it had been largely used as a fuel for auto- mobiles, trucks and airplanes. As a result, the Middle East supplied a major share of the world’s energy needs, not only for oil - which was natural enough - but in effect of all energy, because the other types of energy had dwindled in importance, due to the low price of oil. The extremely low price of Middle East oil had the effect of postponing or slowing down the development of oil production in the rest of the world, where production costs were 50-100% higher than in the Middle East. It also encouraged consump- tion and thus caused oil to account for a significant portion of the energy equation in consumer countries while also encouraging the wasting of energy.

Things could not go on like this for long. If the 1973 oil crisis had not happened, it would have finally hit in 1975 or 1977 because OPEC would have been unable to meet demand. And so in 1973, declining ARAMCO investments and the resumption of the Arab-Israeli war led to the oil supply crisis, a quadrupling of oil prices and the opening of the public’s eyes to the energy situation. Importing countries established energy policies, energy equipment and the public’s behaviour patterns changed and the crisis was suc- cessfully staved off. The abnormal situation of prices and consumption that had existed since 1950 came to an end in 1983: oil prices turned around because the demand for oil stopped growing.

Thus, the price increase sought in 1973 by OPEC, which was justified but too high was the result of an excessive demand. This is an economic reality. The increase was brought about by political events, but economic in nature. Here are a few figures which shed some light on this point.

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OPEC currently produces about 18 million bbl/ day, or 900 million tons per year. It can produce approximately 30 million bbl/ day, given the current state of reserves. However, if oil-importing countries had con- tinued to exhibit their 1972 pattern of consump-

tion - ie if they had continued to waste energy and not use natural gas and coal - the demand for OPEC oil in 1986 would have been more than 50 million bbl/day, and if the price increase on the other hand, had not led to the develop- ment of oil resources outside OPEC, we would have been asking OPEC in 1986 for not 18 million bbl/day, but approximately 60 million bbl/day, more than the entire current world oil consumption (56 million bbl/day).

It is obvious that OPEC could not have provided that much oil and that some time well before 1985 there would have been an oil crisis marked by skyrocketing prices. It is obvious that oil-importing countries, attracted by low prices, had lead themselves into an impasse. Today, the oil-importing countries have managed to extricate themselves from that predica- ment, and the oil crisis at the world level is over. Compared with imports of manufactured goods, oil imports have regained their traditional share of 8-9% of international trade, even though they had ac- counted for 23-25% ten years earlier.

The world-wide return to normalcy is reflected by:

0 oil’s declining share of the total energy con- sumed world-wide - from 45% down to 30%; the growing importance of other types of energy: gas, coal, nuclear energy and hydro- electric power; and the significant downturn in energy wastage: already we are using 20% less energy to produce the same GNP as in 1973, and by the year 2000 we will be using an additional 20% less.

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These are deep and lasting changes. Unfortunately, the crisis is not over for everyone -

only for those countries that are able to invest in order to overcome their over-dependence on oil - in other words, the industrialized countries. For the others, the developing countries, with oil prices in real terms nearly three times higher than in 1972, the crisis con- tinues. For the oil-exporting countries the future means balancing their budgets with revenues derived from resources other than oil. Many of them may find natural gas a satisfactory replacement.

Currently, oil prices are depressed because of excess production capacity, amounting to 40% of all oil sold on the international market, or 500 million t/year. This constitutes a fragile situation, and there is a serious threat of a further downturn in prices over the near term.

However, in a few years time, perhaps around 1995, resumed demand will cause much of this excess capacity to disappear. By then production will fall off in the non-OPEC countries, such as the USA, the

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The world energy situation: P. Desprairies

(1987 $) for very long. When oil consumption will be limited to specific uses of liquid energy, transport, the petrochemical industry, and Third World energy needs, ie when oil becomes a non-replaceable source of energy, then prices will be able to take off without risk to producers. When? By 2010? By 2020? It will be our grandchildren’s, rather than our children’s, prob- lem - unless, of course, oil were to continue to be overly plentiful because of the invention of a miracle battery which will lead to electric cars or some similar technical innovation which would drastically reduce the demand for oil.

Given future world market trends, what can be said about the situation of the developing countries? Their situations will in fact vary somewhat.

0 In this scenario, oil-exporting developing countries will have to come to terms with re- duced export earnings, particularly as domestic consumption increases as a result of population growth and higher standards of living. Fortu- nately, oil and gas are linked in the subsoil by nature, to varying degrees. For several coun- tries, gas will constitute a source of exploitable wealth or a source of energy for the domestic market. Oil-importing developing countries will prob- ably have to persevere along the road that virtu- ally all have followed, that of stimulating national oil and gas production by encouraging oil companies to prospect in their subsoil, by appropriate tax and mining provisions and by arrangements for sharing risks equitably. There has been a positive trend in this direction over the past four or five years. If prices do not col- lapse but stabilize around US$20, companies will have the financial resources they need to take advantage of the opportunities this creates.

Generally speaking, it is likely that in many countries, natural gas will be discovered and exploited. This is of great value for the production of fertilizer, for indus- trialization and for development. It is also likely that international gas networks will be developed. In any scenario, energy conservation and the development of national sources of energy should remain a vital and common element of all energy policies of de- veloping countries.

Soviet Union, or the UK; and the OPEC countries, and the Gulf countries in particular, ie Saudi Arabia, Kuwait and the Emirates, which have immense re- serves, will take charge of the oil market once again. Nevertheless, it is doubtful that the OPEC countries will take advantage of this situation to provoke another oil crisis for two main reasons.

First, there will be no scarcity of cheap oil, as there is already enough cheaply produced oil in the world to last for a long time; until the year 2000 there will be plenty of oil costing less, and often much less, than US$lS/bbl to produce, and technology will continue to bring production costs down. The result is that if OPEC hikes prices too much, non-OPEC oil produc- tion will expand.

Second, other types of energy will be in competit- ion with oil. Currently, oil costing around US$15/bbl is competing with low cost natural gas and coal. The latter will replace oil if the price of oil goes up. Large natural gas production capacities already exist in Nor- way, Algeria and the USSR and, to a lesser degree, in Nigeria and Qatar. This gas may reach the market at a price of US$15/bbl of oil equivalent - or less - ie at a price of US$2.50/ft3X lo3, and its consumption will certainly increase if oil prices move up to US$25 or US$30/bbl. There is coal in the USA, South Africa, Australia, Colombia and China which can easily reach markets at prices which are less than the equiv- alent of US$10/bbl of oil. This coal will be used in electric power plants, where it will be preferred over heavy oils.

It seems likely that the Persian Gulf States, which have vast reserves, will, if they succeed in dominating the market in the future, follow the direction taken by the oil companies in the past and prevent natural gas and coal from taking over the energy market.

This competition between types of energy will last as long as oil is used purely for thermal uses, par- ticularly in the form of heavy oil - where it can be replaced by gas, coal or nuclear energy. Some 900 million tons per year, or one-third of world consump- tion, are used purely for thermal uses. By the year 2000, 20-25% of estimated consumption will still involve replaceable oil. This is what will actually halt the rise of oil prices.

As long as this competition between types of energy exists, that is, until the end of the century, it is unlikely that oil prices will stay above US$25/bbl

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