The introductory summary highlights the conclusions. Pages 2–3 of the
main report reveal and explain CIA’s
tentative preference for the oil industry’s estimate of a 1 million
barrel per day decline in US oil
production between now and 1982, as compared with the Energy
Department’s belief that domestic production will not fall significantly
in this period. Pages 11–12 carry the main policy implications, which
are consistent with the positions you took at the Tokyo Economic Summit
and in your April and July energy speeches.4
Attachment5
The World Oil Market in the Years Ahead
A Research Paper
Summary and Conclusions
The gas lines and rapid increases in oil prices during the first half
of 1979 are but symptoms of the underlying oil supply problem—that
is, we can no longer count on increases in oil production to meet
our energy needs. Although the current oil shortages may disappear
when economic activity slows, they are likely to recur during the
upswing of the next business cycle. Thus, contrary to the view that
had become popular during the temporary supposed “oil glut” of
1977–78, the world does not have years in which to make a smooth
transition to alternative energy sources. Consumers are already
being forced to make adjustments, not only through higher prices and
shortages but also through slower economic growth.
In its broadest scope, the world energy problem reflects the limited
nature of world oil resources. Although the world is not running out
of oil, current consumption is greatly exceeding new discoveries of
oil. If this trend continues, as most experts expect it will, output
must fall within the decade ahead. Limited oil reserves have already
forced a fall in US production and
we expect soon will do so in the USSR. Together these two countries account for
one-third of world oil production, and the number of discovered
reserves in both countries has fallen sharply in recent years.
Some countries with oil reserves that are large relative to
production are increasing their production capacity only slowly or
not at all. These cautious policies reflect both a strong preference
for production profiles that stretch out reserves over longer
periods and an aversion to even a small risk of impairing ultimate
oil recovery. Among key Persian Gulf countries—Saudi Arabia, Iran,
Iraq, Kuwait, and the United Arab Emirates (UAE)—financial, social, and political factors also
influence capacity and production decisions. These nations are
extremely reluctant, partly because of past experience, to keep a
large share of their wealth in the form of financial assets, and
they are also worried about the disruptive social effects of an
excessive inflow of oil money.
The number of countries that have imposed policy constraints on
production has grown markedly over the past several years and now
[Page 737]
includes countries
with roughly 60 percent of total world reserves. Some of these are
outside the Organization of Petroleum Exporting Countries (OPEC). Norway, for example, has
established rigid policies regarding the rate of reserve development
and capacity expansion. The Mexican Government also has conservative
views on the kind of reserve-to-production ratios it wishes to
maintain in the years ahead.
Many major producers not only are restricting development of new
capacity but also are holding production below capacity. Saudi
Arabia has had a production ceiling of 8.5 million barrels a
day6 since 1974. Kuwait’s
production ceiling of 2.0 million b/d reflects its strong
conservationist views. The UAE
limits output to 80 percent of capacity for similar reasons. Iran
and Iraq are the most recent OPEC
countries to formulate production ceilings. For Iraq, the goal seems
to be a limit of 2.4 million b/d, and the Iranian Government has
talked of a ceiling of 3.5–4.0 million b/d.
These production limits are not rigid; they have been and can be
relaxed. During the first three months of 1979, Saudi Arabia and
Kuwait boosted output temporarily to help offset some of the
shortfall caused by the Iranian disruptions, although Saudi Arabia
cut back production to its ceiling of 8.5 million b/d when Iranian
output partially recovered. Saudi Arabia again announced its
intention to increase temporarily output beyond the ceiling shortly
after the June OPEC meeting. The
ceilings may also be changed in the future, although revisions are
more likely to be downward than upward, in view of the basic
motivations behind the oil policies of most of these countries.
Oil production in OPEC countries
outside the Persian Gulf is limited by productive capacity, which is
unlikely to expand during the next few years. Consequently, if the
Gulf countries’ production stays at announced ceilings, total output
will remain nearly constant. Although OPEC production could rise if ceilings are lifted, it
could also fall, either because of a lowering of ceilings or because
of disruptions of a political or technical nature.
Outside OPEC, the likely changes in
production and capacity will tend to offset each other. In
particular, we expect:
• A marked increase in North Sea oil production, to a probable peak
in 1982–83.
• A decline in US production.
• An increase in production in less developed countries (LDCs)
outside OPEC, especially Mexico
and Egypt; most of the increase, however, will be offset by a rise
in LDC consumption.
• A decline in the net exports of oil from Communist countries, as
Soviet production peaks and begins to drop.
[Page 738]
On balance, industrial nations of the West cannot count on any
increase in oil supply in the foreseeable future; indeed, it is
prudent to plan on some decline in the next few years.
With traditional oil supplies thus restricted, the importance of
alternative energy sources—tar sands, shale oil, natural gas, coal,
and nuclear energy—will increase. Except for natural gas, the
resource base for these energy sources is sufficient to allow a
large expansion of output, but there are severe cost and
environmental constraints. Moreover, even with the enhanced
profitability resulting from higher real oil prices, large-scale
development of these resources would take many years. During the
next three to four years, even an optimistic projection of
production of nonoil energy sources in the member countries of
OECD (Organization for
Economic Cooperation and Development), which assumes an increase of
2 million b/d oil equivalent in coal supplies and no further delays
in the nuclear power programs, would result in only a 1.0- to
1.5-percent annual rate of growth in the total energy supplies of
the OECD countries.
The consuming countries will find it very difficult to adjust to such
a slow growth of energy supply. Holding energy demand to projected
supply levels without lowering economic growth targets of OECD countries below the 3- to
3.5-percent rates generally considered acceptable would require
unprecedented rates of conservation. Although government policies
can help, most conservation is likely to be imposed by market
forces. The interaction between consumer-country policies supporting
economic growth and producer-country policies limiting oil
production will operate to push up the price of oil. Higher oil
prices in turn will slowly stimulate energy production and
conservation. During the next few years at least, the higher oil
prices will work to cut demand by holding down the economic growth
of the OECD countries—to perhaps
2.5 percent annually or less on the average.
Oil price increases are likely to come in spurts, such as that of
January–June 1979. The average OPEC price will reach more than $20 a barrel in July,
or some 60 percent above the 1978 level. These higher oil prices
will have a depressive impact on economic activity in the next two
years, and, in turn, real oil prices could stabilize or even decline
slightly. Thus, weak demand may mask the worsening energy situation,
as was the case during 1975–78. The problem of public perception is
complicated by the fact that very small swings in production and/or
consumption can create enough slack in the oil market to create the
illusion of ample oil supplies.
The oil market may, of course, be either tightened or eased by the
policy reactions of both oil exporters and oil importers to these
events. At the same time, other contingencies would almost certainly
make
[Page 739]
things worse rather
than better. For example, a major lesson from the Iranian revolution
is that the United States and other major consuming countries are
highly vulnerable to unpredictable supply interruptions. The
political situation in Iran remains extremely unstable, and exports
from that country could fall or even cease. Unexpected supply
interruptions could occur elsewhere as well. In a basically tight
energy market, even such common events as a harsh winter or a coal
strike could create disruptive energy shortages and higher prices.
Use of oil as a political weapon by one or more producers, of
course, would also cause economic dislocations.
In the longer term, the oil supply problem is likely to get worse
later in the 1980s. Although higher prices will stimulate oil
exploration and development, enhanced recovery, and production of
heavy and shale oil, progress in these areas will take time. The
predominant view among geologists is that the chances of discovering
enough quickly exploitable oil to offset declines in the known
fields are slim. If the Persian Gulf countries and some non-OPEC producers continue to limit
production, as we expect, world oil production probably will begin
to decline in the mid-1980s. As time goes by, the possibilities for
energy conservation and substitution of other energy sources
multiply, but in the decade of the 1980s the required adjustment
will be extremely difficult.
[Omitted here is the remainder of the paper.]
