262. Memorandum From the Director of Economic Research, National Foreign Assessment Center, Central Intelligence Agency (Ernst) to Gary Sick of the National Security Council Staff1

SUBJECT

  • The Oil Supply Problem in the 1980s

1. Jim Cochrane indicated to me that you want to read a paper recently done by the Office of Economic Research for Ed Fried.

2. This is OER’s first hurried attempt to analyze and project the OECD energy supply through 1990. We have sketched out the main elements of our thinking on the subject and made up 2 scenarios, which we consider to be respectively, highly optimistic or highly pessimistic. We have not detailed oil and other energy production projections on all individual countries to avoid unnecessary arguments. We could specify several combinations of country projections that would be consistent with our more aggregative projections.

3. The paper reflects current OER views. It is still in rough-draft form and the subject needs a great deal of additional work. I would like to present it as a basis for discussion, not as representing CIA’s eventual best estimate. So please do not give it wide dissemination.

4. Specifically, the following additional types of analysis are needed:

• More systematic calculations of potential oil production profiles in key countries under various assumptions. We are currently doing this for Saudi Arabia and Iraq.

• More systematic analysis of the probability of finding new oil in various areas, and of the difficulty in extracting it.

• A fuller assessment of projected revenue requirements of key OPEC countries.

• Assessments of the possibilities for changes in the composition of final energy demand to accommodate the changing mix of energy products available.

• [2 lines not declassified]

[Page 827]

5. We hope to put out a more elaborate study, with some of these gaps partially filled, this summer.2

Maurice C. Ernst

Attachment3

The Oil Supply Problem in the 1980s

Conclusions

World oil production may have already peaked and is likely to decline at least slowly throughout the 1980s. Whether the decline is slow or rapid will depend on the following:

—whether greater oil exploration efforts occurring in response to growing oil scarcity are successful in offsetting more of the depletion of oil reserves than was the case in the 1970s;

—whether oil production rates in the Persian Gulf and other policy-constrained countries will be cut as depletion progresses;

—whether political change in key producing countries will lead to a further curtailment of oil supply.

Specifically, we expect:

—Persian Gulf production to decline, or at best to remain near current levels;

—production in other OPEC countries to decline, at least slightly;

OECD production to decline after the mid 1980s;

—production in LDCs to increase, the extent depending largely on Mexican discoveries and decisions;

—Communist oil trade to shift from a net export to a net import position.

Overall, we project declines in Free World oil supply in the 1980s ranging from less than 5 percent to about 25 percent. Most of the decline will be in the lighter grades of oil, from which most light oil products are made. The interaction between OPEC price decisions and the production decisions of OPEC countries will tend to give results closer to the lower than to the higher end of the range. As oil prices are ratcheted upward during periods of tight markets, oil producers often cut production—initially to avoid excessive surplus revenues, and later, as demand drops, to sustain the new real oil price.

It is virtually certain that the OECD countries will get a declining share of Free World oil supplies, as has been the case in the past decade. This is because of the tendency of the oil producers to give their own [Page 828] needs priority, a likely continued differential in economic growth rates between the LDCs and the OECD countries, and the particular energy needs of developing countries. We consequently expect OECD oil supplies to fall at least 15 percent and as much as one-third.

Increased supplies of other forms of energy to the OECD, especially coal and nuclear power, are likely to just about offset the decline in oil supply. At best, total OECD energy supplies would grow about 1 percent a year; at worst, they would decline 1 percent a year.

It would be extremely difficult for the OECD to achieve acceptable rates of economic growth with energy supplies stagnating. To achieve even 3 percent economic growth would require annual declines in energy consumption per unit of GNP of between 2 and 4 percent, or 2 to 3 times the rate achieved since 1973. Energy, especially oil, prices are bound to rise rapidly in this situation, leading to far greater conservation, as well as to slower economic growth.4 Adjustment of energy demand to stagnating energy supply will be hindered by the likely depressive effect of slower economic growth on investment and consequently on the rate of introduction of more efficient energy-using durables. And demand adjustment will be greatly complicated by a rapid decline in supplies of light oil products for which there are no good substitutes while potential coal supplies may not be used.

[Omitted here is the body of the 35-page paper.]

  1. Source: Carter Library, National Security Affairs, Staff Material, Middle East File, Box 66, Middle East Oil, 11/79–10/80. Confidential.
  2. The study has not been found.
  3. Confidential. The paper is dated February 1980.
  4. The International Energy Weekly Review produced by the National Foreign Assessment Center, March 19, focused on “International Payments Implications of Rising OPEC Oil Prices.” A copy is in CIA’s FOIA Electronic Reading Room.