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May 5,1978
GLOBAL OIL SCARCI
TY?
Growing production from Alaska and
the North Sea, in the context of stagnant worldwide demand, has created
a global surplus of crude oil in recent
months. This situation probably helps
explain the OPEC decision last December to leave their prices unchanged
for the immediate future. But while
these new production sources may
dampen the demand for OPEC oil and
thereby moderate the increase in
world oil prices over the next few
years, a seller's market for OPEC oil
could again develop by the mid1980's, according to independent
studies conducted by the Organization
for Economic Cooperation and Development (OECD), the u.s. Central Intelligence Agency (CIA), and the
Workshop on Alternative Energy Strategies (W AES)at the Massachusetts Institute of Technology. All of these
studies argue that a sharp increase in
world prices for petroleum - relative
to the overall u.s. inflation rate - will
be required by the mid-1980's to bring
supply and demand for OPEC oil into
balance.
The authors of all three studies assume constant world oil prices (in 1975
dollars) over the forecast period. That
is, they seek to determine what might
happen to the demand and supply of
oil throughout the non-Communist
world if world oil prices - based on
the price of light Saudi Arabian
crude - were to rise in pace with the
overall U.s. inflation rate over the forecast period. The authors also assume a
4-percent economic growth over the
forecast period, along with the con-
tinuation of present conservation policies. (That growth rate will be
somewhat below what was experienced in the decade prior to the
1973-74 world oil price upsurge).
Using this methodology, all three studies forecast
of various magnitudes by the mid or late-1980's
between the amount of OPEC oil demanded by the non-Communist
world and the estimated amount the
OPEC cartel will be willing or able to
supply for export. In addition, the CIA
expects the Soviet Bloc to become a
net importer of oil by 1985, widening
the
between total world demand for OPECoil and available supply. Since world oil prices in actuality
will rise sufficiently to balance supply
and demand for OPEC oil.- thereby
invalidating the assumption of constant
relative world oil prices - these studies suggest that world oil prices probably will have to rise sharply relative to
the overall u.s. inflation rate by the
mid or late-1980's to bring the
demand and supply of OPEC oil into
equilibrium.
Under all these assumptions, the authors of these studies expect that the
world demand for OPECoil will remain
relatively constant over the 1977-80
period because of the increase in nonOPEC supplies, but will then increase
in the 1980's as non-Communist world
oil consumption continues to grow
and non-OPEC production remains relatively stable or even declines. Indeed, they claim that because of the
temporary "'glut'" created by Alaska
(continued on p,age 2)
and North Sea production, importing
nations may ignore the danger of future increased reliance on insecure
OPECimports, and may fail to take the
necessary steps to reduce the growth
of oil consumption and accelerate the
development of alternative energy
resources.
CIA 4lrn<l\
OIECD
.fim:llRrngs
The CIA report, TheInternational
Energy
Situation:
Outlook to 1985/ is
decidedly the most pessimistic of the
three energy studies. The impact of
these CIA findings on the Administration's views helps account for the
sense of urgency conveyed in·the ,,-President's energy messagea year ago,
about the need for a
equivalent of warN to reduce the growth of
U.s. energy consumption.
According to the CIA staff estimates,
total non-Communist world oil demand would rise from about 50 million
barrels/ day in 1977 to a minimum of
68 million barrels/day by 1985, with
the u.s. accounting for about one-half
of that increase in demand. Meanwhile, non-OPEC (and non-Communist) oil production would rise from
about 19 million barrels/day in 1977
to 22 million barrels/ day by 1980 - because of rising Alaskan and North Sea
output - but would then level off despite increased Mexican and Egyptian
production. Given those trends, the
demand for OPEC oil would rise
sharply, from 31 to 46 million
barrels/ day, over the 1980-85
period.
Meanwhile, the CIA expects nonSaudi OPEC production to remain approximately stable at around 28 mil2
lion barrels/day as a result of declining
reserves, so that Saudi Arabia would
have to raise its production to at least
19 million barrels/day to balance
world supply and demand for OPEC
oil- or to 22 million barrels/day if (as
the CIA expects) the Soviet Bloc turns
into a net importer by 1985. This is
double Saudi Arabia's present production capacity, and would require a
ina jor expansion in its present plans to
expand capacity to 16 million
barrels/day by the mid-1980's. Saudi
Arabia has the reserves necessary to
support a doubling of production, but
it may not want to produce at that level because-such--aolicy could· Ie-ad -. p
to
accelerated domestic inflation and
rapid depletion of its oil supply.
The OECD staff in its report, World
Energy
Outlook,expects non-Communist world demand for OPEC oil to
reach aroun'd 39 million barrels/ day by
1985. (Unlike the CIA staff, it expects
that the Soviet Bloc will meet its own
requirements.) According to that
study, the OPEC cartel will have the
physical ability to meet that level of
demand, but then as now, the margin
between the rated capacity and the
exporters' desired level of output may
be quite large. This tendency to operate below rated capacity could
produce a
and uncertain balance between OPEC export supplies
and world demand. The OECD staff
also stressesthat its forecast implies a
strenuous effort by non-OPEC nations
to expand alternative energy sources,
such as coal and nuclear power, and
to stimulate more domestic oil production. The authors conclude that this effort is an
that cannot be
taken for granted.
N
N
oarreI S/U ClIj,f
(Millions)
50
Total Demand Ci\lon-Commlilnist
World
.
__ ---""'.
--*.
f -----
40
30
Potential Supply
20
10
OPEC Oil
78 79
Based on U. S. Central Intelligence Agency
Projections, Assuming Constant World Oil
Prices, 1975
Timing of downturn?
The authors of the W AESreport, Energy: Global Prospects 1985-2000,do
not expect non-Communist world
production to peak for physical reasons until around 1995. Unless the
Arab nations deliberately limit production - either for economic or political
reasons- there would not be any impending shortfall in supplies until
1995 - much later than the dates estimated by the CIA and OECD staffs.
This difference in timing does not stem
from different geological estimates of
ultimately recoverable oil reserves,
which are generally agreed to be on
the order of 1.6 trillion barrels for the
non-Communist world. Rather, the
W AESstaff is more optimistic about
the extent to which new discoveries,
extensions to known fields and better
recovery techniques can add to proven reserves - reserves that can be
mined profitably at current prices with
known te.chnology. The W AESstaff
warns, however, that a shortfall could
develop by the early 1980's if Saudi
Arabia were to limit production then
to 13 million barrels/ day - and a shortfall would be likely to develop by
1990 even if Saudi Arabia were willing
to expand production to 25 million
barrels/day by that time.
Despite this disagreement over timing,
these three major studies generally
agree that non-Communist world oil
production will plateau and then decline sometime before the end of this
century. Indeed, there are already
forces in motion which strongly suggest this outcome. Between 1950 and
1970, an average of 18 billion barrels
of oil were added to non-Communist
reserves per year - but this figure fell
3
to 15 billion barrels in the first half of
this decade. In on-shore activities,
smaller and smaller deposits are being
located. While there may be a few
more North Slopesremaining to be discovered, geologists are certain there
are no more bonanzas similar to those
in the Middle East,which contains 60
percent of the non-Communist
world's total proven reserves. Offshore exploration could boost the discovery rate through the mid-1980's,
but geologists believe it will fall off
soon thereafter. At projected rates of
growth in demand, total production
thus will pass additions by the early
1980's, causing proven reserves to begin to decline. This decline will impose
a physical maximum on production before the end of the century.
Consequently, on the basis of these
three studies, it seems imperative that
the oil-importing nations reduce the
growth of oil consumption and accelerate the development of domestic alternative energy resources, in order
to achieve a smooth transition from oil
to other energy sources. Because of
this country's importance as the nonCommunist world's largest oil consumer, it must playa major role in this
effort. U.s. energy policy can follow
two alternative plans - permitting domestic energy prices to
to the
world oil equivalent in order to slow
consumption growth and encourage
domestic resource development, or
mandating conservation and accelerated development by the use of the
tax system, mandatory conservation
or a combination of different measures. Whatever the path chosen, it is
clear that there is little time to waste in
developing an effective energy policy.
Yvonne levy
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BANKI
NG D ATA- TWIELfTH FEDIERAL
RESERVE STRI
DI
CT
(Dollar amounts in millions)
Selected Assets and liabilities
large Commercial Banks
Loans(gross, adjusted) and investments*
Loans(gross, adjusted)- total
Security loans
Commercial and industrial
Real estate
Consumer instalment
U.s. Treasury securities
Other securities
Deposits (lesscash items)- total* '
Demand deposits (adjusted)
U.s. Government deposits
Time dep.osits total*
Statesand political subdivisions
Savingsdeposits
Other time depositst
Large negotiable CD's
Weekly Averages
of Daily Figures
Member Bank Reserve Position
ExcessReserves( )/Deficiency (-)
+
Borrowings
Net free(+ )/Net borrowed (-)
Federal Funds-Seven large Banks
Interbank Federal fund transactions
Net purchases(+)/Net sales(-)
Transactionswith U.s. security dealers
Net loans (+)/Net borrowings (-)
Amount
Outstanding
Change
from
4/19/78
4/12178
109,914
87,409
2,183
26,872
29,306
15,365
7,998
14,507
107,428
30,950
685
73,991
7,017
31,525
32,950
14,626
+
+
+
+
+
+
-
+
+
+
+
+
-
200
884
46
262
179
87
366
318
699
175
327
122
562
275
217
214
Change from
year ago
Dollar
Percent
+ 14,380
+ 14,735
589·
+
+ 3,407
+ 6,513
+ 2,819
- 1,421
+ 1,066
+ 11,984
+ 3,365
184
+
+ 8,482
+ 1,501
436
+ 7,002
+ 5,236
Week ended
Week ended
4/19178
4/12178
+
+
+.
+
+
+
-
+
+
+
+
+
+
+
+
15.05
20.28
36.95
14.52
28.57
22.47
15.09
7.93
12.56
12.20
36.73
12:95
27.21
1.36
26.98
55.76
Comparable
year-ago period
72
11
61
55
16
71
+ 2,268
+ 1,951
+
142
111
+
283
+
+
+
126
+
24
0
24
*Includes items not shown separately. tlndividuals, partnerships and corporations.
Editorial comments may be addressed to the editor (William Burke) or to the author ..••
Information on this and other publications can be obtained by calling or writing the Public Information
Section, Federal Reserve Bank of San Francisco, .,.0. Box 7702, San Francisco 94120.Phone (415) 544-2184.
@FedFRASER