International Energy Outlook 1998

Oil prices are expected to remain relatively low, and resources are not expected to constrain substantial increases in oil demand through 2020. Oil usecontinues to dominate transportation energy markets.

In the early 1990s, oil demand was relatively flat: oil consumption worldwide was only 1 million barrels per day higher in 1993 than it was in 1989. Since 1993, however, the world’s demand for oil has risen by almost 7 million barrels per day, to 73.7 million barrels per day in 1997 [1]. Nonetheless, oil prices moved down sharply during 1997, falling from the $23 to $24 range in January to a range of $18 to $19 per barrel in the fall. Many analysts have lowered their near-term price projections by $1.00 or more per barrel over at least the next year. General perceptions are that near-term price risks are more heavily weighted on the down, rather than the up side. This is a sharp reversal of views generally held in early 1997.

Current price movements have not modified EIA’s intermediate and long-term price expectations. Three long-term price paths are posited. The reference case price track for this outlook is essentially unchanged from last year’s, except that the end year of the projection has been extended to 2020. In that context, the long-term trend in oil prices is assumed to rise slowly in real terms, reaching about $23.00 a barrel in 2020 relative to current prices of $17.00 and year-end 1996 prices of $24.00 (Figure 28).

Sources: History: Energy Information Administration (EIA), Annual Energy Review 1996, DOE/EIA-0384(96) (Washington, DC, July 1997). Projections: EIA, Annual Energy Outlook 1998, DOE/EIA-0383(98) (Washington, DC, December 1997).

The reference case projections show large increases in both oil demand and supply. Between 1995 and 2020, oil demand is expected to grow at an average rate of 2 percent per year, resulting in an increase of more than 40 million barrels per day relative to 1997. In 2020, world oil consumption is projected to exceed 115 million barrels per day. A higher or lower oil price track is possible, but the expected range is limited. Over the past 25 years, oil prices have been highly volatile. In the future one can expect volatile behavior to recur principally because of unforeseen political and economic circumstances. It is well recognized that tensions in the Middle East, for example, could easily give rise to serious disruptions in normal oil production and trading patterns. On the other hand, significant excursions from the reference price trajectory are not likely to be long sustained. High real prices deter consumption and encourage the emergence of significant competition from marginal but large sources of oil and non-oil energy supplies. Persistently low prices have the opposite effects.

Limits to long-term oil price escalation include substitution of other fuels (such as natural gas) for oil, marginal sources of conventional oil that become reserves when prices rise, and nonconventional sources of oil that become reserves at still higher prices. Advances in exploration and production technologies bring down the price where these additional resources become part of the reserve base. There are also important limits to the potential range of oil price declines relative to reference case expectations. Lower prices deter investment in exploration and development, causing the expansion of oil supply capabilities to be diminished. At the same time, low prices encourage increased oil use, so that reserves are consumed without being replaced through exploration activity.

It should be noted that, regardless of the IEO98 price scenario, oil demand rises significantly over the projection period. In the high and low world oil price cases, the projected rise in oil consumption ranges from a low of 25 to as much as 60 million barrels per day. There is now widespread agreement that resources are not a key constraint in satisfying increases in world oil demand to 2020. Rather more important are the political, economic, and environmental circumstances conditioning supply and demand development.

Although there is substantial optimism in long-run expectations for oil markets, current developments suggest potential challenges to demand-supply equilibrium. The onset of recession in Southeast Asia could slow oil demand growth in a region that has accounted for 40 percent of the growth in world oil demand since 1990. On the supply side, the crisis in Iraq, if settled peacefully, could lead to an acceleration of oil exports even as oil prices are in decline. The denomination of allowable Iraqi exports in dollar terms means that as oil prices decline, more physical supply must enter the market. The impact is compounded as the dollar quota is increased. The 1997 United Nations quota permitted exports in the range of 700,000 to 800,000 barrels per day. In February 1998, the quota was more than doubled (from $2 billion to $5.2 billion in sales for 6 months). At current prices, the implied permitted export volume would exceed current Iraqi supply capabilities, which are estimated at more than 2 million barrels per day [2].

Some analysts argue that still another factor weakening the near-term prospects for oil prices is the recent decision by the Organization of Petroleum Exporting Countries (OPEC) to raise output quotas by 10 percent, from 25 million barrels per day to 27.5 million barrels per day. Within OPEC the move to increase quotas was led by Saudi Arabia. It has been suggested that the initiative signals a determination by Saudi Arabia to improve its share of production in world oil markets. If this were pursued, near-term oil prices would fall. As of this writing, however, Saudi Arabia has not increased production beyond the levels it reached before the quota adjustment. A more benign interpretation of the quota adjustment would be that it was needed to reflect the realities of current production patterns and to develop a framework for coping with future adjustments likely to be necessary as world oil markets continue to grow.

The latter view is one of the underpinnings for the reference case price projection presented in IEO98. Still another important assumption is that the financial downturn now being suffered in countries such as Thailand, Indonesia, Malaysia, and South Korea will not spread to China, India, and other parts of developing Asia. While the short term (1998 through 2000) may see lower GDP, it is expected that in the medium term the economies of these developing countries will recover, and that economic growth in Japan will be typical of the industrialized world.

Oil demand in the industrialized countries is projected to grow by 1.1 percent per year, from 42.4 million barrels per day in 1995 to 55.3 million barrels per day in 2020 (Figure 29). Although oil is still the most important energy source in the majority of industrialized countries, its share of total energy consumption is expected to drop by 2 percentage points (from 43 to 41 percent) over the 1995 to 2020 period. The decline reflects a continuation of trends in Europe, Japan, North America, and other countries, in which newer technologies use oil more efficiently and natural gas and other energy sources replace oil for many uses. The major portion of oil’s growth within industrialized economies is in fuels used for transportation, where it has no substantial competition.

Sources: 1970 and 1995: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database and International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). 2020: EIA, World Energy Projection System (1998).

The industrialized countries in 1995 accounted for almost two-thirds of total world oil demand, whereas over the next two decades they are expected to account for only one-third of the increase in demand. The reference case projection anticipates about 55 million barrels per day of oil demand in 2020 for the industrialized countries, up by almost 13 million barrels per day from 1995. North America—the United States, Canada, and Mexico—is expected to account for 8.4 million barrels per day of incremental demand. The projected growth in U.S. oil demand is the slowest within North America (1.3 percent per year). U.S. consumption in 2020 is expected to be nearly 6.7 million barrels per day higher than 1995 levels. Mexico has the highest projected percentage increase in North America (2.3 percent per year), primarily because economic growth is expected to proceed at twice the rate of growth for the United States and Canada.

Oil demand in industrialized Asia is projected to rise from 7 million barrels per day in 1995 to 10 million in 2020. The reference case projection is more uncertain for Japan than for North America because of its close ties tocountries currently experiencing currency and debt difficulties.

The slowest growth in oil use is projected for Western Europe, where overall oil demand is expected to rise by less than 2 million barrels per day from 1995 to 2020. Oil use for power generation and home heating is declining and being replaced by natural gas throughout the region. Oil is also losing market share to natural gas and electricity in many industrial energy uses. In addition, energy-intensive industries are beginning to be replaced by service industries, which are more likely to use natural gas and electricity than oil.

A looming uncertainty not addressed in IEO98 relates to consequences that may flow from commitments under the Kyoto Protocol. In North America, half of all growth in carbon emissions in the IEO98 projections is associated with increased use of oil, especially in transportation. The Kyoto initiatives could prompt changes in the fuel use characteristics of motor vehicles, with the possibility that as much as 8 million barrels per day of oil demand growth could be curtailed.

It should be noted that the IEO98 projections for U.S. oil demand reflect an upward revision relative to those presented in IEO97. Key forces driving that revision were relatively low oil prices and rising personal income, which encourage consumers to travel more and to travel in larger and less fuel-efficient vehicles.

In developing countries, the increase in oil demand between 1995 and 2020 in the reference case is more than 29 million barrels per day. The major impetus to growth is expected from Asia. Oil consumption in the developing countries of Asia is projected to grow by 3.8 percent per year, from 11.3 million barrels per day in 1995 to about 28.6 million barrels per day in 2020 (Figure 30).

The developing economies of Asia will become a dominant force on the demand side of the world oil market over the projection period. The region’s oil demand in the year 2000 is expected to average 13.3 million barrels per day—close to Western Europe’s 14.3 million barrels per day—and its expected level of 28.6 million barrels per day in 2020 is greater than the projected consumption in the United States (24.4 million barrels per day). High rates of economic growth and rising standards of living drive these expectations.

In China, oil consumption is expected to grow at an average rate of 5.0 percent per year from 1995 to 2020, with oil consumption tripling (Figure 30). As compared with 19 percent in 1995, oil is expected to account for 21 percent of China’s total energy consumption in 2020. The potential for oil demand growth in China is large, given its huge population, its potential for sustained long-term economic growth, and the characteristics of its transportation sector, as discussed below.

The transportation sector in China is underdeveloped relative to other economic sectors and has a substantial rail component. The rail system depends heavily on coal-fired engines but is switching to diesel or electric engines, which will lead to some increase in the demand for oil. More importantly, road transportation in China is limited, both for freight hauling and for personal travel, and is likely to develop rapidly in the future. The increase in demand for motor fuels will lead to an increase in the use of lighter petroleum products in China. The industrial sector will continue to be dominated by coal, but moderate growth in oil use is expected. Increases in oil use for heating and cooking are also expected in the residential and commercial sectors.

In India, where GDP growth is expected to be slower than China’s, growth in oil demand is projected to average 3.6 percent per year between 1995 and 2020 (compared with 5.0 percent per year in China). India currently imports refined petroleum products, as well as crude oil to feed domestic refineries. Its import requirement for petroleum products is expected to grow until new refining capacity comes on stream, at which time the import emphasis will switch from products to crude oil.

If the future growth of oil demand in China and India were to match the historical rate for South Korea, the IEO98 projection could be low by several tens of millions of barrels per day. Although high growth rates in oil use are projected for China and India in the reference case, the rates are much lower than those seen in the recent past for the rapidly growing economies of Indonesia, Malaysia, South Korea, Taiwan, and Thailand. In South Korea, for example, oil consumption grew at an average rate of 13.5 percent per year from 1985 to 1995, and in 1995 the country’s annual oil consumption was 16.5 barrels per capita [3]. In China and India, oil consumption currently is less than 1 barrel per capita annually, even though their usage levels have increased by 77 percent and 76 percent, respectively, since 1985. Oil demand is highly income-elastic, especially in countries like China and India, which have underdeveloped personal transportation systems but 38 percent of the world’s population.

Substantial growth in oil demand is also anticipated outside Asia, in other developing regions. In Central and South America, oil consumption is expected to more than double between 1995 to 2020. Following the reforms in government policies led by developments in Argentina and Chile, substantial economic growth is projected—twice the rate for developed economies. Such growth (4.3 percent annually) can promote improvements in living standards and, in concert, strong increases in demand for energy and oil-using products. In this region, large increases in transportation fuel use can be expected, and demand for non-transportation uses will also grow. While the share of baseload electricity generation fueled by oil will decrease, oil consumption in the electricity sector is projected to increase in absolute terms, primarily in remote areas and for peak load generation. Large investments are being made in gas and electricity transmission in Central and South America, and a significant portion of incremental power generation is expected to rely on natural gas; however, diesel-fired combustion turbines will continue to be used to satisfy a significant portion of the region’s demand for electric power.

The reference case projection for Eastern Europe and the former Soviet union (EE/FSU) depicts a near doubling of oil demand between 1995 and 2020, which would return consumption levels to those last seen in 1990, before economic depression befell the region. Signs of economic recovery are now clearly evident in Eastern Europe, with growth in GDP at 4 percent or more per year. For the FSU, 1997 appears to mark the beginning of economic turnaround, and average annual growth of about 3.5 percent is projected through 2020. Still, oil demand projections for the EE/FSU region are highly uncertain. Obvious uncertainties relate to privatization and the institution of market-based economic reforms, which if successful would increase per capita incomes. As in Asia, there is a strong potential for oil demand beyond that currently projected, especially in relation to personal transportation, if reforms are successful.

In developed countries, the bulk of oil demand and the prospective growth in demand are associated with transportation. Oil price shocks in the 1970s drove efforts to substitute other fuels for oil, an objective largely achieved except in the provision of transportation services. With high vehicle ownership rates, per capita oil use for transportation tends to be high in the industrialized nations: about 15 barrels per person per year. Not much growth in total per capita oil use is expected, however, and thus oil demand in industrialized countries tends to increase mostly in proportion to population.⁴

The greatest potential for growth in transportation energy demand is in the developing world. The largest increase is projected for China, where oil use for transportation rises from about 1 million barrels per day in 1995 to 3.5 in 2020, an increase of 250 percent (Figure 31). For India, the projected increase is 1.2 million barrels per day, or 165 percent; and for the rest of developing Asia combined, transportation oil use grows from about 2.7 million barrels per day to 6.6 million barrels per day, an increase of 3.9 million barrels or 144 percent. Because vehicle ownership rates can have a large impact on transportation energy demand, the following discussion focuses on the implications of rising vehicle ownership rates for oil demand, particularly in developing countries.

Sources: 1995: Derived from Energy Information Administration (EIA), Office of Energy Markets and End Use, International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1998).

Despite recent turmoil in the economies of developing Asia, the potential for long-term growth in transportation demand is the greatest in this region. Until late in 1997 these economies had been growing by more than 8 percent a year. Increasing business and industrial activity as well as increasing household incomes and growing urban populations have led to a rising demand for transportation. In 1995, transportation energy demand in developing Asia was 9.6 quadrillion Btu, accounting for 13.4 percent of total energy consumption. By 2020, transportation energy demand for the region is projected to surpass 26 quadrillion Btu, nearly half of which will be in China and India. The primary reason for the rapid growth is the increasing motorization of Asia (Figure 32) as a result of projected robust economic growth in the medium to long term.

Source: American Automobile Manufacturers Association, World Motor Vehicle Data 1997 (Detroit, MI, 1997).

Passenger car ownership rates differ among the countries of developing Asia. South Korea has a passenger car density of 132 cars per 1,000 inhabitants; both China and India have rates of approximately 3 to 4 cars per 1,000 inhabitants [4]. Between 1994 and 1995, new car registration grew by almost 40 percent in China, India, and Malaysia. By 2015, China is projected to have 51 million cars and India 16 million [5].

Rapid growth in vehicle ownership rates has been seen in many countries as income per capita has risen. When incomes rise above subsistence levels, demand for vehicle ownership tends to be highly income-elastic [5. 12-13], as demonstrated by the legendary traffic jams of Bangkok, Manila, Mexico City, and elsewhere. From 1960 to 1973, the ratio of vehicles to population grew by 24 percent per year in Japan and by 19 and 14 percent, respectively, in Spain and Italy. In South Korea, the ratio increased by 16 percent per year between 1970 and 1991. If China sustains a growth rate in vehicle ownership of 10 percent per year for the next two decades, its vehicle population will approximate the U.S. vehicle population by 2015. Even at that rate, however, China would have fewer vehicles per capita in 2015 than Japan and South Korea have already [5, p. 25]. In 1970, 44 percent of the world vehicle population was in the United States, but by 1995 the U.S. share had dropped to 31 percent, even though U.S. vehicle ownership had nearly doubled (Figure 33).

Source: American Automobile Manufacturers Association, World Motor Vehicle Data 1997 (Detroit, MI, 1997).

Figure 34 shows vehicle ownership rates for selected industrialized countries. Figure 35 reports on regions of the developing world and Russia. Industrialization, with higher per capita incomes, appears to give rise to vehicle ownership rates which are orders of magnitude greater than now evident in emerging economies. Thus, sustained economic growth is likely to drive large increases in petroleum demand, given current fuel use technologies for motor vehicles.

Source: American Automobile Manufacturers Association, World Motor Vehicle Data 1997 (Detroit, MI, 1997).

The IEO98 reference case projects an increase in world oil supply of 40 million barrels per day over the next 25 years. Gains in production are expected for both OPEC and non-OPEC regions; however, only one-fourth of the production rise is expected to come from non-OPEC areas. Over the past two decades, the growth in non-OPEC oil supply has eroded OPEC’s market share, and the long-term outlook for non-OPEC supply remains optimistic even in the face of lower world oil prices. New exploration and production technologies, aggressive cost-reduction programs by industry, and attractive fiscal terms to producers by governments all contribute to the outlook for continued growth in non-OPEC oil production.

On the other hand, the reference case projection anticipates that as much as three-fourths of the increase in demand over the next two decades will be met by increases in production by members of OPEC rather than by non-OPEC suppliers. OPEC production capacity in 2020 is projected to be more than 32 million barrels per day higher than it was in 1996 (Figure 36). Some analysts suggest that OPEC might prefer and pursue significant price escalation through conservative capacity expansion decisions rather than undertaking such an ambitious production expansion effort. The view presented in this outlook discounts such an expectation.

There is general agreement that OPEC members with large reserves and relatively low production capacity expansion costs can accommodate sizable increases in petroleum demand. In the IEO98 reference case, the production call on OPEC producers grows at a robust annual rate of 3.1 percent (Table 11 and Figure 37). With the expected growth in demand, especially in the developing countries of the Pacific Rim, OPEC capacity utilization is expected to increase sharply after 2000, reaching 95 percent by 2010 and remaining there for the duration of the forecast period.

Source: American Automobile Manufacturers Association, World Motor Vehicle Data 1997 (Detroit, MI, 1997).

Given the requirements for OPEC production capacity expansion implied by the IEO98 estimates, much attention has been focused on the oil development, production, and operating costs of individual OPEC producers.

Sources: 1970-1979: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Statistics Database. 1980-1996: EIA, International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1998).

With the reserve-to-production ratio of Persian Gulf producers exceeding 80 years, significant capacity expansion is obviously feasible.

The cost to produce a barrel of oil in Persian Gulf OPEC nations ranges between $0.99 and $1.49 per barrel, depending on field size. The capital investment required to increase production capacity by 1 barrel per day in Persian Gulf OPEC nations ranges between $2,525 and $4,866 [6], also depending on field size. Assuming the IEO98 low price case and mid-size fields only, total development and operating costs over the entire forecast period as a percentage of gross revenues range only between 15 and 20 percent. Thus, for the Persian Gulf producers, the total cost of capacity expansion is a relatively small percentage of projected gross revenue even in the low price case.

For OPEC producers outside the Persian Gulf, the cost to expand production capacity by 1 barrel per day is considerably greater, ranging from $7,610 (Indonesia) to $10,240 (Venezuela). Nevertheless, even this group of producers can expect margins in excess of 40 percent on investments to expand production capacity over the long term in the low price case [7]. Venezuela has the greatest potential for capacity expansion and has already announced plans to increase its production capacity to 4.5 million barrels per day by 2005. Tables A40-A47 in Appendix A show the ranges of production potential for both OPEC and non-OPEC producers.

The reference case projection implies aggressive efforts by OPEC to apply or attract investment capital to implement a wide range of production capacity expansion projects. If those projects were not undertaken, world oil prices could escalate; however, the combination of potential profitability and the threat of competition from non-OPEC suppliers argues for the pursuit of an aggressive expansion strategy.

In IEO98, the projections for oil production from OPEC members outside the Persian Gulf have been bolstered somewhat over the IEO97 projections. Recent discoveries of significant Nigerian offshore production potential, as well as increased optimism with regard to Algerian, Indonesian, and Venezuelan output, have contributed to this reassessment. OPEC production outside the Persian Gulf is expected to increase by at least 1 million barrels per day early in the next century and continue for the duration of the forecast period. As a result, the world’s projected dependence on Persian Gulf oil is 3 to 5 percent lower than was projected in IEO97.

The growth in non-OPEC oil supplies has eroded OPEC’s market share over the past two decades. During that period, non-OPEC oil supply has become increasingly diverse. North America dominated non-OPEC supply in the early 1970s, the North Sea and Mexico emerged as major producers in the 1980s, and much of the new production in the 1990s has come from developing countries. In the IEO98 reference case, non-OPEC supply from proven reserves is expected to increase steadily, from 43.5 million barrels per day in 1996 to 55.3 million in 2020 (Table 12).

There are several important differences between the IEO98 production profiles and those published in IEO97:

In the IEO98 forecast, North Sea production reaches a peak in 2003, exceeding 7.6 million barrels per day. Production from Norway, Western Europe’s largest producer, is expected to peak at about 3.8 million barrels per day in 2003 and then gradually decline to about 3.1 million barrels per day by the end of the forecast period with the maturing of some of its larger and older fields. The United Kingdom sector is expected to produce about 3.6 million barrels per day early in the next decade, followed by a decline to about 2.3 million barrels per day in 2020.

Two non-OPEC Persian Gulf producers are expected to increase output gradually into the beginning of the next decade. Enhanced recovery techniques are expected to increase current output in Oman by about 40,000 barrels per day, and only a modest decline in production is anticipated beyond 2005. Current oil production in Yemen could increase by almost 100,000 barrels per day early in the next century, and those levels could be maintained throughout the forecast period. Syria’s production is expected to show a steady decline.

Oil producers in the Far East are beginning to reap the benefits of enhanced exploration and production technologies. India is expected to show a modest production increase into the next decade and exhibit very little decline in output thereafter. Deepwater fields offshore from the Philippines are expected to produce in excess of 200,000 barrels per day by the year 2000. There has been much optimism about the long-term production potential for Vietnam, where output is projected to exceed 450,000 barrels per day by 2020. Australian production is expected to peak at about 870,000 barrels per day in the early years of the next decade, but enhanced production technologies will temper the production declines somewhat after 2005. Malaysia’s output will peak at about 810,000 barrels per day by the turn of the century and gradually decline to about 650,000 barrels per day by2020. Exploration and test-well activity have indicated some production potential for Bangladesh and Mongolia, but significant output is not expected until the turn of the century.

Central and South America’s producers have significant potential for increasing output over the next decade. By the turn of the century, both Brazil and Colombia will have joined the relatively short list of worldwide producers whose output exceeds 1 million barrels per day. Colombia’s output is projected to reach almost 1.3 million barrels per day early in the next decade and to remain at that level through 2020. Brazil is viewed as having vast untapped production potential and, given a favorable climate for attracting foreign investment, could exceed 1.8 million barrels per day by 2020. Argentina is expected to raise its production levels modestly out to the end of this decade, and former OPEC member Ecuador is expected to increase its production capacity to allow additional output of more than 100,000 barrels per day.

West African producers Angola, Congo Brazzaville, and Congo Kinshasa will reap the benefits of substantial offshore exploration activity and combine for an additional 700,000 barrels per day in output in the early part of the next decade. Production levels are expected to increase modestly for the remainder of the forecast period. North African producers Tunisia and Egypt produce from mainly mature fields, which are likely to be in gradual decline after 2000. Chad and the Sudan are expected to combine for 600,000 barrels per day of output by the turn of the century. Other African producers with output potential beyond 2000 include the Ivory Coast, Equatorial Guinea, Somalia, and South Africa.

For North America, the falling U.S. output is more than offset by production increases from Canada and Mexico. Canada’s output is expected to increase by 200,000 barrels per day by the end of the decade, mainly from Newfoundland’s Hibernia oil project, which could produce 140,000 barrels per day at its peak, some time near the turn of the century. Canada will add an additional 500,000 barrels per day in output from a combination of frontier area offshore projects and oil from tar sands. Offshore discoveries in the Gulf of Mexico, incremental Alaskan production from Cook Inlet, and technological advances in production methods will temper the decline in U.S. production. In Mexico, with the continuation of government energy policies that encourage the efficient development of its vast resource base, production volumes are expected to reach 4 million barrels per day by 2005 and hold at that level for the remainder of the forecast period.

Oil production in the former Soviet Union is expected to reach 9.5 million barrels per day by 2005 and to exceed 13.1 million barrels per day by 2020. Thus, by the end of the forecast period, the FSU would be a net exporter of almost 5.7 million barrels per day. Much of the export potential for the FSU region is in the resource-rich Caspian Basin (see box). While China’s output is expected to increase steadily, to more than 3.6 million barrels per day by 2015, it will find itself importing large volumes of petroleum to meet its burgeoning domestic demand.

The IEO98 estimates of non-OPEC oil production are based on such parameters as numbers of exploration wells, finding rates, reserve-to-production ratios, advances in both exploration and production technologies, and world oil prices. Non-OPEC production potential could be significantly greater if no constraints were placed on the exploration and development of undiscovered resources. For the IEO98 reference case, low oil price, and high oil price assessments, it was assumed that no more than 15 percent of the mean U.S. Geological Survey (USGS) estimate of undiscovered oil would be developed over the forecast period. Tables A40-A47 in Appendix A show the ranges of production potential for both OPEC and non-OPEC producers.

For non-OPEC production potential, the world oil price is the only variable across the low price, reference, and high price cases. As a result, the range of non-OPEC supply projections is modest, varying by only slightly more than 5.2 million barrels per day at the end of the forecast period. A fourth view of non-OPEC production—the high non-OPEC supply case—was therefore provided, assuming that some portion of the undiscovered oil (based on USGS estimates) in non-OPEC nations will be developed and produced before 2020.

Source: “DESTINY” International Energy Forecast Software (Houston, TX: Petroconsultants, 1998).

Figure 38 compares OPEC and non-OPEC production estimates in the reference and high non-OPEC supply cases. In the high case, the annual growth rate for non-OPEC production is projected to be 1.4 percent, compared with 1.0 percent in the reference case. Non-OPEC production reaches a peak of 60.5 million barrels per day in the high case in 2020, compared with 55.4 million barrels per day in the reference case. Figure 39 compares peak production levels for six non-OPEC regions in the reference and high non-OPEC supply cases.

In the reference case, OPEC production peaks at 60.5million barrels per day, and the OPEC share of worldwide production does not begin to exceed that of non-OPEC suppliers until 2018. In the high non-OPEC supply case, OPEC production peaks at 55.3 million barrels per day and never assumes the majority market share over the forecast period.

Sour.ces: History: Energy Information Administration (EIA), International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: EIA, World Energy Projection System (1998).

Source: Energy Information Administration, World Energy Projection System (1998).

In 1995, industrialized countries imported 15.8 million barrels of oil per day from OPEC producers. Of that total, 9.4 million barrels per day came from the Persian Gulf region. Oil movements to industrialized countries represented more than two-thirds of the total petroleum exported by OPEC member nations and more than 60 percent of all Persian Gulf exports (Table 13). By the end of the forecast period, OPEC exports to industrialized countries are estimated to be more than 6 million barrels per day higher than their 1995 level, with almost three-quarters of the projected increase coming from the Persian Gulf region.

Despite such a substantial increase, the projected share of total petroleum exports in 2020 that goes to the industrialized nations is lower than their 1995 share, at slightly over 50 percent. Their share of all Persian Gulf exports falls even more dramatically, to around 33 percent. This significant shift in the balance of OPEC export shares between the industrialized and nonindustrialized nations is a direct result of the robust economic growth anticipated for the developing nations of the world, especially those of Asia. OPEC petroleum exports to developing countries are expected to increase by more than 22 million barrels per day over the forecast period, with about two-thirds of the increase going to the developing countries of Asia. China, alone, will most likely import almost 7 million barrels per day from OPEC by the year 2020, virtually all of which is expected to come from Persian Gulf producers.

North America’s petroleum imports from the Persian Gulf are expected to increase by more than 70 percent over the forecast period (Figure 40); however, almost three-fourths of total North American imports in 2020 will be from Atlantic Basin producers and refiners. Large increases in crude oil imports are anticipated from Latin American producers, including Venezuela, Brazil, Colombia, and Mexico. West African producers, including Nigeria and Angola, are also expected to increase their export volumes to North America. Caribbean Basin refiners are expected to account for most of the increase in North American imports of refined products.

Sources: 1995: Energy Information Administration (EIA), Energy Markets and Contingency Information Division. 2020: EIA, Office of Integrated Analysis and Forecasting, WORLD Reference Model.

Table 13. Worldwide Petroleum Trade in the Reference Case, 1995 and 2020
(Million Barrels per Day)

As North Sea oil production declines moderately, Western Europe is expected to import increasing amounts from OPEC producers in the Persian Gulf, North Africa, and West Africa, as well as substantial quantities from the Caspian Basin. Industrialized Asian nations are expected to increase their already heavy dependency on Persian Gulf oil.

Worldwide crude oil distillation refining capacity was 76.1 million barrels per day at the beginning of 1997. To meet the projected growth in international oil demand in the reference case, worldwide refining capacity will have to increase by more than 50 million barrels per day by 2020. Substantial growth in distillation capacity is expected in the Middle East, Central and South America, and especially in the Asia Pacific region. Refiners in North America and Europe, while making only modest additions to their distillation capacity, will continue to improve product quality and enhance the usefulness of the heavier portion of the barrel through investment in downstream capacity. Likewise, future investments by developing countries must also include more advanced configurations in order to meet the anticipated increase in demand for lighter products.

The three world oil price paths for IEO98 (see Figure 28) are similar to the IEO97 forecasts out to the year 2015. The price projections continue to reflect a view that world oil production can rise dramatically without raising world oil prices substantially. Beyond 2015, a gradual rise in oil prices is expected in the reference case, from $21.48 per barrel (in constant 1996 dollars) in 2015 to $22.32 in 2020. In nominal dollars, the reference case reaches $47 per barrel in 2020.

By 2020, there is a spread of about $8 per barrel between the reference case and the low price case and about $6 per barrel between the reference case and the high price case. The IEO97 low and high price cases were symmetrical in their divergence from the reference case; however, the IEO98 high price case reflects the view that alternative or nonconventional energy supplies would become economically viable only if the world oil price reached about $28 per barrel, and that oil prices are unlikely to exceed that level for any sustained period of time.

The IEO98 low and high price cases are derived by assuming alternative levels of OPEC oil production. The low price case is associated with vigorous growth in OPEC production capacity and assumes the availability of outside investment capital for such expansion. The high price case is associated with more modest growth in OPEC production capacity and assumes that production capacity expansion will be financed mainly by the oil revenues of the producing nations themselves.

In the past oil prices have been quite volatile, and volatile price behavior can be expected in the future, principally as the result of unforeseen political and economic circumstances. The IEO98 projections assume, however, that significant volatility is not likely to be long sustained. High real prices deter consumption and encourage the emergence of competition from alternative sources of oil and other energy supplies. Low prices have the opposite effect.

This outlook continues the optimism expressed in IEO97 with regard to long-term oil production possibilities. Technologies continue to evolve that significantly enhance both exploration and production capabilities. Subsea drilling technology has permitted economical access to resource-rich, deepwater areas that were heretofore considered too harsh or environmentally risky for development. Significant offshore additions to the resource base have been achieved in the United States, the North Sea, and deepwater areas off the coasts of Brazil and West Africa.

The stability of government institutions and the investment climate created by government energy policies cannot be overlooked as being of equal importance to the adequacy of the underlying resource base. Policies that encourage private investment for resource development continue to evolve in both OPEC and non-OPEC nations.

Despite the optimism regarding long-term oil supply potential, it is not uncommon to find “gloom-and-doom” scenarios in publications or on the internet predicting that the world will run out of oil within the next decade. A few simple calculations cast substantial doubt on such claims. At the beginning of 1997, there was slightly more than 1 trillion barrels of oil in proven reserves worldwide. “Proven” means that there is considerable geologic and engineering evidence that supports the ability to develop such resources under current economic and technological environments. Using the IEO98 reference case production projections and assuming that no additional oil is discovered worldwide over the forecast period, proven reserves could easily meet oil demand through 2020 (Figure 41, “NoReserves Added”).

Sources: History: Energy Information Administration (EIA), Office of Energy Markets and End Use, International Energy Annual 1996, DOE/EIA-0219(96) (Washington, DC, February 1998). Projections: C. Masters, E. Attanasi, and D. Root (U.S. Geological Survey), “World Petroleum Assessment and Analysis,” in Proceedings of the Fourteenth World Petroleum Congress (New York, NY: John Wiley and Sons, 1994), and EIA, World Energy Projection System (1998).

Moreover, it seems unduly pessimistic to suggest that noadditional reserves will be added to the resource baseover the forecast period. The USGS, in its assessment for the World Petroleum Congress, attempted to bracket an estimate of undiscovered oil resources. The USGS maintained that there is a 95-percent chance of finding an additional 292 billion barrels of oil worldwide but only a 5-percent chance of finding at least another trillion barrels [9. Again, using the IEO98 reference case production projections and assuming the high and low USGS estimates of undiscovered oil, it is clear that the world is not imminently running out of oil (Figure 41). In addition, the USGS assessment was based only on current technology and economic environments. If technological advances are projected into the longer term, the probability of enlarging the ultimately recoverable oil resource base increases.

If the above argument is not sufficiently compelling, then an additional argument can be made with respect to nonconventional oil. The term “nonconventional oil” refers to a vast resource base (at least 5 trillion barrels by some estimates [10]) of oil that is suspended in some geological medium such as tar sands (as in Canada and Venezuela) or shale (as in the United States). Although the technology to segregate the efficiently oil is either not sufficiently developed or too expensive to be applied at present, the ability to extract oil from tar sands has improved over the past decade. Canada has dramatically lowered the operating costs for extraction and processing, to less than $15 per barrel, but the initial capital investment required keeps tar sand production at today’s modest levels [11]. If the world oil price were to rise to $25 a barrel early in the next century, some forecasts suggest that significant volumes of nonconventional oil (as much as 15 million barrels per day) could become available by 2020. As technology brings the cost of producing a nonconventional barrel of oil closer to that of a conventional barrel, it becomes reasonable to view oil as a viable energy source well into the twenty-second century.

World oil price forecasts are prepared by many oil market analysts. Widely used forecasts generally present a conservative view of the prospects for significant oil price escalation over the next decade or so. Table 14 compares the IEO98 projections with similar forecasts from DRI/McGraw-Hill (DRI), the International Energy Agency (IEA), Petroleum Economics, Ltd. (PEL), Petroleum Industry Research Associates, Inc. (PIRA), the Gas Research Institute (GRI), Natural Resources Canada (NRCan), and NatWest Securities, Ltd. (NatWest).

Table 14. Comparison of World Oil Price Projections, 2000-2020
(1996 Dollars per Barrel)

Among the forecasts, the IEO98 price expectations tend to be higher than most of the comparable forecasts. However, this comparative set represents a very broad range of prices: the 2005 price estimates range from $13.97 per barrel in constant 1996 dollars (PEL) to $26.73 (IEA CC), with IEO98 at $20.19 in the reference case. For 2010, the range is $13.14 (PEL) to $26.73 (IEA CC), with IEO98 at $20.81. For 2015, the range is $12.71 (PEL) to $23.43 (DRI), with IEO98 at $21.48. PEL price projections, in fact, remain the lowest of the set through 2015, the last year of the PEL forecast. By 2020, the range narrows (only four of the forecasts extend to 2020). Prices in 2020 range from $20.38 (NRCan) to $26.16 (DRI), with the IEO98 price at $22.32. The IEA CC and IEA ES forecasts were formulated iin April 1996 and, as a result, can be considered somewhat dated in relation to the more recent price forecasts from IEO98, PIRA, PEL, and NatWest.

Table 15. Comparison of World Oil Production Forecasts
(Percent of World Total)

Year	Reference Case	High Oil Price	Low Oil Price
History
1990	24.5	—	—
1996	28.3	—	—
Projections
2000	29.9	28.2	32.1
2005	34.3	30.9	39.9
2010	40.6	35.3	48.8
2015	49.9	42.6	60.2
2020	60.5	52.5	72.9
Note: Includes the production of crude oil, natural gas plant liquids, refinery gain, and other liquid fuels. Sources: History: Energy Information Administration (EIA), International Petroleum Statistics Report, DOE/EIA-0520(97/12) (Washington, DC, December 1997). Table 1.4. Projections: EIA, World Energy Projection System (1998).

Year	Reference Case	High Oil Price	Low Oil Price
History
1990	42.2	—	—
1996	43.5	—	—
Projections
2000	47.3	47.9	46.6
2005	52.0	53.0	50.2
2010	55.0	56.7	52.6
2015	55.2	57.6	52.5
2020	55.3	57.7	52.4
Note: Includes the production of crude oil, natural gas plant liquids, refinery gain, and other liquid fuels. Sources: History: Energy Information Administration (EIA), International Petroleum Statistics Report, DOE/EIA-0520(97/12) (Washington, DC, December 1997). Table 1.4. Projections: EIA, World Energy Projection System (1998).

Country	Proven Reserves	Potential Resources	Total Resources
Azerbaijan	12.5	32	45
Iran	0.1	15	15
Kazakhstan	17.6	92	110
Russia	0.3	7	7
Turkmenistan	1.7	38	40
Uzbekistan	0.3	2	2
Total	32.5	186	218
Source: “DESTINY” International Energy Forecast Software (Houston, TX: Petroconsultants, 1998).

Exporting Region	Importing Region
	Industrialized				Nonindustrialized
	North America	Western Europe	Asia	Total	Pacific Rim	China	Rest of World	Total
	1995
OPEC
Persian Gulf	1.8	3.4	4.2	9.4	4.1	0.4	1.5	6.0
North Africa	0.3	1.9	0.0	2.2	0.0	0.0	0.1	0.1
West Africa	1.0	0.6	0.1	1.7	0.3	0.0	0.1	0.4
South America	1.6	0.3	0.0	1.9	0.1	0.0	0.6	0.7
Asia	0.1	0.0	0.5	0.6	0.1	0.0	0.0	0.1
Total OPEC	4.8	6.2	4.8	15.8	4.6	0.4	2.3	7.3

Non-OPEC
North Sea	0.7	3.4	0.1	4.2	0.0	0.0	0.4	0.4
Caribbean Basin	2.8	0.3	0.1	3.2	0.1	0.0	0.9	1.0
Former Soviet Union	0.0	1.6	0.0	1.6	0.3	0.0	0.7	1.0
Other Non-OPEC	0.6	0.2	1.1	1.9	0.1	0.2	0.4	0.7
Total Non-OPEC	4.1	5.5	1.3	10.9	0.5	0.2	2.4	3.1

World Total Petroleum Imports	8.9	11.7	6.1	26.7	5.1	0.6	4.7	10.4
	2020
OPEC
Persian Gulf	3.1	3.8	6.9	13.8	10.1	6.9	11.0	28.0
North Africa	0.3	1.9	0.2	2.4	0.1	0.0	0.2	0.3
West Africa	1.3	0.5	0.3	2.1	0.1	0.0	0.1	0.2
South America	2.9	0.4	0.1	3.4	0.1	0.0	0.8	0.9
Asia	0.0	0.0	0.2	0.2	0.1	0.0	0.0	0.1
Total OPEC	7.6	6.6	7.7	21.9	10.5	6.9	12.1	29.5

Non-OPEC
North Sea	0.9	2.7	0.0	3.6	0.1	0.0	0.4	0.5
Caribbean Basin	3.9	0.1	0.1	4.1	0.1	0.0	1.8	1.9
Former Soviet Union	0.6	2.4	0.5	3.5	0.8	0.4	0.9	2.1
Other Non-OPEC	2.2	0.5	0.2	2.9	0.2	0.2	0.5	0.9
Total Non-OPEC	7.6	5.7	0.8	14.1	1.2	0.6	3.6	5.4

World Total Petroleum Imports	15.2	12.3	8.5	36.0	11.7	7.5	15.7	34.9
Notes: Totals may not equal sum of components due to independent rounding. Sources: 1995: Energy Information Administration (EIA), Energy Markets and Contingency Information Division. 2020: EIA, Office of Integrated Analysis and Forecasting, WORLD Reference Model (1998).

Forecast	2000	2005	2010	2015	2020
IEO98
Reference Case	19.11	20.20	20.81	21.48	22.32
High Price Case	21.86	24.51	26.97	28.59	28.71
Low Price Case	14.47	14.59	14.44	14.42	14.43
DRI	17.29	19.27	21.07	23.43	26.16
IEA
Capacity Constraints (CC) Case	18.18	26.73	26.73	NA	NA
Energy Savings (ES) Case	18.18	18.18	18.18	NA	NA
PEL	15.31	13.97	13.14	12.71	NA
PIRA	19.52	18.54	19.13	NA	NA
WEFA	18.35	19.05	19.77	20.53	21.31
GRI	17.05	17.06	17.05	17.06	NA
NRCan	20.38	20.38	20.38	20.38	20.38
NatWest	19.00	19.00	19.00	19.00	NA
Notes: IEO98 projections are for average landed imports to the United States. DRI, GRI, and WEFA projections are for composite refiner acquisition prices. PEL projections are for Brent crude oil. PIRA and NRCan projections are for West Texas Intermediate crude oil at Cushing. Sources: IEO98: Energy Information Administration, Annual Energy Outlook 1998, DOE/EIA-0383(98) (Washington, DC, December 1997). DRI: DRI/McGraw-Hill, World Energy Service: U.S. Outlook, Spring 1997 (Lexington, MA, April 1997), p. 22. IEA: International Energy Agency, World Energy Outlook 1996 (Paris, France, 1996), pp. 231-232. PEL: Petroleum Economics, Ltd., Long Term Oil and Energy Outlook to 2015 (London, United Kingdom, February 1998) (preliminary numbers). PIRA: PIRA Energy Group, Retainer Client Seminar—Part One (New York, NY, October 1997), Table II-3. WEFA: WEFA Group, U.S. Long-Term Economic Outlook, Spring/Summer 1997, p. 3.9. GRI: Gas Research Institute, 1998 Data Book of the GRI Baseline Projections of U.S. Energy Supply and Demand to 2015 (Washington, DC, August 1997), p. SUM-21. NRCan: Natural Resources Canada, Canada’s Energy Outlook, 1996-2020, Annex C2 (Ottawa, Ontario, Canada, April 1997). NatWest: NatWest Securities, Ltd., Oil Perspectives (London, United Kingdom, September 1997).

Report#: DOE/EIA-0484(98)

The World Oil Market

Forecast	OPEC	EE/FSU^a	Rest of World
History
1996	39	10	51
Projections
2000
IEO98	39	10	51
DRI	43	9	48
IEA Capacity Constraints Case	42	11	48
IEA Energy Savings Case	40	11	49
PEL	41	10	49
PIRA	36	10	55
NatWest