The crude oil market rebounded dramatically in 1999. Prices rose from the low monthly average of $9.39 per barrel (nominal U.S. dollars) in December 1998 to $24.44 in December 1999, an increase of almost $15 a barrel.
Prices were influenced by the successful adherence to announced cutbacks in production by members of the Organization of Petroleum Exporting Countries (OPEC) as well as several non-OPEC countries, notably, Mexico and Norway.
In addition, the price decline in 1998 significantly dampened the annual production growth that non-OPEC suppliers had provided since the mid-1990s, and petroleum demand in Southeast Asia began to recover from the severe recession of 1997-98.
Oil consumption rose in 1999 by slightly more than 1 million barrels per day with industrialized nations accounting for about one-half of the increase. Before the 1998 recession, oil demand in developing Asia (including China) had grown at a robust annual rate of about 8.0 percent between 1991 and 1997.
As the Asian economies began recovering in 1999, oil demand grew in China by 5.1 percent and in the rest of Asia grew by 2.0 percent. With economic problems in Brazil and political uncertainty in Colombia, Ecuador, and Venezuela, oil demand in Latin America did not increase in 1999.
Persistent economic problems in Russia caused declines in oil demand in both 1998 and 1999 for the former Soviet Union (FSU); however, oil demand in the FSU is expected to show slight growth in 2000 .
On March 23, 1999, OPEC (not including Iraq) agreed to production cutbacks totaling 1.7 million barrels per day. Four non-OPEC suppliers (Mexico, Norway, Russia, and Oman) pledged an additional 0.4 million barrels per day.
Two earlier OPEC ministerial meetings in 1998 had yielded plans for oil production cutbacks that were never successfully realized, but the active encouragement by non-OPEC producers may have lent an air of seriousness to the more recent OPEC pledges. Since the March 23rd meeting, OPEC’s production management efforts have been successful, and their target of raising prices above $20 per barrel has been met.
A September 22-23, 1999, OPEC ministerial meeting yielded no additional production cutbacks, but there was agreement to hold the current course. The question now is when OPEC will raise the production targets for its members.
At the beginning of 1999, constraints on worldwide oil supplies were becoming evident as the low oil price environment prevailed.
Stripper production in the United States was in decline. Exploration and development spending was being slashed. Rig utilization rates, especially for onshore equipment, had drastically fallen.
Announced spending plans worldwide were reduced. Oil-producing countries faced severe fiscal deficits, causing national oil companies to cut capital spending. Private-sector restructuring led to mergers involving leading multinational oil companies. The oil market pessimism prevalent at the beginning of 1999 was not evident, however, by the end of the year.
Incorporating the recent price turbulence into the construction of an intermediate- and long-term oil market outlook is difficult and raises the following questions: Will prices remain above $20 per barrel even when the production targets of OPEC producers are raised and significant increases in non-OPEC production are once again expected? Will sustained and robust economic growth in developing countries continue, given the severe setback to the Asian economies in 1998? Will technology guarantee that oil supply development moves forward even in a low world oil price environment?
Although oil prices more than doubled in real terms from 1998 to 1999, that development is not indicative of the trend in the International Energy Outlook 2000 (IEO2000) reference case. In the short term, oil prices in are expected to continue at the levels seen during the later months of 1999 into 2000.
As OPEC production cutbacks are relaxed and non-OPEC production increases are realized, however, prices are expected to fall back slightly from the 2000 level, then increase gradually out to 2020. When the economic recovery in Asia is complete, demand growth in developing countries throughout the world is expected to be sustained at robust levels.
Worldwide oil demand reaches almost 113 million barrels per day by 2020 in the reference case, requiring an increment to world production capability of almost 40 million barrels per day relative to current capacity.
OPEC producers are expected to be the major beneficiaries of increased production requirements, but non-OPEC supply is expected to remain competitive, with major increments to supply coming from offshore resources, especially in the Caspian Basin and deepwater West Africa.
Over the past 25 years, oil prices in real 1998 dollars have ranged from $12.10 to $63.30 per barrel. In the future, one can expect volatile behavior to recur principally because of unforeseen political and economic circumstances.
Tensions in the Middle East, for example, could give rise to serious disruptions of 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 potentially important 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.
Advances in exploration and production technologies are likely to bring down prices when such additional oil resources become part of the reserve base. The IEO2000 low and high world oil price cases suggest that the projected trends in growth for oil production are sustainable without severe oil price escalation.
There are oil market analysts, however, who find this viewpoint to be overly optimistic, based on what they consider to be a significant overestimation of both proven reserves and ultimately recoverable resources.
Highlights of the IEO2000 projection for the world oil market are as follows:
The reference case price projection shows an oil price increase of more than $4 per barrel from 1999 to 2000, a decline of slightly less than $3 per barrel in 2001, and then an 0.4-percent average annual increase through 2020.
Deepwater exploration and development initiatives are generally expected to be sustained worldwide, with offshore West Africa emerging as a major future source of oil production.
Technology and resource availability can sustain large increments in oil production capability at the reference case prices. The low price environment of 1998 and early 1999 did slow the pace of development in some prospective production areas, especially, the Caspian Basin region.
Economic development in Asia is crucial to long-term growth in oil markets. The evolution of Asian oil demand projected in the reference case would strengthen economic ties between the Middle East and Asian markets.
Although OPEC’s share of world oil supply is projected to increase significantly over the next two decades, competitive forces among energy producers are expected to remain strong enough to forestall efforts to escalate real oil prices significantly. The competitive forces operate within OPEC, between OPEC and non-OPEC sources of supply, and between oil and other sources of energy (particularly, natural gas).
The uncertainties associated with the IEO2000 reference case projections are significant. Changes in the prospects for sustained economic recovery in developing Asia, Japan’s economic turnaround, China’s economic reforms, and economic recovery in Brazil, other Latin American economies, and the FSU could lead to oil market behavior quite different from that portrayed in the IEO2000 projections.
Growth in Oil Demand:
World petroleum consumption projections are slightly lower in IEO2000 than in last year’s forecast in the early years (about 1 percent in 2005), due to the much higher oil prices expected in the near term, as well as the lingering effects of the economic slowdown in Asia, Central and South America, and Russia.
World oil consumption is expected to increase by 1.1 million barrels per day in 1999, exceeding the increase of 0.5 million barrels per day in 1998 but lower than the average annual increase of nearly 1.6 million barrels per day from 1994 to 1997.
Oil provides a larger share of world energy consumption than any other energy source, at 39 percent of the total in 1997. Petroleum is used heavily in the transportation sector and is also used to provide heat and power as well as industrial feed-stocks.
World oil consumption is projected to increase by a total of 39.8 million barrels per day (an average rate of 1.9 percent per year), from 73 million barrels per day in 1997 to 112.8 million barrels per day in 2020 (Figure 31).
Between 1970 and 1997 oil use rose by a total of 26.2 million barrels per day, an average annual increase of 1.7 percent; and the 1970-1997 growth might have been still larger without the price shocks of 1973-1974 and 1979-1980. Oil’s share of the energy market is expected to decline only slightly over the forecast period.
The industrialized countries, currently the largest consumers of petroleum, are expected to remain the largest users through 2020. Oil consumption in the industrialized countries is projected to rise from 43.1 million barrels per day in 1997 to 54.5 million barrels per day in 2020.
The developing countries, however, are expected to make the largest contribution to the increment in oil demand, an increase of 24.7 million barrels per day from 1997 to 2020 (Figure 32), representing 62 percent of the growth in worldwide petroleum consumption. Petroleum consumption in developing countries was just over one-half (56 percent) of the total consumption in industrialized countries in 1997 but is projected to reach 90 percent of that in the industrialized countries by 2020.
Regionally, developing Asia and North America increased oil use by the largest amount from 1970 to 1997, and they are expected to lead the increases in consumption in the forecast period (Figure 33). Substantial growth is also expected in Central and South America, the Middle East, and Africa.
Consumption in Eastern Europe and the former Soviet Union (EE/FSU) was lower in 1997 than in 1970, as a result of political and economic difficulties during the 1990s, primarily in the FSU.
Petroleum consumption in the FSU is expected to remain flat for the next few years and then start to rise after 2000. The EE/FSU total is projected to increase by 3.7 million barrels per day between 1997 and 2020.
Oil demand is driven by economic growth, along with rising population. The industrialized countries consume oil at much higher levels per capita than the developing countries, such as China and Brazil (Figure 34), but there are also large differences among the industrialized countries.
Per capita oil use in the United States, for example, is much higher than in Japan or Western Europe. Consumption per capita is projected to increase at a rapid pace in developing countries, but in most cases the levels remain much lower than those of the industrialized countries.
One notable exception is South Korea, where rising per capita incomes allow per capita oil consumption to reach the levels of the industrialized countries, or even surpass them, in the forecast period.
In most countries oil intensity (oil consumed per dollar of GDP), decreases over time. The industrialized countries, especially Western Europe and Japan, tend to have lower levels of oil intensity, reflecting their more energy-efficient, fuel-diverse, and service-oriented economies.
Intensity levels in developing countries are projected to decline at a faster rate, however, as energy efficiency improvements penetrate the economies.
The transportation sector is the primary user of petroleum, consuming 49 percent of the oil used in the world in 1997. The patterns of consumption between the industrialized and developing countries are quite different, however.
In the heat and power segments of the markets in industrialized countries, non-petroleum energy sources were able to compete with and substitute for oil throughout the 1980s; and by 1990, oil consumption in other sectors was less than in the transportation sector.
Most of the expected gains in worldwide oil use occur in the transportation sector. Of the total increase (11.4 million barrels per day) projected for the industrialized countries from 1997 to 2020, 10.7 million barrels per day is attributed to the transportation sector , where few alternatives are economical until late in the forecast.
In the developing countries, the transportation sector also shows the fastest projected growth in oil use, rising nearly to the level of nontransportation oil consumption by 2020. In the developing world, however, in contrast to the industrialized countries, oil use for purposes other than transportation is projected to contribute 42 percent of the total increase in petroleum consumption.
The growth in nontransportation petroleum consumption in developing countries is caused in part by the substitution of petroleum products for noncommercial fuels (such as wood burning for home heating and cooking) as incomes rise and the energy infrastructure matures.
Industrialized Countries:
The largest increases in oil consumption among the industrialized countries from 1997 to 2020 are projected for North America . The largest absolute increase is projected for the United States (6.5 million barrels per day), and the most rapid growth is expected in Mexico (3.3 percent per year).
Mexico’s projected economic and population growth rates are the highest among the industrialized countries and regions in the forecast, accompanied by strong growth in both transportation and nontransportation oil consumption.
North America as a whole is projected to contribute 22 percent of the increase in worldwide oil use.
Growth in petroleum consumption in Western Europe from 1997 to 2020 is expected to be considerably below the average annual growth rate of 1.4 percent per year from 1985 to 1997.
The projected increase of 1.5 million barrels per day amounts to an annual average growth rate of 0.4 percent. Outside the transportation sector, oil use is projected to decline as natural gas makes inroads into the heat and power sectors of the market.
Industrialized Asia is projected to add 1.1 million barrels per day to its petroleum consumption between 1997 and 2020, and more than half the increase is projected for Japan, the world’s second-largest petroleum-consuming country.
After growing by 2.7 percent per year from 1985 to 1996, petroleum consumption in Japan is projected to slow to 0.4 percent per year from 1997 to 2020, as the country reaches saturation in terms of per capita motor vehicle use.
Australasia’s consumption of petroleum is projected to increase by 0.5 million barrels per day over the forecast period (1.4 percent per year).
Developing Countries:
Petroleum consumption in developing countries is projected to more than double, increasing from 24.2 million barrels per day in 1997 to 49.0 million barrels per day in 2020 (3.1 percent average annual growth).
Although the region overall experienced a slowdown in oil demand with the recession that began in mid-1997, developing Asian economies affected by the recession are already beginning to show strong recovery, and IEO2000 expects the region to contribute 30 percent of the worldwide increase in petroleum consumption over the next two decades.
China alone is projected to provide 14 percent of the world increase in oil demand, and China and India combined are expected to add 8.0 million barrels per day to oil demand from 1997 to 2020, as compared with 6.5 million barrels per day for the United States.
China has the highest projected growth rate for oil consumption among the nations of the world at 4.1 percent per year, followed closely by Brazil and India at 4.0 and 3.7 percent per year, respectively.
Road infrastructure projects currently planned in China are expected to contribute to more rapid growth in transportation petroleum consumption. South Korea’s petroleum consumption, after a fourfold increase (1.7 million barrels per day) from 1985 to 1997, dropped by more than 0.4 million barrels per day in 1998 as a result of the economic and financial turmoil that spread throughout Asia.
The country’s demand for petroleum is expected to recover as economic conditions improve and is projected to grow at a more modest rate of 2.0 percent per year rate from 1997 to 2020.
Strong growth is also expected in Central and South America, with a projected increase of nearly 5 million barrels per day for the region as a whole. Oil consumption in Brazil is projected to increase by 4.0 percent per year from 1997 to 2020.
Recent financial and economic difficulties are expected to slow petroleum consumption growth in the near term, but rapid growth is expected to return in both the transportation and end-use sectors of the market.
Petroleum consumption in the rest of Central and South America is expected to nearly double over the forecast period. Again, much of the increase projected to occur in the transportation sector.
Substantial increases in oil consumption are also expected in the Middle East (4.2 million barrels per day) and Africa (3.5 million barrels per day). Much of the increase will be used to fuel electricity generation in African nations, where the infrastructure needed to support the use of other fuels for power generation still is lacking.
Eastern Europe and the Former Soviet Union:
As a result of political and economic turmoil in the FSU, oil consumption in 1996 was 55 percent below its 1987 level . In 1997, however, there was an increase of 0.2 million barrels per day over 1996. Oil use in the FSU is expected to remain at about the 1997 level through 2000 and then rise through the rest of the forecast period.
The reference case projection for 2020 is 7.6 million barrels per day, still below the peak level of 9.1 million barrels per day for the FSU in 1982.
Petroleum consumption also declined in the early 1990s in Eastern Europe but has been rising slowly since 1995. A trend of slow growth is expected to continue, with petroleum consumption rising to 1.8 million barrels per day by 2020, the same level as 1989.
In contrast to the FSU, all the increase in Eastern Europe is projected for the transportation sector. Petroleum consumption in other sectors declines slightly in the projections as natural gas is substituted for oil.
Source: United States Energy Information Administration
