Abstract

The unprecedented rise in the price of world oil in the last ten years has resulted in a massive investment boom in ail and gas exploration and development. During this period, an increasing reliance an imparted crude oil from the Organizationof Petroleum Exporting Countries (OPEC), especially by the United States, created an expectation of ever rising world oil prices. Much of the investment made, especially since 1980, is now viewed, in light of dropping ail prices, as an enormous business mistake.

Opportunities for the future will appear to be less attractive and investment capital, bath from the oil industry and other sectors, are being revised downwards. Although consumption will grow at a more modest rate, the corresponding decline in investment capital will result in reduced productioncapacity outside OPEC.

Expectations that 70% of the production required in the next decade will come from the reserves yet undiscovered will prove to be unattainable unless this investment capital is made. Failure to makethese investments will push the world to another major oil crisis in the early part of the next decade.

Summary

Unless the world slumps back into a major recession, global oil consumption which rose 3% in 1984 (breaking a straight three year decline), will continue to rise by at least 1 million barrels perday aver the next several years. However, with almost 40% spare production capacity within the Organization of Petroleum Exporting Countries (OPEC), this gradual growth of 1% holds promise for continuing weak world oil prices for the next two to three years. Although there is a serious risk of an "all-out" price war by a number of oil exporting countries (which could drive the official price of oil down sharply), we consider this a remote possibility.

Oil production overcapacity for the next Four years will prevent any significant upward rise in oil prices, since increased demand will be essentially filled with increased production. However, by the end of this time period, growing demand will create tight markets and probably significant price appreciation once again. Whether a major pricing crisis will develop similar to that seen in 1972/73 and 1979/80 depends upon a number of events, the most important being political instability within the Middle East.

The gradual erosion in prices, as witnessed since 1981, is already causing a postponement of needed oil and gas investments. The lower oil prices go in the short term, the more rapid this postponement will become. This drop 1n investment will bring with it production shortfalls from non-OPEC sources within less than five years. Non-OPEC crude oil production has, or will peak within the next three years and will Face a serious production decline, unless the investments are maintained at the recent record levels, an unlikely scenario in a weak oil price environment. Dropping investment will force the free world, and specifically the United States, to rely on more OPEC (or "near OPEC")) imports in the latter part of this decade.

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