Safer, Arnold E., Irving Trust Company, N.Y.

Abstract

Over the period 1973–1978, world oil consumption increased by only one million barrels per day, but non-OPEC oil supplies increased by almost 4 million barrels per day. Renewed economic growth around the world suggests that over the period 1978–1983, world oil demand could increase by as much as 5 million barrels per day. Nevertheless, new non-OPEC supplies over this per day. Nevertheless, new non-OPEC supplies over this period will increase by 7 million barrels per day. As period will increase by 7 million barrels per day. As a result, oil price increases are likely to remain moderate and the U.S. should diversify its sources of oil imports. Projected physical shortages of oil are like a "receeding horizon"—no matter how far you travel toward the horizon, it's the same distance away.

Introduction

In the year's prior to OPEC's dominance of the world's oil markets, the international petroleum industry was one of the most stable elements in the economic structure of the Western world. Oil demand was only mildly affected by recession, growth in supply was assured, and reasonable price stability gave both consumer and producer the ability to plan far ahead into the future. In this paper, I propose to examine the extent to which that stability has been altered. Has the oil business now become cyclical, in that shorter run economic and political pressures so dominate business expectations that secular forces have become relatively less important in the planning process? And, if this perception is in fact true, then process? And, if this perception is in fact true, then how should oil industry planners react in the face of the very long lead times required from initial exploration to ultimate production?

The very short term outlook—estimates of U.S. oil consumption for the next two years—reflect these very uncertainties. In the United States, it seems clear that a peaking of real economic activity is likely in 1979 or 1980. Whether this peaking is followed by at least two quarters of decline, which will constitute an official recession, or whether the economy simply remains sluggish at a relatively high rate of activity is uncertain at this time. But, overall economic growth in the U.S. in the 1979–1980 period is not likely to exceed 2% p.a. As a result, period is not likely to exceed 2% p.a. As a result, cyclically related slower growth is not an unreasonable assumption for 1979–1980 oil consumption. Depending upon elasticity estimates, which combine both business cycle pressures and secular conservation forces, oil consumption in 1979–1980 could vary from -3% to +3%. This would involve a swing of around 1.2 MMB/D in estimates of U.S. demand, (i.e., + 600 MMB/D from estimated 1978 levels). In terms of projecting market prices, this swing in projected U.S. oil consumption could mean the difference between shortage and surplus, not only for the U.S. but around the world. And this very shortage or surplus will in turn affect prices, capacity utilization both in refining and in crude production, and expectations for further exploration.

In short, as the reality of shortage or surplus develops in 1979, long range planning will be affected, both in private companies and increasingly in Washington, London, and in the capitals of the OPEC nations. If expectations lean toward impending shortages, projections of rising prices and profitable gaps between projections of rising prices and profitable gaps between demand supply appear waiting to be filled by enterprising oilmen. On the other hand, if expectations of surplus market conditions begin to dominate the thinking of industry and government planners, then prices would stabilize, or perhaps even decline, prices would stabilize, or perhaps even decline, eliminating those profitable future gaps. Plans for further exploration would be postponed and production from existing reservoirs would be cutback. This process of supply-demand adjustment is a normal part process of supply-demand adjustment is a normal part of business behavior and represents the allocation effects of free market pricing.

When a cartel of oil producers keeps prices well above their open market levels, however, two strange forces begin to interact. First, consumers use less than they otherwise would, no matter what the quantitative estimate of demand elasticity. Second, and perhaps even more importantly, new supplies become ever more profitable under the protection of the cartel's price umbrella.

This content is only available via PDF.
You can access this article if you purchase or spend a download.