Oil glut is no ground for optimism

Press, 22 June 1981, Page 18

Oil glut is no ground for optimism

From “The Economist,” London

When oil ministers from most of the 21 industrial countries in the International Energy Agency (1.E.A.) met on Monday, June 15. in Paris, they looked at the oil market from two angles.

© Supply. The world is currently producing an estimated 2M-3M barrels a day of oil more than it needs. The biggest contributor to that glut is Saudi Arabia. It is supplying 10.3 M barrels a day, some 2M--3M barrels a day more than it really requires to produce to keep its fields operating at maximum efficiency. Just one stroke of a Saudi pen could eliminate the glut. The Saudis are still pondering a 2M barrels a day reduction in their supply (as well as a $2 increase in their price). Against that, peace between Iran and Iraq could theoretically produce an extra 5M barrels'a day.

O.P.E.C.’s total capacity is

close to 34M barrels,a day — more than it is now producing. In the heady days of the 1960 s and early 19705. when oil consumption grew by 6-7 per cent a year. O.P.E.C. produced 30M31M barrels- a day. © Demand. In response to a 170 per cent increase in O.P.E.C. prices since mid-1978, the I.E.A. countries . have slashed their oil consumption. Last year it was down 8 per cent to 35M barrels a day, and will probably fall 2-3 per cent again this year. Only part of that reduction is due to slower economic growth. Japan's oil demand dropped 10 per cent last year - despite 5 per cent G.N.P. growth. West Germany, with more modest growth, cut its oil demand by 12 per cent. In the first four months of this year, America's consumption was 6 per cent lower than a year earlier, even though its G.N.P. was about 3 per cenv higher.

What happens when economies recover? Experts are split. In the black corner, Mr James Schlesinger, Energy Secretary in the Carter Administration. “In periods of respite, such,as the one that we arc now in,, complacencj' takes over.” he said in London this month. He believes that renewed economic growth slowly pushes demands; up towards capacity. “The stage is now set for another shock, -another panic, another frenzy of activity, another economic downturn, another surplus.” In the roseate corner,’ consider Mr John Lichtbau, Executive Director of the Petroleum Industr.v Research Foundation. He argues that “market forces do not support any substantial further real price increases.” He admits that falling demand since 1978 was due in part to economic sluggishness, “but the bulk of the decline appears to be structural and irreversible.” So the 1978 peak in O.E.C.D. oil demand “may very well remain

unsurpassed throughout the 1980 s.” The ros.v view is based on > two beliefs: a realistic one that ’high O.P.E.C. prices and high, oil taxes are slashing consump- ■ tion come boom, come slump; and the more Pollyannaish belief in the short-term possibilities of substituting for oil. The easiest substitute for oil is still oil. The alternatives — coal, nuclear, synthetic fuels — are being delayed for political and environmental reasons. If everything did go right, the world economy could grow quite fast without running into tight energy bottlenecks.

One I.E.A. scenario envisages economic growth of about 3.1 per cent a year during the 1980 s: energy use per dollar of G.D.P. declining by about 14 per cent in 10 years, and oil use per dollar of G.D.P. dropping by 37 per cent. But that requires coal consumption to rise by 60 per cent from 1979 levels, stable indigenous LE A. oil production and a 2 1 ,2-fold rise in nuclear capacity.