Two main forces will shape the oil market during the next 3 years.
The pace of worldwide economic growth will determine demand growth. Although energy use efficiency has improved, especially in the industrialized world, demand for energy and oil products remains chiefly a function of economic activity.
And producing nation politics will have much to say about supply. A crucial and unpredictable variable is when Iraq, now subject to a United Nations trade embargo, resumes exports at significant rates.
Demand growth will exceed production increases outside the Organization of Petroleum Exporting Countries, which means an ever-increasing role for the exporters' group.
THE DEMAND OUTLOOK
Economic activity - both the rate of growth or decline and the type - will determine future demand for petroleum products and crude oil.
At present, growth is sluggish or absent in the major industrial countries. Eastern Europe and the former Soviet Union are in recession. By contrast, economic growth in the developing world - Asia-Pacific and, to a lesser degree, Latin America - is rapid.
Improved efficiency of energy use and conservation have changed the relationship between economic growth and petroleum demand but not severed the link.
With growth rates low among members of the Organization for Economic Cooperation and Development (OECD), generally representing the most developed economies, oil demand cannot rise much.
At the same time, the economies of the Commonwealth of Independent
States (C.I.S.) and East Europe have slumped. Their depression has slashed demand for energy overall and consumption of petroleum in particular. Much of the curtailed, inefficient industrial activity had been ravenous for energy.
In contrast to trends in the OECD and C.I.S., economies in several developing countries, particularly in the Pacific Rim, have been expanding rapidly, Consumption rates of energy and petroleum have surged. Energy conservation has not been a priority in the developing countries so economic growth and energy growth are more closely coupled.
During 1991-93, most of the major OECD countries and many small industrial countries have been in recession. In 1991, gross domestic product (GDP) fell in the U.S. by 1.2%, Canada by 1.7%, the U.K. by 2.2%, Sweden by 1.7%, Switzerland by 0.1%, Finland by 6.4%, Australia by 1.1%, and New Zealand by 2.7%.
Overall GDP growth for the OECD's 24 member countries slowed to 0.7% in 1991.
Among the larger OECD countries in 1992, only the U.K. was still in recession, with GDP down 0.6%. Japan's GDP increased by only 1.3% during the year.
The small OECD members showed GDP declines: Finland 3.3%, Iceland 3.3%, Sweden 1.7%, and Switzerland 0.6%. The sharp decline in Finland occurred partly because the economy has close ties to the economically troubled C.I.S.
Economic output for the entire OECD moved up an estimated 1.5% in 1992.
The slump spread throughout Western Europe this year. According to estimates by OECD, Germany's economy went into recession this year, with GDP expected to fall 1.9%. France is expected to post a decline of 0.7%, Italy 0.2%. Japan's growth rate is expected to slip again to 1%. It is also estimated that several of the smaller industrial countries show GDP declines: Austria 0.6, Belgium 0.7%, Iceland 1.8%, Netherlands 0.3%, Spain 0.6%, Sweden 2%, and Switzerland 0.5%.
The GDP growth rate for the entire OECD is expected to slip to 1.2% for 1993.
With OECD countries struggling with recession, East Europe and the former Soviet Union had to deal with profound political and economic upheaval and transition.
The International Monetary Fund (IMF) has estimated aggregate economic output declines in these areas of 10.1% in 1991, 15.5% in 1992, and 8.8% in 1993. Output in East Europe fell 13.5% in 1991 and 7.5% in 1992, but the decline is estimated at only 1.5% this year as these economies adjust to transformed economic systems.
In the C.I.S., economic activity fell 9% in 1991 and 18.5% in 1992 and is estimated to be down another 11.8% in 1993. Economic output in the C.I.S. in 1993 will be only 65% of the 1990 level.
Over the same period the developing countries as a group have been experiencing robust economic growth. According to the IMF, aggregate economic output in the developing countries moved up 4.2% in 1991 and 5.6% in 1992 and will increase 5.8% in 1993.
The rate of growth was highest in the developing countries of Asia, where output increased 5.8% in 1991 and 7.9% in 1992 and is expected to increase 6.7% this year.
ECONOMIC PROJECTIONS
OGJ expects 1994 to be a year of improvement in economic growth in most areas of the world. Low rates of interest and inflation are expected to boost investment in mann, of the industrial countries.
Investment in developing countries will remain high. As a result, economic growth rates will improve among OECD and developing countries.
In Eastern Europe, economic activity will increase for the first time since 1989. And the rate of decline in the C.I.S. will diminish.
OGJ projects that aggregate GDP for OECD countries will more than double to 2.7% in 1994. Recoveries in the U.S., Japan, and Canada will lead the way, while Germany, France, and Italy will at least move out of recession.
Economic output in the U.S. and Japan will increase in the range of 33.3% in 1994.
Economic growth in the developing countries will rise 5. 1 % next year. The countries of Asia will continue to post the strongest growth rates, although improvement is also expected in Africa and Latin America.
The combined economic output of the C.I.S. and East Europe is expected to slip by 1.6% in 1994. Economic output in Eastern Europe alone will grow by a modest 2.6% as investment and production respond to the region's movement toward a market-oriented economic structure.
The adjustment in the C.I.S. will take longer. Aggregate output will decline 3.5% next year, more than offsetting East Europe's recovery.
The overall economic improvement in 1994 will boost consumption and stimulate investment, strengthening economic growth rates in 1995 and 1996. In addition, relatively low energy prices will stimulate economies throughout the forecast period.
OGJ projects the OECD economic growth rate at 3% in 1995 and 3.2% in 1996. Total GDP growth among developing countries will be 5.2% in 1995 and 5.4% in 1996. The C.I.S. and East Europe as a whole will post a growth rate of 3% in 1995 and 4% in 1996, as the political transition continues and market economics take hold.
ENERGY INTENSITY
Energy intensity differs greatly between the industrial countries and developing countries, including the once - centrally planned economies of the C.I.S., China, and East Europe. Energy intensity is the quantity of energy consumed to produce a unit of economic output, usually measured as BTUs consumed per dollar of GDP.
The OECD countries have made steady improvement in energy efficiency through investment in new capital equipment and conservation measures. Developing countries have concentrated investment more on economic output than on energy conservation, so improvement in energy efficiency has been slower.
During 1983-92, the OECD economies grew an estimated 28.7%, and energy consumption increased 19.6%. Energy consumption moved up 0.69% for every 1% increase in economic Output.
In developing countries, rates of economic growth and energy consumption more closely matched. This was similar to the 1950-70 period of economic expansion in the industrial countries, when energy demand moved in lock step with economic expansion.
Aggregate economic output of developing countries increased an estimated 59.9% during 1983-92, and total primary energy consumption increased 55.4%. Energy consumption moved up 0.93% for every 1% increase in economic output.
In the C.I.S. and Eastern Europe, energy intensity has increased in the last few years, as economic output has dropped much faster than energy consumption. Economic output of the C.I.S. and East Europe in 1992 was down 9.2% from the 1982 level. And 1992 energy consumption was down only 1.2% from the level 10 years earlier. Since 1989, the year prior to the start of the economic downturn, economic output has fallen 26.8%, while energy consumption is down only 13.3%.
IMPROVEMENT TO CONTINUE
OGJ projects continuing improvement in energy efficiency in all of these major economic sectors over the next 3 years.
In the OECD industrial countries, energy consumption is projected to move up at a pace slightly more than half the rate of economic growth, with energy consumption increasing 0.56% for every 1% increase in economic growth. OECD energy demand in 1996 will be up 5.1% from estimated 1993 consumption.
These countries have great pressure to improve energy efficiency for environmental reasons and to cut production costs in an increasingly competitive world economy.
Especially in the industrial world, economies increasingly encompass service and information activities at the expense of more energy-intensive manufacturing. In addition, new environmental regulations and environmentally based taxes are making consumption of fossil fuels more expensive in many OECD countries, which encourages conservation.
In developing countries political pressures focus on increasing output in order to raise living standards and provide for rapidly growing populations. Conservation of energy is not a major priority; therefore, improvement in overall energy efficiency over the forecast period will be relatively small.
Many developing countries have growing, energy-intensive manufacturing and processing industries that will boost energy consumption. However, there will be some improvement in energy efficiency as many of these countries purchase new capital equipment from the industrial countries with mature energy efficiency programs.
Over the forecast period for developing countries, OGJ projects that energy consumption will move up 0.85% for every 1% increase in economic output. Developing-country energy consumption will be 14.1% higher in 1996 than the estimated demand this year.
OGJ anticipates that in the C.I.S. and East Europe, the economic transition will continue and economies will reach bottom. Economic output and energy consumption will move up in 1995 and 1996.
On the upturn, the relationship between energy consumption and economic output will become similar to that of the developing countries. During 1995 and 1996, energy demand will rise about 0.85% for every 1% increase in economic output. In 1996, energy consumption in the C.I.S. and East European countries will be up an estimated 5.4% from the depressed 1993 level.
There is much room for improvement in energy efficiency in the C.I.S. and East European countries, but there is little capital available for investing in new, efficient equipment. The rate of improvement in energy efficiency will be slow.
This forecast assumes that the transition to a market system continues. If political upsets intervene, economies won't rebound as much, if at all, and energy demand will suffer accordingly.
REGIONAL ENERGY MIXES
All major energy sources will contribute to market growth expected during the forecast period. But consumption growth patterns will be different in each of the geographic and economic sectors.
The individual major fuels will have different growth patterns and market shares in the OECD, developing countries, and C.I.S. and East Europe. Production and consumption will increase for all major fuels.
Total worldwide energy demand in 1996 will be up 7.7% from estimated consumption this year. Energy demand will be up 5.1% in the OECD, 5.4% in the C.I.S. and East Europe, and 14.1% in the developing world.
In the OECD group of countries, energy from hydro power, geothermal power, and other miscellaneous sources will grow fastest in the next 3 years, increasing 14.8% by 1996. But this will remain the smallest energy category, with a share of 2.7% vs. 2.5% at present.
Natural gas will be the next fastest growing fuel in the OECD, with demand up 8.8% in 1996 from 1993. The gas market share will increase to 22.2% in 1996 from 21.4% this year.
Gas demand is growing in OECD areas that have access to adequate supply, spurred by environmental regulations. The fuel's market share will grow at the expense of coal and nuclear power.
Coal is projected to show an increase in' demand of 2.5% by 1996 among OECD countries but a decrease in market share to 21.2% in 1996 from 21.8% in 1993. Nuclear output is forecast to be up 3.6% in 1996, with market share slipping to 10.6% from 10.7% this year.
The combined oil and natural gas share of the OECD energy market will move up to 65.5% in 1996 from 65% in 1993.
In the developing countries as a group, coal plays a major energy role along with oil. This group includes China, where coal is the major fuel and where future economic growth is expected to be fueled largely by increased coal output.
Coal demand in developing countries is projected to increase 14.8% by 1996 and represent 39.5% of the energy market, compared with 39.3% in 1993.
Oil consumption in the developing world is expected to increase along with economic activity, rising 13.3% by 1996. But because of the rapid rise in coal demand in China, oil's market share will slide to 43.3% from 43.6% this year.
Natural gas demand is forecast to be up 14% in 1996 in developing countries, with the market share remaining at 12.6%. Energy from other fuels such as hydro and geothermal is projected to be up 13.7%, the market share steady at 3%.
Nuclear power output is expected to move up 22.1 % but remain only 3% of the overall developing-country energy market. Nuclear expansion is anticipated in China and elsewhere in the Far East.
The C.I.S. has announced plans for construction of new nuclear facilities, ending the moratorium in place since the 1986 Chernobyl accident. As a result, nuclear power output in the C.I.S. and East Europe will be up 36% by 1996, and nuclear's share of this region's energy market will move up to 5.2% from 4% in 1993.
Because of abundant supplies in the C.I.S./East Europe, consumption of natural gas is forecast to rise 5.8% and market share to increase to 42.7% from 42.5% in 1993.
Demand for oil is expected to fall 0.9% in 1996 from 1993. C.I.S. countries in particular will attempt to use nonoil fuels in order to free oil supplies for export. Oil's share of the market will slip to 22.3% in 1996 from 23.7% in 1993.
Coal consumption in the C.I.S./East European region will keep pace with overall energy demand, moving up 5.3% by 1996 and maintaining a 28.2% market share. Other fuels will be up 12.1%, but there will be no change in market share of 1.6%.
WORLD ENERGY MIX
Worldwide, the net result will be little change in the overall energy mix over the next 3 years.
Oil will lose some market share as demand moves up somewhat more slowly than overall energy consumption, increasing 6.6% by 1996. Its share will be 39.5% of the energy market in 1996 vs. 39.9% this year. But natural gas will capture some of this market, with 1996 consumption up 8.6% from the 1993 level and the market share increasing to 23% from 22.8% in 1993.
Worldwide, oil and natural gas combined will account for 62.5% of the energy market in 1996, down from 62.7% this year.
Global coal consumption will increase 8% by 1996, primarily because of the expanding Chinese economy. Coal will retain 28% of the world's energy market.
Expansion plans in the C.I.S., France, Japan, China, and elsewhere in the Far East will boost nuclear output 8.3% by 1996. The nuclear market share will increase to 6.9% from 6.8% this year.
Other energy sources are expected to grow by 14.1% over the forecast period due to hydroelectric power recovery from draught in the U.S. and expansion in China and elsewhere. Hydro's world market share will increase to 2.6% from 2.5% in 1993.
PETROLEUM DEMAND
Oil thus will retain its major role in fueling worldwide economic growth for the next 3 years and for the foreseeable future.
Although demand for oil will not move up at the same rate as economic activity or overall energy demand, OGJ still sees a substantial increase in consumption through 1996. The anticipated 6.6% gain in worldwide consumption of petroleum products will take the average to an estimated 69.9 million b/d.
This will be a volume increase of 4.3 million b/d. The majority of the increase will be spread among developing countries, where consumption of oil products is forecast to be up 2.7 million b/d by 1996 at 23.2 million b/d.
OECD oil demand is expected to increase by 1.7 million b/d to 39.9 million b/d in 1996.
In many of the OECD countries, there have been concentrated attempts to move away from oil as an energy source. Although dependence on oil has diminished, there has been little success in finding a convenient, low cost, abundant substitute fuel for transportation. And it is not anticipated that there will be any major changes soon.
Petroleum products will continue to be essential for economic development, primarily in the transport sector but also in the residential/commercial areas and for industrial activity.
In many developing countries there are fewer energy options, and oil is the lowest-cost convenient energy source for fueling economic growth. Because of its transportability, oil is particularly important in those countries with little indigenous energy, which include many emerging industrial countries.
Petroleum product consumption in the C.I.S. and East Europe is expected to continue to fall in 1994 then begin to recover in 1995 as economies begin to climb back. Oil use will rise again in the region in 1996 but will not get back to the 1993 level.
In the early stages of economic recovery, oil consumption in the C.I.S. is expected to climb at a rate close to the rate of economic growth. Longer term, oil demand won't rise substantially. Energy efficiency eventually will improve in these countries along with investment in new capital goods.
In some areas, the projected future increase in petroleum consumption is an extension of trends observed over the past decade. The International Energy Agency (IEA) recently published some statistics on individual country oil demand in the OECD and non-OECD countries during 1980-91. The data show that all growth in oil demand over this period was in developing countries.
Total OECD demand in 1991 was down 770,000 b/d from the 1980 level. Demand in non-OECD East Europe and the C.I.S. in 1991 was down 1.17 million b/d from 1980.
But for the remainder of the world, demand in 1991 was up 5.97 million b/d from the 1980 level, an increase of 46.2%. The strongest growth was in Asian countries, where demand moved up 2.53 million b/d from 1980 to 1991, an increase of 78.2%. In the Middle East demand increased 1.31 million b/d during 1980-91, up 63%.
Demand in Latin America moved up 850,000 b/d from 1980 to 1991, an increase of 19.2%. Demand in China increased 750,000 b/d, a 42.9% gain, and demand in Africa was up 530,000 b/d, or 36.6%.
PRODUCT DEMAND
OGJ expects that demand will increase for all major petroleum products during 1994-96.
Demand for middle distillates and the category "all other products" will grow fastest.
Middle distillate demand in the OECD and developing countries is expected to move up 8.6% by 1996 to 21.7 million b/d, as transport requirements accelerate along with economic development. In many developing countries, highway truck transport is essential to economic growth, which will boost diesel fuel demand.
Motor gasoline demand is also expected to rise, increasing 4.9% to 19.3 million b/d. The number of automobiles and miles driven worldwide will increase with the improvement in living standards, but this will be partially offset by increasing vehicle fuel efficiency.
Fuel oil demand will increase 6.4% during the forecast period to 10.2 million b/d. Fuel oil consumption will move up due to increases in water transport, industrial production, and electrical power demand in certain areas. In many industrial countries, fuel oil will be replaced by other sources for electrical power production. But in many other areas there are few alternatives, and fuel oil will be required for increased electrical generation.
Demand in the other-products category will rise 9.8% through 1986 to 10.2 million b/d. This includes demand for petrochemical feedstocks, lubricants, asphalts, and so forth.
The other-products group is growing in volume and importance as technologies develop new oil products. Demand for petrochemical products will grow at or above the pace of economic expansion, and the petrochemical call on refining yields will increase steadily.
SUPPLY QUESTIONS
The big question about supply during the forecast period is the amount of crude oil that will be needed from and produced by members of OPEC.
Events this year may have set the pattern for OPEC performance through 1996. In 1991 and 1992, with Iraqi production negligible and Kuwaiti flow recovering from war, the market was in relative balance with OPEC members producing crude nearly at will.
This year, with Kuwait back on stream and demand anything but robust, OPEC once again faced a growing excess of production capacity.
To a large extent, OPEC is the supplier of last resort. Consuming countries use indigenous production first and turn to the international market for remaining crude needs.
OPEC's share of that market is the crucial variable. At any given price level, other exporters can be expected to produce and sell crude at maximum rates, leaving to OPEC the task of meeting demand without creating a surplus.
It's usually a muddlesome process. OPEC members have urgent revenue needs, and the market-balancing task usually forces them to hold off stream production capacity that's often cheaper to operate than non-OPEC capacity producing at maximum rates. The temptation to cheat on OPEC quotas thus is always strong, which makes quota discipline by all members rare.
But the job should become easier for OPEC as the already large gap between worldwide demand and non-OPEC supply continues to grow. The need for OPEC oil will rise as oil demand rises without commensurate increases in non-OPEC production.
Production declines in the C.I.S. and U.S. recently have created new room in the oil market for OPEC crude despite increasing output by other non-OPEC producers.
This year, worldwide economic problems have suppressed demand for crude and weakened prices. At the same time, Kuwaiti exports have returned to the market after the oil field devastation caused by Iraq's invasion of the emirate in August 1990.
Before the late-September OPEC meeting, production by members was exceeding the 23.6 million b/d group quota by about 1 million b/d. Prices were slumping.
OPEC raised the quota to 24.5 million b/d in a move that was expected to reduce actual output by 200,000 b/d. The agreement produced two breakthroughs that might influence production through most if not all of the forecast period.
One breakthrough was an alliance over OPEC goals between Saudi Arabia and Iran, which otherwise remain rivals in the Persian Gulf region. The other was acceptance by Kuwait of a 2 million b/d quota, 160,000 b/d below what it wanted, signalling at least political reacceptance of OPEC discipline. During its period of postwar production recovery, Kuwait had insisted on exemption from group quotas.
The September meeting means OPEC at least can still reach production agreements, whether or not its members abide by them. A larger remaining question is when Iraqi exports will return to the market in significant volumes. The country has been subject to a United Nations trade embargo since its invasion of Kuwait.
NON-OPEC PRODUCTION
Outside OPEC, the most dramatic recent trend has been the drop in C.I.S. production.
C.I.S. production peaked at 12.6 million b/d in 1987 and has declined steadily since. The decline accelerated in 1991 and 1992, falling to an average of 9.1 million b/d last year and 8.2 million b/d in the first half this year.
In the U.S., a severe drilling slump has depressed production. Liquids production fell to 8.9 million b/d in 1992 from a recent peak of 10.3 million b/d in 1985. The 1992 total includes 7.2 million b/d of crude and 1.7 million b/d of NGL.
Excluding the C.I.S. and U.S., non-OPEC production increased from 17.6 million b/d in 1985 to 20.7 million b/d in 1992. Major gains have come from Norway, Canada, Syria, Yemen, Angola, China, Malaysia, and Papua New Guinea. In the first half of 1993, crude output from this group was up 2.2%.
IEA estimated that first half world oil demand was down 500,000 b/d from the comparable period of 1992. Total non-OPEC supply was down almost 1 million b/d, while average OPEC total liquids production, including 2.2 million b/d of NGL, was up 1.1 ton b/d.
The increase in OPEC output thus has made up for the slide in non-OPEC supply, but the weaker market has resulted in excess supply, rising inventories, and slumping prices.
Demand is expected to move up seasonally in the fourth quarter, raising the call on OPEC crude by nearly 1 million b/d, depending on the handling of stocks. If it does, this year's price slump should end, creating a more-solid market in the first year of the forecast period.
RESERVES, OUTPUT CAPACITY
Because of OPEC's domination of worldwide reserves, most new demand for crude oil over the long term will have to be satisfied by production from members of the exporters' group.
At the start of 1993, OPEC crude oil reserves totaled 772.2 billion bbl, 77% of total world oil reserves of 997 billion bbl. At the 1992 rate of production, this represents 86 years of supply. Non-OPEC reserves represent 15.9 years of supply at the 1992 output level.
In the near term, however, the rate of development of non-OPEC reserves will have much to say about total supply and thus about the level of demand for OPEC oil. Recent, substantial investments by international oil companies in non-OPEC areas will help sustain output through 1996.
Crude oil production capacity is expected to move up over the forecast period in both OPEC and non-OPEC countries. A number of OPEC countries have indicated plans to boost capacity, including Saudi Arabia, the United Arab Emirates, Iran, and Venezuela.
In addition, the embargo on export of Iraqi crude probably will be lifted sometime during the next 2 years, adding to effectively available OPEC capacity,. Precise timing of this political event is impossible to predict.
For purposes of this forecast, OGJ assumes that Iraqi crude will return to the market in 1995 and that output will rise rapidly to capacity levels by 1996.
This will be a substantial addition to OPEC and worldwide crude oil capacity. Iraq is now producing about 420,000 b/d but has the installed capacity and reserves to produce more than 3 million b/d, although equipment deterioration of unknown extent will limit production to some degree.
There also will be capacity additions in some non-OPEC countries during the next 3 years. Significant increases are expected in Yemen, China, Colombia, Argentina, Brazil, and the U.K. Minor additions will be made elsewhere.
The production capacity increases will be partially offset by the substantial decline in the U.S. and minor decreases in other producing areas.
Capacity additions are expected to outpace demand growth during the forecast period. OGJ projects a 7.5% increase in worldwide liquids production capacity by 1996 to 76.7 million b/d.
This 5.37 million b/d increase in capacity will exceed the expected 4.15 million b/d increase in demand over the next 3 years. As a result, worldwide excess capacity will increase 19.6% by 1996 to an estimated 7.43 million b/d.
Thus, excess capacity in 1996 will represent 9.7% of total capacity and 10.7% of demand. This is up from 8.7% of capacity and 9.5% of demand in 1993. The increase in excess capacity will moderate crude oil prices during the forecast period.
PRODUCTION GAINS
Worldwide output will increase through 1996 as oil demand escalates along with economic recovery, with the larger share of the increase coming from members of OPEC.
Total world liquids output will move up 4.15 million b/d above the 1993 level to 69.27 million b/d in 1996. This is an increase of 6.4%.
Non-OPEC output is expected to move up only 1.9%, an increase of 735,000 b/d, to 38.885 million b/d.
The increase in non-OPEC production is constrained by problems in the C.I.S. and East Europe. Total liquids production will dip to 7.77 million b/d in 1995 before recovering to 8.233 million b/d in 1996. This will leave output at the end of the forecast period in the C.I.S. and East Europe down 87,000 b/d below the 1993 output level.
Although a number of international companies are investing in development of C.I.S. reserves, production from these efforts won't be significant during the forecast period.
Production for the remainder of the non-OPEC countries will move up 2.8% to 30.652 million b/d. Declining production in the U.S. will be more than offset by increased output elsewhere. Favorable production agreements in many non-OPEC countries are attracting investment and will slow the shift to OPEC output.
INDUSTRY OPERATIONS
A growing market and shifting patterns of supply and consumption as always will require adjustments in operations of the upstream and downstream petroleum industry.
The adjustments will be reflected in levels of drilling activity, stocks, and refinery construction and operation.
DRILLING
Drilling activity will have to increase during the forecast period if OPEC members and other producers are to meet stated production capacity goals.
Growing production volumes and moderate price rises will generate revenues to finance some increase in exploration and production.
The number of active rigs outside the U.S. and Canada will increase from 775 in 1993 to 840 in 1996. The drilling increase won't reflect the total increase in upstream investment because funds are increasingly used for geophysical exploration and other non-drilling activities.
The U.S. active rig count also will increase in the next 3 years, spurred mainly by the need to keep deliverability of natural gas in line with expected gains in demand. OGJ projects a U.S. rig count of 810 in 1996, compared with an average of 760 in 1993.
Canadian drilling has rebounded this year, with the active-rig count jumping from only 97 in 1992 to an estimated 170 in 1993. OGJ expects the count to average 175 in 1996.
STOCKS
Stock management has changed in recent years.
Total stocks in the OECD, the only group with reliable inventory data, have tended to rise since 1985 in line with demand, but government-controlled stocks have accounted for a rapidly rising share. Private companies have tended to hold less in inventory, partly due to their emphasis on controlling costs.
According to the IEA, total OECD stocks on land rose from 3.13 billion bbl at the end of 1985 to 3.39 billion bbl at the end of 1992. Both totals represent 93 days of forward demand on their respective dates.
In contrast to the 8.3% increase in total stocks' government-controlled inventories rose 22% in the same period - from 861 million bbl to 1.05 billion bbl. In terms of days of forward demand, government stocks moved up from 25 days to 29 days.
Company stocks increased only 2.9% during this period to 2.34 billion bbl at yearend 1992. In terms of forward demand, company stocks fell from 67 days at end 1985 to 64 days at end 1992.
Companies have found ways to manage supply that are more efficient and less costly than holding inventories and to some extent have shifted the responsibility for contingency supply to governments. This trend may continue, but there are limits-including operational limits-on companies' abilities to reduce inventories.
REFINING
Worldwide refining capacity dropped in the early 1980s in response to shrinking demand for petroleum products. Much of the affected capacity was in OECD countries.
Worldwide refining capacity dropped from 78.5 million b/d in 1982 to 73 million b/d in 1985. Capacity then slowly moved up to 75.6 million b/d in 1991 as demand recovered.
Refining capacity fell again in 1992 to 74 million b/d due to a 2.2 million b/d reduction in the C.I.S. Total worldwide capacity in 1992 was down 4.5 million b/d from the level 10 years earlier, a drop of 5.7%.
The sharp reduction in refining capacity was made to align capacity with crude oil throughputs necessary to meet demand. When capacity exceeds average throughputs - that is, when utilization rates are low - unit operating costs rise.
For the OECD and developing countries combined, the overall refining capacity utilization rate fell to 68.4% in 1983. Worldwide, including the C.I.S. and East Europe, the utilization rate fell to 71.5%.
With the increase in demand and crude oil throughput along with the reduction in capacity, the utilization rate moved up to 81.6% in 1992. For the OECD and developing country refineries, the 1992 rate was 87.3%.
Among OECD countries, refining capacity was cut by 6.9 million b/d to a 1992 total of 36.7 million b/d. In contrast, refining capacity in developing countries moved up 3.7 million b/d to a 1992 total of 24.5 million b/d.
Due to the economic restructuring in the C.I.S. and East Europe, refining capacity fell to 12.9 million b/d in 1992, down 1.3 million b/d from the level in 1982.
In OECD Europe, total refining capacity fell from 18.1 million b/d in 1982 to 14 million b/d in 1992.
Capacity in the U.S. and Canada fell from 19.1 million b/d in 1982 to 17.2 million b/d in 1992. Latin American refining capacity fell by 700,000 b/d during the period to 7.6 million b/d. Much of the Latin American reduction was in Caribbean refineries primarily used to supply the U.S. market.
The increase in refining capacity in developing countries was mainly in the Middle East and Asia-Pacific areas. During 1982-92, capacity in the Middle East moved up 1.4 million b/d to 4.9 million b/d; in Asia-Pacific, it increased 1.7 million b/d to 14.5 million b/d.
African refining capacity also moved up in the period, increasing 570,000 b/d to 2.9 million b/d in 1992.
Worldwide refining capacity will increase during the forecast period. With utilization rates high in many areas, future demand increases will strain capacity. The location of new capacity will depend upon a number of factors, including the location of demand and the cost of complying with environmental regulations.
OGJ expects worldwide capacity to move up to 75 million b/d in 1996. Capacity will not rise as much as throughput and product demand, which means steadily rising utilization rates.
The worldwide refining capacity gain of 900,000 b/d by 1996 will compare with an anticipated crude oil throughput increase of 4 million b/d. As a result, the refining utilization rate will increase from 85.1% in 1993 to 89.5% in 1996.
Periodic maintenance downtime, accidents, weather-related shutdowns, and other contingencies will make it difficult for refiners to operate at utilization rates above 90% for extended periods. Therefore, as demand moves up additional refining capacity will be required. Some of this new capacity probably will be located in developing countries with relatively lenient environmental regulations.
PRICES
Since the end of the Persian Gulf conflict, crude oil prices have been relatively stable because, until this year, the excess crude oil production capacity that plagued the market at least since 1986 was absent.
Between the market collapse of 1986, when Saudi Arabia was reclaiming market share, and the Iraqi invasion of Kuwait in 1986, crude prices went through several wide swings. The average price of world export crude oil fell from $26.86/bbl in 1985 to $14.97/bbl in 1986, hitting a monthly low of $10/bbl in July that year.
OPEC quota discipline helped boost prices to an average $17.41/bbl in 1987. But production restraint weakened in 1988, and prices fell to $13.80/bbl. Better production control in 1989 strengthened prices to an average of $16.66/bbl. Prices were weakening in 1990, when Iraq invaded Kuwait.
The invasion pushed prices in October of that year to their highest level since January 1983-$33/bbl. For all of 1990, the average was $21.36/bbl.
After the crisis ended in January 1991, the export-crude price fell and stabilized, averaging $17.80/bbl in 1991 and $17.95/bbl in 1992.
In the first half of this year, the price average slumped to $16.95/bbl as OPEC struggled without success to accommodate growing production capacity and sluggish demand for its crude.
OGJ estimates the 1993 average world export price at about $16.80/bbl. Prices will recover toward yearend as demand increases if OPEC maintains discipline around its September production agreement - but not enough to make up for the price losses of earlier in the year.
PRICE FORECASTS
The increase in worldwide product demand in 1994 will boost crude oil prices modestly.
OGJ projects a reduction in excess capacity as demand moves up faster than additions to crude oil production. The price will average $17.60/bbl in 1994.
As demand continues to increase in 1995, additional price pressure will develop. The average worldwide export crude oil price will rise to $18.25/bbl.
But capacity additions will begin to exceed the increase in demand as Iraqi oil returns to the market. By yearend 1993, the excess production capacity that OPEC will have to apportion among its members will have grown by 1 million b/d.
In 1996, Iraqi production under OGJ's scenario will be moving toward preinvasion levels, putting pressure on capacity elsewhere. This additional available crude oil will weaken the market and push the average export-crude price down to $17.85/bbl for the year.
Thus the probability is much greater for surplus than it is for shortage during the forecast period. But oil demand will prevent a price collapse. On balance, the relative price stability of the past 3 years is likely to continue for the next 3 years - but for different reasons.
Price stability will help stimulate demand, especially in the U.S. and Canada, where taxes are lower than they are elsewhere in the OECD and where feedstock costs thus represent a great Portion of total petroleum product costs.
ROLE OF TAXES
Even in the U.S., however, petroleum product taxes are being treated as convenient tools for raising government revenues. U.S. product prices, therefore, might move up faster than crude prices during the forecast period.
In most other OECD countries, high consumption taxes on petroleum products have somewhat insulated demand from fluctuations in crude oil prices. But the rate of taxation varies be, product, and lower refining costs may influence the level of demand for some products.
The highest tax rates are generally leveled on motor gasoline and other transportation fuels. In countries where this is the case, the level of economic activity is the major determinant of the level of petroleum product consumption.
Recent motor gasoline price data reported by IEA illustrate the differences in consumer costs: U.S. $1.12/gal, Canada $1.54/gal, Germany $2.99/gal, Spain $3.00/gal, U.k. $3.07/bbl, France $3.58/bbl, Italy $3.87/bbl, and Japan $4.46/bbl.
Most of fluctuation in product prices during the forecast period will be related to changes in taxes more than to changes in crude oil costs to refiners.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.
