COMPETITION INCREASES TO OBTAIN OIL IMPORTS

L.F. Ivanhoe
Novum Corp.
Santa Barbara, Calif.

Many oil analysts assume that the numerous non-OPEC countries will always be able to make up any shortage in U.S. oil supplies that previously came from OPEC nations like Kuwait or Iraq, thereby keeping prices down. Unfortunately, there is no good evidence for this wishful case.

The first economic law of supply versus demand applies particularly to all-essential crude oil, where the ubiquitous global consumption is almost 1 trillion (million million) gal/year.

Of the 155 non-OPEC nations, 134 are oil importers that will always compete to buy whatever crude oil or products they want. Of these, 132 are oil short nations that produce less than 75% (U.S. = 50%) of their consumption and consequently are hostage to oil imports to maintain their economies.

The six "superoily" members of OPEC are the only ones with any substantial uncommitted shut-in production capacity that might be called on during emergencies to moderate future oil supplies and prices.

U.S. antitrust laws do not apply to sovereign foreign governments, which can unilaterally renege on contracts, prices, loans, treaties, or any other commitments.

The critical factor for crude oil planning is not the total global production but the 50% of total production that is available for exports (Fig. 1). 4

Just as dope prices are set by dope dealers (not by dope addicts), oil importing nations must buy their oil at prices set by competition between oil exporting countries, not by importing nations' consumers, planners, or politicians.

A true global oil market exists in which the oil products consumed within any country sell at an international price set by the world's oil exporters, adjusted locally for transportation, quality, and fuel taxes or subsidies.

The world contains some 168 nations. Of those, 81 produce crude oil, including pittance contributors. The remaining 87 (non-OPEC) nations must import 100% of their oil needs.

Among the globe's 81 oil producing countries, 47 (non-OPEC) effectively consume all of their local production, such as the U.S., Brazil, India, and others.

Only 34 nations have surplus oil to export. These crucial 34 oil exporters include: 13 OPEC, three Communist Centrally Planned Economies (CPE); and 18 market economies (ME) countries (Fig. 1).

Of the latter, six are non-OPEC Arab nations of the Middle East and North Africa.

Oil neutral countries, in which consumption approximately equals production, may shift from being exporters to importers or vice versa in different years without significantly altering global export patterns.

No significant additions to the current oil producing countries are expected through 2000, but several producers (U.K., U.S.S.R., and Peru) may reduce or cease exporting.

Competition for the world's oil exports will henceforth increase from the overpopulated less developed countries (LDC), where the oil consumption has increased 6.6%/year from 6 million b/d in 1970 to 14 million b/d in 1989, during which years overall oil consumption in the industrial world held flat. 17

OPEC

The 13 OPEC oil producers can be divided into two classes, superoily and oily.

The six superoily members of OPEC include Iran, Iraq, Kuwait, Saudi Arabia, the United Arab Emirates, and Venezuela.

This is where the world's oil is--nothing else comes close. Time is on the side of these superoily countries, which will still be pumping crude oil for decades during the next century after the rest of the world's flush oil has been exhausted. 2

The five superoily OPEC countries around the Persian Gulf had 68% of the globe's known reserves and exported 11 million b/d in 1988.

Venezuela, with 6% of the globe's 1989 reserves excluding its Orinoco heavy oil, is the only superoily OPEC country in the Western Hemisphere. Its 1988 exports averaged 1.5 million b/d.

All of the six superoily OPEC countries have small populations with low oil demands, so they can easily hold their breath and resist normal economic (non-military) sanctions (Table, Fig. 2).

The seven oily OPEC producers are Algeria, Ecuador, Gabon, Indonesia, Libya, Nigeria, and Qatar. They have a combined 6% of the world's known oil reserves, and their 1988 exports averaged 4.5 million b/d.

Several of these have large populations or small reserves. Some, such as Ecuador and Gabon, could cease to be oil exporters within a decade or so.

COMMUNIST PRODUCERS

The U.S.S.R. and China are the only CPE nations that export significant oil.

Albania's production slightly exceeds its frugal consumption. The other Eastern Europe and Asian CPE countries are all oil poor and must import virtually all of their oil needs.

The U.S.S.R. held 6% of the globe's oil reserves and supplied 2.8 million b/d plus 900,000 b/d of natural gas liquids exports in 1988, while China had slightly more than 2% of the world's reserves and produced 600,000 b/d of exports.

Both of these vast nations have large populations that consume most of their production.

U.S.S.R. oil production may drop rapidly in the next decade due to the dearth of new giant oil field discoveries since 1970. 5

China is an excellent example of how the discovery of big oil in an LDC country greatly increases the local oil consumption to improve the standard of living and economy.

China's oil production surged from 200,000 b/d in 1969 to 2.8 million b/d in 1989, while consumption went from 400,000 b/d to 2.4 million b/d during this period.

The critical factor for the rest of the world's oil problems is not how much oil is produced in the country but how much is available for exports. There is no shortage of Chinese customers for new Chinese oil.

If China does not add new reserves and production, its oil exports may dwindle after 2000. Recent exploration has had only limited success on a global scale. China's best recent discoveries are so remote that transportation costs to markets are prohibitive.

NON-OPEC MARKET ECONOMIES

The public normally thinks of these countries as non-OPEC oil producers.

They include Canada and Mexico; Colombia, Peru, and Trinidad; Norway and the U.K.; Angola, Cameroon, Congo, Egypt, and Tunisia; Bahrain, Oman, Syria, and Yemen; and Brunei and Malaysia.

Combined exports of these 18 countries in 1988 were 5.2 million b/d, of which 1.3 million b/d were from six non-OPEC Arab nations.

Countries with small populations, such as Trinidad, Norway, Cameroon, Congo, Oman, Yemen, and Brunei, should be able to readily supply exports beyond 2000.

Countries with large populations or industrial economies, such as Canada, Mexico, Peru, U.K., Egypt, and Malaysia, may have a more difficult task to control their internal consumption to allow exports.

Giant oil fields--those with estimated ultimate recovery of 500 million bbl or more--are critical for any nation's production. The world's 320 known giant oil fields contained 75% of all of the oil discovered through 1985.

The 35 giant non-OPEC market economy oil fields discovered and put on stream during the 1960s and 1970s in the North Sea, northern Alaska, and elsewhere that blunted OPEC oil shocks Nos. 1 and 2 have begun to decline. There are no new giant fields in reserve to replace them, so non-OPEC oil production can be expected to slump in the near future.

For national security, every oil importer diversifies its sources of oil supplies. Virtually all crude production in non-OPEC market economy nations is already committed to internal or foreign customers, with no surplus for newcomers. Americans have no inalienable right to buy and consume other nations' oil. 3

Mexico is a special case, of great interest to the adjoining U.S. Whether Mexico is superoily, as suggested by Petroleos Mexicanos reserve claims, or merely oily, as indicated by its production record, is the key question.

In 1988 Mexico consumed 61% of its crude oil production of 2.512 million b/d, and NGL supplied an additional 370,000 b/d. Exports to the U.S. were 747,000 b/d, limited by a Mexican export quota set up because the country does not wish to become a U.S. oil colony.

PERMANENT OIL SHOCK

Superoily nations are crucial for long term global oil supply plans.

A permanent oil shock, when world oil demand will exceed the dwindling global production potential, can be foreseen after the 1990s, when only the superoily nations will supply exports.

The worldwide financial panic and price surge after Iraq's invasion of Kuwait showed how dependent all economies are on crude oil and its products.

If a temporary interruption of the still replaceable Iraq-Kuwait oil production could cause such immediate dismay, what should we expect at the end of the 1990s when there will be no long term global crude oil production in sight to fill the world's demand? Governments would be wise to plan accordingly (Fig. 1). 4

REFERENCES

British Petroleum Co., BP Statistical review of world energy--1989, 1990, London EC2Y 9BU.
Ivanhoe, L.F., Scavenger oil production and reserve ratios; OGJ, May 19, 1986, pp. 81-84.
Ivanhoe, Time is no longer on our side; OGJ, Sept. 7, 1987, pp. 70-71.
Ivanhoe, Future crude oil supply and prices; OGJ, July 25, 1988, pp. 111-112.
Ivanhoe, Soviet oil production drop may be major, lasting global oil supply woe; OGJ, Sept. 3, 1990, pp. 69-71.
Roadifer, R.E., Size distribution of world's largest known oil, tar accumulations; OGJ, Feb. 24, 1986, pp. 93-98.
U.S. Department of Energy, Energy Information Administration, 1989; International Energy Annual--1988, Annual report DOE/EIA-0219(88), National Energy Information Center, Washington, D.C. 20585.