Part 3: Filling the OECD oil supply gap: Control & influences on world oil price
David Wood - David Wood & Associates, Lincoln, UK
Saeid Mokhatab - University of Wyoming, Laramie, Wyo.
In OECD countries, demand for oil is some 250% higher than indigenous oil production/supply (Figure 1), generating a widening supply gap as indigenous production falls and demand for oil continues to rise. In 2005 this OECD oil supply gap was 29.5 million barrels/day (MMb/d) and has risen steadily since 1985 when it was 17.2 MMb/d, although it did peak in 1978 at 28.1 MMb/d.
This supply gap (or excess demand) has to be met by imports from producing nations outside the OECD. OECD indigenous oil supply remained more or less stagnant since the mid-1980s at close to 20 MMb/d, although it has shown a decline in 4 successive years since 2002 to some 19.8 MMb/d in 2005. Actual demand for oil in the OECD countries increased from 37.2 MMb/d in 1985 to 49.3 MMb/d in 2005, an increase of 12.1 MMb/d.
This OECD shortfall is supplied mostly from OPEC and non-OPEC suppliers outside the OECD (i.e. notably Russia, Caspian states, and Angola). The relationships between OPEC and Former Soviet Union (FSU) supply volumes and the OECD supply gap have historically influenced oil prices, which is particularly clear for global crude oil price collapses of 1986 and 1998 (Figure 2).
This excess of supply to OECD import demand reflects global oil price elasticity; although other demand factors such as growing demand for oil imports in China and India have had an increasing influence since 2001. The excess of OPEC oil supply to OECD import demand does show clear inflection points associated with major reversals in oil price trends (Figure 3 years 1973, 1980, 1986, 1988, and 2002), but the inflections are not always in the same direction (compare 1986 with 1998).
Downward inflections are more likely to be associated with price hikes, and upward inflections are more likely to be associated with price collapses. The downward trend between 1980 and 1985 does not conform to this because of OPEC’s dramatic loss of market share of oil supply to non-OPEC producers at that time dominates the trend.
The upward inflection from 2002 to 2005 also does not conform because of the rapid demand growth in oil from non-OECD nations, primarily China and India. Figure 4 displays the OPEC plus FSU oil supply relative to OECD supply gap and this removes most of the OPEC versus non-OPEC market share impacts. Increases above about 12 MMb/d in the excess OPEC and FSU supply were sufficient to convince the markets of oil oversupply in 1986 and 1998, and price collapse ensued.
The growing oil supply gap for OECD countries (demand less indigenous supply) has played an increasing role in keeping oil prices high or downwardly inelastic. Imported crude oil passing though the OECD downstream infrastructure meets the supply gap.
Oil producers (OPEC and non-OPEC) outside the OECD consuming markets know that if there is a perception of over-supply from them into the OECD then there is a risk of price collapse. It is in the interest of OPEC and non-OPEC producers (and IOCs) to maintain a perception of tight supply to the OECD to prevent oil price collapse, irrespective of the actual volumes and costs of available supplies, but to continue to supply those markets to benefit from the high oil prices they are able to command. This could be interpreted either as the oil-producing nations being manipulated by, or held hostage by, or indeed, being seduced by, access to the high crude oil prices available from the prevailing, predominantly IOC-controlled structure of the OECD oil markets.
Evolution of OPEC and FSU market shares in global crude oil supply
Market share fluctuations and the competition between OPEC and non-OPEC suppliers (most notably Russia) to supply the OECD oil supply gap and maintain the supply-demand equilibrium has historically inhibited the producing nations from committing a large investment to downstream infrastructure outside the OECD for fear of creating global over-supply.
New refining capacity built in non-OECD Asia in the 1990s certainly played a role in the 1998 oil price collapse following the Asian economic crisis of 1997. Figures 5 to 8 illustrate global oil supply market share trends for OPEC, non-OPEC, and FSU and how OPEC and FSU (mainly Russia) appear set to increase their share of global oil supply. Such increases cause long-term security of supply concerns for OECD nations.
About the authors
David Wood [[email protected] and www.dwasolutions.com] is an international energy consultant who specializes in the integration of technical, economic, risk, and strategic information to aid portfolio evaluation and management decisions. He holds a PhD from Imperial College, London. He is based in Lincoln, UK but operates worldwide.
Saeid Mokhatab [[email protected]] is an advisor of natural gas engineering research projects in the Chemical and Petroleum Engineering Department of the University of Wyoming. He has published more than 50 academic and industrial papers, reports, and books. In addition to his technical interests, he has written extensively in wide circulation media in a broad range of issues associated with LNG, LNG economics, and geopolitical issues.
EDITOR’S NOTE: This 5-part series of articles explores how different sectors of the oil supply chain are generically controlled by different international groups and how these controlling factions influence prices and fuel geopolitical tensions. This third article addresses how the OECD oil supply gap has evolved and is widening and how oil price and market share of OPEC and major non-OPEC producers (particularly Russia) have evolved in response to the growing OECD demand for imported oil. A comparison between recent and historical trends indicates why the OECD nations have mounting concerns over security of their future oil supplies.