WORLD PETROLEUM OUTLOOK

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP91B00135R000500900041-4
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 16
• Document Creation Date: December 20, 2016
• Document Release Date: February 20, 2008
• Sequence Number: 41
• Publication Date: February 8, 1983
• Content Type: MEMO

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8 February 1.983
MEMORANDUM FOR: Office of Global Issues
DDI/Congressional Support Staff
SUBJECT World Petroleum Outlook
BRIEFING DATE : Friday, February 18, 1983
CONGRESSMAN/COMMITTEE: Senate Committee on Energy and
Natural Resources
REQUEST : When Committee staff member Howard Useem was at
headquarters on 4 Feb for a briefing by on the global 25X1
impact of the oil price decline, Useem also discussed a Committee
hearing planned for February 18th on the petroleum outlook (see
attached letter). Useem reportedly outlined the format of the
hearing, allocating specific topics to CIA, State, Treasury and
the Dept. of Energy. We are told I elland (Treasury) and Bradley
and O'Brien (DOE) are signed on to represent their departments.
State's representative is yet unknown. If you do not have
adequate information to proceed with preparations for the
hearing, we will have to contact Useem again since he did not
provide any written instructions other than the attached
letter. Would OGI be able to handle this broad topic alone, or
does it involve other DDI offices?
DEPARTURE TIME:
BRIEFING TIME: 9:00 A.M.
ESCORT OFFICER:
Legislative Liaison Division
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Testimony By CIA National Intelligence Council
Chairman Henry Rower. Before the.Senate Committee or,
Energy and Natural Resources
February 18, 1983
Mr. Chairman and distinguished members of the committee.
I welcome this opportunity to present the Central
Intelligence Agency's views on the world energy situation and its
implications.
Our own analysis of the present oil market situation and
outlook is very similar to the testimony just presented by the
Department of Energy. We believe there is a,strong possibility
for a cut in nominal oil prices in the coming weeks. The
persistent softness in the world oil market and growing financial
difficulties of several oil producers is contributing to this
possibility. Market weakness is due to a number of factors:
o Economic growth continues weak and a recovery is not
now expected until the latter half of the year,
o Unseasonably warm weather in the Northern Hemisphere
has held oil and energy use sharply below normal winter
levels.
o Because consumption is lower than expected, inventories
remain surplus to company needs. Adding to the
pressure to reduce inventories is the perception that
purchases should be postponed because future prices
will be lower.
o Conservation and substitution away from oil continue
albeit at rates slower than the past three years.
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These factors have had a dramatic effect or, the oil market:
OPEC crude. production has fallen from about 31 million
b/d in 1979 to only 17.2 million b/d in January.
February production maybe one million b/d lower.
o Free World oil consumption has declined by.7 million
b/d to about 45 million b/d.
o Spot oil prices, which peaked in 1980 at about $44 per
barrel for African light crudes,. fell to the present
level of about $29 per barrel, some,$6-7 below official
prices.
The next several-weeks will be a . critical. period for .the oil
market. Oil demand is trending sharply downward as consumption
remains weak and buyers postpone litings in anticipation of.a
---future price decline.
o Confronted by a several hundred thousand barrel.per.day
reduction in oil sales since the beginning of the year,
Mexico is now facing the prospect of either lowering
prices to increase sales or further reducing output.
o The UK. is under pressure to cut in prices amid falling
exports.
o Nigerian production in January fell to 800,000 b/d
compared with 1.4 million b/d during the fourth
quarter.
o Production in Saudi Arabia averaged 4.7 million b/d in
January with prospects of further declines in February.
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So far individual oil producers have been reluctant to initiate a
price drop in an attempt to avoid provoking a round of
competitive price cuts by other producers.
The demand outlook for the balance of,1983 offers little
relief for oil producers. Oil.demand trends will depend on the
shape of the business cycle, the pace of energy conservation and
substitution and inventory patterns. Even with modest economic
growth of 2 'percent in the OECD countries,. demand for OPEC crude
oil, in our estimation, will only average about 19 million b/d in
1983 or about the same as last year and surplus Free World
available capacity wI-Li average about 8 million b/d.
o We expect OECD energy consumption to grow by about.
600,000 b/d o.e. in 1983. Nor, oil energy use is
-projected to increase by about 1--million b/d o.e.
o Free World oil consumption is projected to fall by
about 1 percent to 44.8 million b/d including refinery.
gain. Consumption is expected to remain far below year
earlier levels during the first half of 1983 before
beginning to rise above 1982 levels later in the year
in response to the economic recovery.
o We expect non-OPEC supplies will rise by about 500,000
b/d in 1983 to 24.6 million b/d. This figure includes
natural gas liquids, net Communist exports and refinery
gain. Most of the increase will come from Mexico, the
North Sea, and Canada.
o oil inventories are projected to fall by about 200,000
b/d in 1983 as a decline in commercial inventories is
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partially offset by a-n increase in government
stockpiles. Most of the decline in commercial stocks
will occur in early 1983.
Unless an agreement or, production quotas or price . cuts is
reached soon., Saudi Arabia and the other Arab producers in the
Persian Gulf will continue to bear the brunt of the sharp decline
in demand that is already underway. However, the Saudis.have
little. room or willingness. to cut output further, and have
.threatened price cuts of $2 to $4 per barrel to arrest eroding
oil sales and force a production. sharing agreement. Such action,
however, would constitute a major policy shift by Riyadh, and the
Saudis realize that lower oil prices would not boost oil demand
appreciably in the short run. Moreover, such action could ignite
a series of price cuts by other producers or possible'- retaliation
On balance, we believe there is a growing likelihood that
oil prices will decline, but we think that the OPEC.states will
succeed in preventing an uncontrolled price decline by agreeing
to a production sharing arrangement in the coming weeks. OPEC
members realize.that widespread price discounting could cause a
price collapse that would lower revenues drastically for all
by Iran against Saudi oil facilities.
Still we cannot rule out the possibility of a much larger
.oil price decline. Since a $2-4 price decline would not increase
demand significantly for some time, oil producers would see their
total revenue fall. This would generate pressures, in the
absence of a viable production sharing scheme, for individual
producers in the short. run.
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producers to shave prices in an attempt to their increase market
share. Moreover, political animosities between Saudi Arabia,
Iran, and Libya are sufficient to override rational thinking in
favor of a more emotional response to setting prices. The Saudis
and their fellow members of the Gulf Cooperation Council with
huge financial reserves could more easily handle a drop in
revenues resulting from a price cut.' In addition, if the
expected economic recovery fails to materialize-and oil
consumption continues to fall at a rapid rate OPEC would have a
more difficult time preventing a sharp price decline.
If prices begin -,to slide, we cannot predict how far they
might fall or how long they would remain depressed. At some
point we believe OPEC members and other oil producers would
probably agree -or. some rationing scheme to arrest the price
slide. In any event, a drop in oil prices would have major
impacts on the world economy. There are substantial positive
aspects that could occur including:
o Lower inflation
o Higher economic. growth
o Higher employment
o Lower oil import costs and
o Reduced interest rates.
At the other extreme, lower oil prices could lead to
intensified international financial stress as well as increased
Third World political instability. Unsettled conditions in key
oil exporting countries could eventually translate into a supply
disruption threatening an oil price runup well before the
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positive impact of the initial price decline worked its way
through the system. Sharply lower prices would also damper.
conservation, slow exploration and delay alternative energy
development. The most immediate concern brought on by a sharp
price decline would be the risk of damage to the international
financial system unless some sort of help were provided to high
debt countries that are dependent on income from oil, especially
Mexico. Nigeria, Venezuela, Indonesia, and Egypt would also be
in trouble. For more details of the impact of an oil price
decline--both the potential gains as well as the risks--see the
attached DDI Intelligence Assessment "The Global Implications of
.a Possible Oil Price Decline."
Despite the substantial capacity cushion and outlook for a
soft oil market, the continuation of hostilities between Iran and
Iraq poses a risk to oil supplies. The outcome of the conflict
could affect the oil market in widely different ways. An
escalation of the conflict to neighboring states could disrupt
.oil flows and eliminate the supply cushion. Alternatively, a
quick end to the war could allow Iraq to increase exports to
prewar levels .within. six months. The addition of 2 million b/d
would add further to downward price pressures.
Prospects and Risks Beyond 1983
If a sharp oil price decline is avoided this year, almost
all petroleum industry projections of oil and natural gas markets
indicate only moderate growth in consumption, ample supplies, and
little or no upward pressure on prices well into the late
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continue to decline as a result of.a combination of lower-than-
-expected oil demand, an increase in Mexican oil production, and
an end to the Iran-Iraq war. Still, major. industrialized.
countries will remain heavily dependent on imported oil, and West
European countries and Japan will become increasingly dependent
on imported natural gas.. As the market gradually tightens later
in the decade as we anticipate, the present cushion of surplus
productive capacity is likely to shrink and the market will
.become more vulnerable to supply disruptions.
If prices break`-in the near term, the greater economic
growth and in time higher oil consumption could hasten this
vulnerability period by a few years. Opinion is divided or. this
-issue, however, because much,uncertainty exists regarding the
response of oil users to sharply lower prices.. Some argue that
demand will rebound quickly; others say that because of
structural changes in oil use, a sharp price drop will not cause
a major rebound in oil demand.
The Stable Market Scenario
Economic growth assumptions and energy price trends are
critical in forecasting long-term energy demand. A small change
in annual GNP growth can cause a substantial change in energy
requirements. Most projections assume a Free World GNP growth of
3 percent annually during the 1980s. Even if GNP growth or,
average approximates this level over the next several years, oil
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demand could still change because of sharp variations in year-to-
year growth caused by the business cycle.
Most forecasts assume flat or declining real oil prices to
1985, with prices rising thereafter by 2 to 3 percent per year.
The price path, however, may not be a smooth one. Most forecasts
expect the price of benchmark.OPEC oil, the Saudi Arabian light
crude, to range from $30 to $37 per barrel in 1982 dollars even
if prices tumble in the rear term.
Barring an unexpected supply disruption,- supplies of oil and
natural gas should be ample to meet anticipated Free World demand
at least through thee-1980s. Most forecasters now expect oil
productive capacity in the Free World to average about 56-57
million b/d in the latter half of the decade. The current weak
.oil -market,- however, could cause some -erosion-- in productive
capacity later in the decade. Industry projections indicate nor,-
OPEC productive capacity will increase slightly in the late
1980s,.w.i_th growth in Mexican capacity. accounting for much of.
this increase. Except during periods of unusual weakness in the
oil market, non-OPEC producers will be operating at or near
capacity.
Overall, we estimate that Free World oil consumption in the
late 1980s will approximate 48-55 million b/d--at least 3 million
b/d above 1982 levels. Given these consumption estimates and
non-OPEC supply forecasts, we believe that the demand for OPEC
oil will climb to about 26 million by the late 1980s. As a
result, the Free World will remain dependent on OPEC oil for
about half of total oil requirements. Most industry and
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government forecasts expect OPEC oil productive capacity to
average several million b/d above the expected demand. This
'includes a return of the combined productive capacity of Iran and
Under these circumstances, oil supplies,could support
several years of fairly rapid economic expansion without strong
upward pressure on prices, and surplus productive capacity
through the. late 1980s should be sufficient to protect the oil
market from all but major supply 'disruptions.' This ample supply
situation should give the United. States wider freedom in dealing
Iraq to pre-war levels.
with individual oil-'exporting countries than enjoyed in the.
past. Oil exporters whose interests are inimical to ours--Libya,
for example--will not have the financial flexibility they have
previously enjoyed. Other exporters, however, including Nigeria,
Venzeuzela, Indonesia, Mexico, and Egypt will have to cut back
imports further and could face economic austerity so severe it
may generate some degree of political instability. Countries
losing access to. aid from OPEC nations also could face more
hardship.
Oil Disruption Risks
These unsettled conditions in key exporting countries could
heighten the risk of a supply disruption, perhaps of major
proportions. Such a disruption could drastically and quite
suddenly alter the energy picture. The oil price run-ups of the
1970s were direct results of major market disturbances:
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o Libya's move to reduce foreign company production in
1970, coincident with pipeline sabotage in Syria,
resulted in a 25 percent rise in oil prices.
o The 1973 Arab oil embargo supported a tripling.of oil
prices and contributed to an abrupt curtailment of GNP
growth..
o Supply losses resulting from the Iranian revolution
contributed. to`a doubling of oil prices between late
1979 and early 1980.
Although the odds are against a major internal or external
disruption in oil exports in any particular exporting nation or
region, the probability of some sort of disruption is quite
high. The uncertain political climate and recent escalation of
hostilities in the Middle East has heightened fears of a
potential supply disruption in that region, which is expected to
continue to account for about one-third of Free World oil
:production. The Persian Gulf has a particularly high
concentration of petroleum production and export facilities,
highly vulnerable, to damage from war or sabotage. A change in
regime or political policies car, also pose a threat to oil flow
patterns.
The impact of a supply cutoff would-depend on the nature of
the disruption. Despite the present supply cushion, the United
States and its allies could be hurt by deep, sustained production
cuts that could occur under a variety of circumstances. Among
the possibilities that could occur are:
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o An expansion of the Iran-Iraq war, to other Persian Gulf
countries, which could affect as much as 17 million b/d
in oil productive capacity..
o Closure of the Strait of Hormuz,, the only sea route
into the Indian. Ocean from the Persian Gulf, would
produce a comparable disruption. More than 9 million
b/d of crude oil was shipped through Hormuz last year,
nearly 7 millioh b/d to OECD countries. Four pipelines
totalling close to 4 million b/d ire export capacity
circumvent the Strait,. but these also are vulnerable to
disruption,-arid two transitting Syria are currently
closed for political reasons.
o A disruption in Saudi Arabian oil production could
affect more than half of Persian Gulf oil supply
although prospects for political stability in Saudi
Arabia appear good.
o An Iranian victory in its war with Iraq would likely
result in greater instability in the Persian Gulf, and
heighten the threat to the Saudis and other
conservative regimes.
o The ever present threat of terrorist attacks against
key oil facilities could increase as a result of
Should a disruption occur, its impact would depend heavily
on the availability of energy supplies from surplus productive
capacity, alternative fuels such as coal and gas, and
stockpiles. To some extent, the impact of future oil disruptions
Palestinian setbacks in Lebanon.
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will also be modified by a number of changes in energy use.
Price controls have been eliminated in several countries, more
efficient capital stock has been installed, and many industrial
oil users have converted to other fuels or developed a dual-fuel
'capability. Stock drawdowns can play a major role in offsetting
lost oil supplies. Commercial stocks represent the bulk of oil
inventories held in consuming countries, however, and in several
past disruptions oil companies have been reluctant to. draw down
inventories beyond certain levels. Sizable strategic stockpiles
are located only in the United States, Japan, and West.Ge.rmany.
At present, the foreign countries have no specific plans or, how
to distribute this oil in the event of a crisis.
Surplus productive capacity will afford the OECD
considerable protection against an oil disruption at least for
the next several years. Surplus capacity in the Free World
available to offset a supply cutback currently stands at more
than 10 million b/d. This, of course,. assumes that none of the
countries possessing excess capacity is involved in the
disruption. Little more than 3 million b/d of surplus capacity
are outside the Persian Gulf. Over the next several years, the
market may be vulnerable only to a cutoff of Saudi oil production
or to the flow of oil-from the Persian, Gulf.
After the mid-1980s, the capacity cushion is likely to
shrink as OECD economic growth rebounds and productive capacity
erodes in some OPEC countries. Oil market vulnerability to
smaller supply disruptions could greatly increase. We have
estimated that under a high demand scenario, available surplus
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capacity would shrink to less than. 2 million b/d by 1990, leaving
the market vulnerable to ever. small supply disruptions.
The Price Break Scenario
A price break in the near term which stimulates consumption
and leads to cutbacks in capacity development projects could
greatly accelerate the convergence between available capacity and
demand. We are.-already witr.e.ssirg cases where major producers
are postponing or canceling capacity development plans, both
because lower than expected oil revenues have reduced available
investment funds and-because lower demand levels make it doubtful
additional supplies could be marketed. Such cutbacks could
significantly impair the ability of producing countries to
respond to a supply disruption later in the decade. Considering
the importance of imported oil to US allies, there is no way the
United States could insulate itself fully from the economic
reverberations of a supply disruption.
Gas Markets
The natural gas outlook is, for the most part, similar to
that for oil. Ample supplies are anticipated at least through
the mid-1980s in each of the three major markets--western: Europe,
Japan, and North America. Because of the high cost and
inflexibility of gas transportation, however, the capability of
the -narket to shift supplies from one region to another in
response to a disruption is much more limited, making consumers
more vulnerable to a supply cutoff.
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In Western Europe, the Netherlands will remain the largest
single supplier of natural gas and will be Europe's critical
source of surge capacity in the event of a disruption.
Substantial new supplies are expected to come from Algeria by
means of the recently completed Trar.smediterrarear. pipeline to
Italy if pricing issues can be resolved. Additional deliveries
of Soviet gas are likely to begin between 1985 and 1987, either
through spare capacity in- existing pipelines or the Siberian
pipeline when completed. Given the Soviets' need for additional
markets in Europe, it is likely that price competition will
prevail late into the-.1980s.
Rising gas requirements in Japan will have to be satisfied
by increasing LNG imports, largely from Indonesia, Abu Dhabi, and
Malaysia. If all of the LNG projects now under way in countries
supplying Japan are completed or, schedule, supplies to Japan
should begin to exceed demand around 1985.
Gas supply disruptions appear to pose a major threat only to
Western Europe through the late 1980s. Because of its ability to
switch fuels, Japan probably could withstand a major gas cutoff
if alternative oil supplies could be obtained. US gas imports
will remain a small share of supply.
Growing dependence on imported gas could leave Western
Europe dependent on Algeria, Libya, and the Soviet Union for
almost 40 percent of its gas needs by 1990. These three
suppliers could be providing as much as 70 percent of total
Italian gas supplies, 50 percent of French requirements, and more
than 30 percent of West German reeds. Under these circumstances,
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a gas supply disruption is potentially quite serious, especially
if it occurred.in winter when European gas use peaks at more than
'twice the summer level. Ever, given an unlikelihood that these
exporters woud act in concert, a cutoff by any one or more would
provide the remaining suppliers with considerable leverage that
could be used to political or economic advantage.
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