The Global Oil Situation

The Global Oil Situation


Oil is vital to the functioning of the global economy. The ‘energy crises’ of the 1970s and early 1980s were a result of very significant increases in the price of oil. The current price is at more than a 20-year high and it could have much further to go. If the price continues to rise, it could have a considerable impact on the global economy. A number of organisations have made predictions as to when peak global oil production will be reached. However, these forecasts vary widely.


small globe iconRecent price rises

The price of oil has risen from $10 (£5.75) a barrel in 1998 to more than $65 (£37.30) a barrel in late 2005. In October 2005, prices in some petrol stations in the UK reached £1 a litre. In just one day in October 2005, a week’s worth of fuel was sold when people feared a disruption to the supply because of possible fuel protests, such as blocking oil refineries and motorways. Memories of the fuel protests of September 2000 flooded back, when large-scale protests had a major impact on the country. Fortunately for consumers, the recent fuel protests were extremely muted compared to five years earlier and supplies of petrol were not interrupted.

The UK Treasury commented that all leading economies were being affected by high oil prices, predicting that:

  • If oil prices stayed at $65 (£37.30) a barrel, the UK economy would grow by 2 per cent a year.
  • However, an increase to $100 (£57.50) a barrel would see growth fall to 1.5 per cent.

The price of oil affects the cost of almost all other products and activities. The previous three global economic recessions were all strongly linked to a substantial increase in oil prices. Up to late 2005, the global economy had managed to ride out the price rises but some economists doubted that this could continue. Previous sharp and significant increases in the price of oil have been mainly the result of supply shocks (the OPEC oil embargo in 1973–74, the Iranian revolution in 1979 or Iraq’s invasion of Kuwait in 1990). The current high price situation is due mainly to rising demand. This means that prices are more likely to remain high although the level may fall back to a certain extent. Experts at Goldman Sachs predict oil prices to average out at $68 (£39) a barrel in 2006 and $60 (£34.50) for the next five years.

The main reasons for the recent rapid rise in the price of oil are:

  • The significant increase in the demand for oil – the rises in both world GDP and world oil consumption in 2004 were the largest for almost 30 years. Very high growth in demand in China, India, the USA and some other economies was impacting heavily on the rest of the world. Many emerging economies such as India and China subsidise oil, which encourages consumption.
  • Insufficient investment in exploration and development over the last two decades. The low oil prices for most of this period did not provide enough incentive for investment for the major global energy companies.
  • Problems in the Middle East centred on Iraq. Exports of oil from Iraq are well below potential because of terrorist attacks and the slow pace of reconstruction after the war.
  • Major buyers, particularly governments, stocking up on oil to guard against disruptions to supply.
  • The impact of Hurricane Katrina and other hurricanes on US oil production. In the Gulf of Mexico, 711 out of 819 oil platforms and gas towers were temporarily shut down as personnel were evacuated in the wake of Katrina. During this hurricane period, oil extraction in the Gulf dropped by 91.7 per cent. The Gulf supplies about 35 per cent of US domestic output. In September 2004, Hurricane Ivan reduced US oil output by 45 million barrels over six months.
  • Limited US refining capacity due to inadequate investment in recent decades. US refineries are ageing and thus require more maintenance. This, in turn, reduces capacity.
  • A lack of spare oil production capacity. In the past, Saudi Arabia has maintained a significant amount of spare capacity (wells it was not pumping oil from) to prevent global supply problems when supplies were interrupted in other producing countries. This spare capacity has declined to a 20-year low because of investment failing to keep pace with rising demand.

The Oil Depletion Analysis Centre based in London recently predicted that supplies of oil would be tight for the rest of this decade, even if all the major new exploration and drilling projects underway meet their targets. It takes several years to get new projects on stream. The International Energy Agency estimates the world will need to spend $3 trillion (£1.7 trillion) over the next 25 years to meet the predicted demand.

small globe iconGlobal patterns and trends

Figure 2 shows the change in daily oil consumption by world region from 1979 to 2004. The data shown here, and in the following four illustrations, is from the BP Statistical Review of World Energy from June 2005. After a fall in demand in the early 1980s to under 60 million barrels a day, global demand rose steeply to over 80 million barrels a day in 2004. The graph shows that the largest increase has been in the Asia Pacific region, which now accounts for 28.9 per cent of consumption. Only North America has a higher global share at 29.8 per cent. Of the latter, the USA accounts for 24.9 per cent. In contrast, Africa consumed only 3.3 per cent of global oil, behind South and Central America with 5.9 per cent.

The pattern of regional production is markedly different from that of consumption (see Figure 3).

In 2004, the Middle East accounted for 30.7 per cent of production, followed by Europe and Eurasia (22 per cent), North America (17.3 per cent) and Africa (11.4 per cent). Within the Middle East, Saudi Arabia dominates production, alone accounting for 13.1 per cent of the world’s total. Saudi Arabia is followed in order of importance by Iran, UAE, Kuwait and Iraq. The Russian Federation accounts for over half the total production of Europe and Eurasia.

Figure 4 illustrates the spatial distribution of proved oil reserves and the dominating position of the Middle East. In the period 1984–2004, proved reserves rose considerably but much more so in the earlier part of the period than in the latter part. The problem is that demand is increasing at a faster rate than proved reserves. In 2004, the Middle East accounted for almost 62 per cent of global proved reserves. The main countries contributing to the latter figure are: Saudi Arabia (22.1 per cent); Iran (11.1 per cent); Iraq (9.7 per cent); Kuwait (8.3 per cent); and United Arab Emirates (8.2 per cent). Europe and Eurasia held the second largest proved reserves with 11.7 per cent of the world’s total. The Russian Federation accounted for over half the latter figure.

Figure 5 shows the reserves-to-production ratio for the world from 1980 to 2004 and the situation for 2004 by world region. While the reserves-to-production ratio is 81.6 years in the Middle East, it is only 14.2 years in Asia Pacific and 11.8 years in North America. Not all organisations agree with these figures, a situation that will be discussed later in this case study.

Figure 6. Imports and exports of oil in 2004.

Figure 6 shows recent data for the import and export of oil by world region. Europe, the USA, China and Japan are the major importers while exports are led by the Middle East, the former Soviet Union and West Africa.

Economic development affects the relationship between GDP and oil usage. MEDCs use half as much oil per real dollar of GDP, as in the mid-1970s, due to:

  • Improved energy efficiency
  • A switch to other sources of energy
  • A shift from manufacturing to services.

Many of the fastest growing economies today are relatively inefficient users of oil. To produce one dollar of GDP, developing countries use more than twice as much oil as developed countries.

The US government’s Energy Information Agency predicts that the demand for oil will rise by 54 per cent in the first quarter of the twenty-first century. This amounts to an extra 44 million barrels of oil each day by 2025. Much of this extra demand will emanate from Asia. All estimates indicate that the Persian Gulf’s share of the oil trade will rise steadily over the next two decades and, along with it, the risk of terrorist attack and embargo by the key producing countries.






















Figure 1. Texaco marine petrol station on the river Amazon.
Figure 1.
Texaco marine petrol station on the river Amazon.
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Figure 2. Oil consumption by area.
Figure 2.
Oil consumption by area.
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Figure 2. Oil production by area.
Figure 3.
Oil production by area.
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Figure 4. Distribution of oil reserves in 1984, 1994 and 2004.
Figure 4.
Distribution of proved oil reserves in 1984, 1994 and 2004.
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Figure 5. The ratios of reserves-to-production.
Figure 5.
The ratios of reserves-to-production.
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small globe iconUS  dependence on oil

The USA consumes approximately one quarter of the global oil output but has less than 3 per cent of its proven reserves. The USA uses 50 per cent more oil per dollar of GDP than the EU because the relatively low price of oil in the USA results in very high per capita usage. Although petrol prices reached a surprising high of $3 (£1.70) a gallon in some US cities in late 2005, this was less than half the price in the UK and Germany. Of the 20 million barrels a day consumed in the USA (Figure 7), 25 per cent is used for transportation. However, the oil efficiency of US vehicles is at a 20-year low, a result of complacency in the period of low energy prices from the mid-1980s to the early part of the present decade.

The USA’s high dependence on oil leaves it vulnerable to supply shocks and also pushes prices higher for the rest of the world. The only realistic way to limit the demand for oil in the USA is to increase the tax on petrol substantially. However, it is unlikely that any American President would take such a big political risk with an electorate historically used to paying very low prices for energy.

The USA, gravely concerned about the political leverage associated with imported oil, began the construction of a Strategic Petroleum Reserve in 1977. The oil was to be stored in a string of salt domes and abandoned salt mines in southern Louisiana and Texas so they could be easily linked up to pipelines and shipping routes. The initial aim was to store one billion barrels of oil that could be used in the event of supply discontinuation.

When Hurricane Katrina disrupted supplies of Gulf Coast petroleum in 2005, the US government said it would consider lending oil from the Strategic Petroleum Reserve (SPR) to refiners that requested it. The loaned oil would be returned to the SPR when supplies got back to normal levels. The SPR currently holds 700 million barrels. Figure 8 gives details of loans from the SPR over the past decade.

Figure 8. Strategic reserve facts.

small globe iconChina: Rapidly rising demand

China alone has accounted for one-third of the growth in global oil demand since 2000. China passed Japan as the world’s second largest user of oil in 2004. Its average daily consumption of 6.63 million barrels is about twice its domestic production. This meant that China’s oil imports doubled between 1999 and 2004. However, oil consumption per person is still only one-fifteenth of that in the USA. As this gap narrows, it will have a considerable impact on global demand. The demand for oil in China is expected to increase by 5 to 7 per cent a year. If this occurs, China will take over from the USA as the world’s largest consumer of oil by 2025. China’s current share of world oil consumption is just under 8 per cent.

small globe iconThe North Sea

The North Sea is the largest new oil ‘province’ found since the Second World War. Between 1967 and 1974, eighteen oilfields were developed and the first oil was piped onshore in 1975. However, production is now past its peak. This occurred for the UK in 1999 at 137.4 million tonnes and for Norway in 2001 at 162.0 million tonnes. The 2004 figures were 95.4 and 149.9 million tonnes respectively.

small globe iconWhen will global peak oil production occur?

There has been growing concern in recent years about when global oil production will peak and how fast it will decline thereafter. For example, in the USA, oil production peaked in 1970. There are concerns that there are not enough large-scale projects underway to offset declining production in well-established oil production areas. The rate of major new oil field discoveries has fallen sharply in recent years. It takes six years on average from first discovery for a very large-scale project to start producing oil. The International Energy Agency expects peak production somewhere between 2013 and 2037, with a fall by 3 per cent a year after the peak. The United States Geological Survey (USGS) predicts that the peak is 50 years or more away. Its optimistic stance is largely due to rapidly rising estimates of recoverable oil in Canada. In 2003, the USGS moved Canada from twentieth position on the oil reserves list to second, with a figure of 180 billion barrels.

However, in total contrast, the Association for the Study of Peak Oil and Gas [ASPO] predicted at its conference in Berlin in 2004 that the peak of global oil production would come as early as 2008, stating ‘Fifty years ago the world was consuming 4 billion barrels of oil per year and the average discovery was around 30 billion. Today we consume 30 billion barrels per year and the discovery rate is now approaching 4 billion barrels of crude oil per year’. Figure 8 shows this relationship.

ASPO states that:

  • Of the 65 largest oil-producing countries in the world, 54 are past their peak production
  • By 2011, five more countries will reach peak production
  • Cantrell in Mexico, the world’s second largest oil-producing field, is expected to peak in 2006
  • By 2010 the following countries have the potential to produce more oil than they have ever produced before: Saudi Arabia, Iraq, Kuwait, UAE, Kazakhstan and Bolivia. These countries will have to cover the decline in 59 countries and the increased demand from the rest of the world.

If ASPO is correct and the oil peak is only a few years away, it will not allow time to shift energy use to alternative sources.

Figure 7. US oil demand 1970–2004.
Figure 7.
US oil demand 1970–2004.
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Figure 9. Crowded London petrol station.
Figure 9.
Crowded London petrol station.
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Figure 10. Comparison between the discovery and consumption of oil.
Figure 10.
Comparison between the discovery and consumption of oil.
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small globe iconTransportation alternatives to petroleum

The recent significant increase in the price of oil has yet again focused attention on alternative sources. Unfortunately, when the price of oil is relatively low, as it has been for much of the last two decades, such interest and attention fades. British Petroleum, the source of much of the data quoted above, has recently been using the advertising slogan ‘BP – Beyond Petroleum’.

In terms of alternatives to oil, a distinction can be made between those applicable to general energy supply and new sources relevant to transportation. For the latter, the following appear to hold the greatest potential:

  • Due to the high price of oil, biofuels are increasing in popularity as sources of power for trucks, cars and planes. In Brazil, all fuel sold to motorists is 22–26 per cent ethanol. Brazil is the world’s largest producer of ethanol, which is distilled from sugar cane. However, a new generation of cars (flex-fuel vehicles) can run on ethanol alone and this fuel is about half the price of the alternative at the petrol pumps. Brazil exports ethanol to countries such as Japan and South Korea as they start to diversify energy consumption away from oil. The USA is just behind Brazil in ethanol production (corn rather than sugar is the crop source). In Germany, ‘biodiesel’ from rapeseed is increasing in production. In over 30 countries, a variety of crops are now being grown for fuel. A recent Canadian report stated that biofuels have begun to pose the first serious challenge to petroleum-based fuel in a century.
  • Another alternative is unconventional hydrocarbons. Their main resource area is Canada’s tar sands. This is a massive potential resource but it is more technically difficult and expensive to convert into petrol than conventional oil deposits.
  • Autogas, a form of liquefied petroleum gas (LPG), is designed for use in specially-converted cars. Low taxes make it attractive but conversion costs are significant. Most LPG vehicles are exempt from the central London congestion charge.
  • Petrol-electric hybrid cars use petrol engines but boost fuel economy through the use of a small electric motor at low speeds, as well as electronics that capture the energy generated in braking. Sales are modest to date but the growth rate is encouraging. Toyota’s Prius leads the way in this development.
  • Conservation – there is strong evidence that government policies (minimum fuel consumption requirements, taxes on petrol, subsidies to public transport, congestion charges, etc.) can have a considerable impact on energy demand. However, environmentalists accuse governments of complacency during the low energy price era between the mid-1980s and the early years of the present decade.

small globe iconConclusion

While the present global oil situation is causing concern, it is not yet critical. However, this could change in just a few years, particularly if the pessimistic ASPO forecast of peak oil is correct or much closer than more optimistic projections. The world remains heavily dependent on oil, a resource where production is very spatially concentrated. However, the current high price has initiated a flurry of exploration in new potential areas, such as the Falkland Islands. The next few years will be very telling indeed. Conversely, a positive side effect of lower oil reserves (if this is in fact what occurs over the next decade or so) might be that the worst predictions of climate change would be forestalled as fuel use declines.












Figure 11. Refuelling of aircraft at Gatwick airport.
Figure 11.
Refuelling of aircraft at Gatwick airport.
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