ENERGY MARKET VULNERABILITIES IN THE 1980S

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00283R000300050008-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 62
• Document Creation Date: December 22, 2016
• Document Release Date: May 19, 2009
• Sequence Number: 8
• Publication Date: December 1, 1983
• Content Type: REPORT

Directorate of
Intelligence
'Tro
25X1
Y
OR SARK ON
II ' L
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Energy Market
Vulnerabilities
in the 1980s
DOE review
completed.
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11 11
GI 83-10279
December 1983
Copy 3 4 7
 1 -11 1!
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Directorate of
Intelligence
in the 1980s
Energy Market
Vulnerabilities
This paper was prepared by the Energy Issues
Branch. Office of Global Issues, with contributions
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Secret
GI 83-10279
December 1983
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 III "
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Energy Market
Vulnerabilities
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Key Judgments Energy use in non-Communist countries is expected to grow slowly through 25X1
Information available the balance of the decade, increasing by 20 million barrels per day oil
as of 25 October 1983 equivalent b doe to 112 million b/doe in 1990
was used in this report.
On the basis of our own analysis and a review of these
forecasts, we believe the present supply cushion, particularly for oil, will 25X1
gradually erode during the decade, increasing market vulnerability' to an
unexpected cutoff of supplies. Although overall OECD energy require-
ments will increase only marginally, the forecasts indicate that Japan and
Western Europe will remain dependent on imports for more than 80
percent and 40 percent of total requirements, respectively. While the
United States will import only about 15 percent of energy needs according
to these assessments, the US economy will remain vulnerable to art energy
increase. Oil consumption is expected to rise gradually to about 50; million
b/d by 1990 with demand for OPEC oil approaching 25 million b/d. The
forecasts suggest that at this level of demand surplus capacity will 25X1
approximate 6 million b/d, leaving the market with some cushion to cope
with a supply disruption. Should demand approximate 53 million b/d, as
our econometric model forecasts, there would be little spare capacity to
offset an unexpected disruption. In any event, oil will continue to supply
more than 40 percent of non-Communist energy needs, and Japan and
Western Europe will remain heavily dependent on imports to meet their oil
demand. 125X1
The forecasts indicate moderate growth in gas demand and ample supplies.
Gas consumption is expected to increase from about 18 million b/doe inl
1980-to less than 21 million b/doe in 1990. Still, the major gas-consuming
regions-Western Europe, Japan, and the United States-will become
increasingly dependent on imported natural gas. By 1990 Western-Europe
is expected to rely on imports for as much as 30 percent of total gas
requirements, with the bulk coming from the Soviet Union. The Europeans
have contracted for more-than-sufficient supplies to meet projected 1990
demand; the surplus, however, could delay or prevent development'of more
costly Norwegian gasfields needed to limit West European dependence on
non-OECD gas supplies after 1990. 125X1
The outlook for other fuels in non-Communist countries indicates that: I
? Coal consumption will approximate 25 million b/doe by 1990; roughly i 80
percent of this consumption is expected to occur in the OECD.
? Nuclear power consumption will grow 5 million b /doe during the decade,
rising to 8 million b/doe in 1990.
Secret
GI 83-10279
December 1983
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 Even though the forecasts suggest that energy supplies should be adequate
for future demand, continued high reliance on imports will leave the
industrial countries vulnerable to energy supply cutoffs. Disruptions have
occurred frequently in the past, and we believe the probability that some
sort of future disruption will occur is quite high, particularly for oil and
natural gas. We estimate that the volatile Persian Gulf region, for example,
will account for 20 million b/d of production capacity in 1990-more than
one-third of total non-Communist oil supply availability. Indeed, recent
threats by Iran to close the Strait of Hormuz highlight the vulnerability of
the region's oil supplies. Our analysis of a worse-case scenario, such as the
closure of the strait, indicates that with a 6-million-b/d net oil supply
shortfall, oil prices would more than double and GNP loss in the OECD
countries would amount to about 2.8 percentage points. In addition, rising
prices following a major prolonged interruption could have severe repercus-
sions on the international financial system, particularly in the near term
because of existing LDC payment problems. In the case of natural gas, in-
creased dependence on imports from the Soviet Union and Algeria raises
the risk of a natural gas disruption in Western Europe. Because the Soviet
Union is a net exporter of both oil and natural gas, Moscow is a major ben-
Most long-term forecasters have had limited success in predicting future
events, and we believe there is a substantial risk that the present forecasts
overestimate the supply cushion available to the market late in the decade.
We believe lower oil and energy prices will dampen conservation and
substitution while boosting economic growth and energy demand. At the
same time, prospects of weak prices are already discouraging investment in
new high-cost supply projects. The falloff in investment will affect energy
supply availability later in the decade, given the long leadtimes of many of
these projects. Lower demand expectations are already changing the
outlook for future oil supply availability in OPEC, which currently is
suffering from an abundance of unused capacity. Most importantly, Saudi
Arabia has decided to reduce its operating capacity by 2 million b/d to 8
million b/d.l
We believe that a combination of such trends could reduce the oil supply
cushion by 3-4 million b/d below levels currently estimated in other
forecasts. Moreover, we expect that by 1985 only a small part of that
supply cushion-perhaps 1 million b/d-will be located outside the volatile
Persian Gulf region. And much of that could be unavailable to help
stabilize the market during a disruption because it will be located in Libya.
While these considerations in and of themselves do not suggest that we
should expect upward price pressures to develop late in the decade, our
analysis indicates that the market will become vulnerable to even minor
supply disturbances.
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Contents
Page
Key Judgments ,.. iii
Introduction 1
Current Oil Market Situation I
The Outlook to 1990 3
Assessing the Future: The Methodology 3
Energy Demand 4
The Resource Base 9
Energy Supplies 9
The Oil Market 9 '
Natural Gas Markets 12
Coal and Nuclear Prospects 14
Market Vulnerabilities 15
Near-Term Market Risks 15,
Implications of Import Dependence 161
Supply Disruptions 16'
Losing the Supply Cushion 171
Other Risks 17'
An Oil Price Weakness Scenario 20'
Supply Disruption Scenarios and Impacts 20'
Oil Cutoff 20;
Gas Disruptions 22
Simultaneous Oil and Natural Gas Disruption 23
Benefits to the USSR 24,
The Importance of Policy 24,
Appendixes
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 Energy Market
Vulnerabilities
in the 1980s P
During the past decade, two major disruptions in oil
supplies-the Arab oil embargo in 1973 and the
Iranian revolution in 1978-sparked massive changes
in the world economy and sent governments scram-
bling to devise policies to promote energy security. In
the upheaval following the ninefold increase in oil
prices during the 1970s, economic growth slowed
considerably, unemployment rose, and inflation in-
creased sharply. At the same time, however, the rapid
rise in oil and energy prices touched off a wave of new
investments in energy conservation that, coupled with
sluggish economic growth, caused a sharp decline in
By early 1983 the drop in oil demand was so severe
that members of OPEC were forced to initiate a first-
ever reduction in the price of the benchmark crude.
This event and continued weakness in the demand for
oil and energy have prompted some observers to
herald an end to the energy crisis. Even though
structural changes continue to reduce energy needs of
the United States and its allies, we believe energy
remains vital to the economic interests of these coun-
tries. Oil still supplies about one-half of non-Commu-
nist energy requirements, and nearly 70 percent of
non-Communist oil reserves are located in the volatile
Middle East. As long as the United States and its
allies must depend on imports for oil and other fuels,
the threat of supply disruptions will continue to make
Non-Communist oil consumption should approximate
44 million barrels per day (b/d) this year, some
2 percent below 1982 levels. Demand for OPEC oil is
now about 19 million b/d, roughly 8 million b/d
below available capacity and nearly 13 million b/d
less than peak 1979 production levels. Increased
production in non-OPEC countries-mainly Mexico,
the United Kingdom, and Norway-have added to
available capacity. At the same time, the recession
and conservation gains have held down oil consump-
tion. OPEC producers have attempted to adjust to
sharply declining revenues that have resulted from
dwindling demand for their oil. Earlier this year,
market pressures forced the OPEC cartel to reestab-
lish production quotas and lower the benchmark crude
25X1
Most OPEC members have thus far largely abided by
the cartel's production and pricing guidelines. 'Recent
gains in OPEC oil production have signaled a return'
to more stable conditions in the oil market. Whether25X1
the organization can prevent a further declinelin
nominal oil prices during the coming year or so,
however, will depend on several factors, the most
important being a recovery in oil consumption.[
Barring a major supply disruption, oil market'condi-
tions will remain soft in the near term. Even though
OPEC was successful in holding the line on prices
through yearend, the cartel will continue to face a
number of problems during the next year or so. One
major hurdle will be the manner in which OPEC
members allocate production above the present pro-
-1 1
25X1
duction ceiling of 17.5 million b/d. Because of press=
ing financial needs, we believe there will be a great
temptation.to produce too much too soon. Indeed, if
consumption continues to fall, major oil companies 25X1
would accumulate excess inventories and cause a
return to the weak market conditions that prevailed in
early 1982 and 1983. Should the Iran-Iraq war end'
unexpectedly in the coming months, attempts by those
two countries to raise production would also sharply
increase downward price pressures. 25X1
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Assumptions about economic growth and oil prices,
as well as future conservation and substitution
trends, are critical to long-term energy market pro-
jections. In assessing recent energy market forecasts,
we concluded that key assumptions made by the
Economic Growth. Most forecasts assume average
annual real economic growth of 2.7 to 3.4 percent
(2.9 percent midrange estimate) during 1981-90 for
the non-Communist world. Projections of economic
growth for the OECD countries range from 2.2 to 2.8
percent annually, with Japan and the United States
expected to experience stronger growth than the West
European countries. To meet projections of 2.6-
percent average annual growth for the decade, GNP
growth in the combined OECD economies would have
to exceed 3 percent per year for the rest of the 1980s:
Economic growth in the developing countries is ex-
pected to average 4 percent per year for the 1980-90
Prices. Most recent energy supply/demand projec-
tions assume declining real oil prices to 1985 and flat
or moderately increasing real oil prices to 1990.
Although forecasters agree on this general trend in
crude oil prices, they point out that the price path
may not be a smooth one. On the basis of past
experience, forecasters believe sharp oil price in-
creases are more likely to occur as a result of a
supply disruption than growth in oil consumption.
Exchange rate fluctuations can also have a consider-
able impact because crude oil prices are denominated
in dollars. Most forecasters do not, however, factor
exchange rate fluctuations into their long-term fore-
casts. In current projections, the forecast of the - '
OPEC benchmark oil price, expressed in constant
1982 dollars, ranges from $22 to $31 in 1985 and $28
to $43 in 1990. The wide range in the oil price
forecast is attributable, at least in part, to attempts
by some forecasters to consider alternative demand
and price scenarios. The midrange estimate of the
OPEC benchmark oil price in 1990 approximates $30
Assumptions about other energy prices are less pre-
cise, but in general coal and natural gas prices are
expected to move in line with oil prices. While we
believe the trend in crude oil prices will largely
determine the pattern for prices of alternative fuels,
we expect natural gas prices to rise relative to the
price of oil products because of the increase in
residential gas use, where gas commands a higher
price. Coal prices will vary among major consuming
regions because of differences in production and
transportation costs; surplus production capacity and
flat real oil prices are expected to keep coal prices
Conservation and Substitution. Assumptions about
future conservation and substitution trends are also
critical to long-term energy demand projections.
Most analysts expect to see continued gains in effi-
ciency during the decade, albeit at a slower rate than
25X1
growth in energy demand in the long term because the 25X1
effect of some past investments may take 20 years to
be fully felt. Other efficiency improvements, however,
might erode as oil prices decline. Residential con-
sumers may turn up thermostats, abandon car pools
and mass transit travel, and increase miles driven in
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Assessing the Future: The Methodology
To assess energy market conditions through the re-
mainder of the decade, we examined an array of long-
term forecasts completed during the past nine months.
Our survey included forecasts by major oil companies,
consulting firms, financial institutions, and govern-
ments (see. appendixes). We examined the forecasts for
reasonableness of assumptions and internal consisten-
cy. In deriving our base or summary case, we attempt-
ed to represent the consensus opinion, tempered when
necessary by our judgment. At times, even the range
of forecasts did.not accommodate all reasonable I
possibilities and, in these cases, alternative estimates
are presented and discussed. In other instances, th'e
forecasts did not present detailed estimates for certain
fuels or regions. In these cases-particularly for
electricity and oil production in individual LDCs we
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 The CIA's Linked Econometric Model: Estimates of
Non-Communist Oil Consumption
The 1,800-equation linked econometric model is an
annual model based on interrelated macroeconomic
and energy behavior for the seven major industrial-
ized countries individually and the smaller OECD
countries as a group. OPEC demand and other LDC
demand are also included, and the country and
subgroup models are linked together by trade, includ-
Each OECD submodel calculates energy demand
based on historical relationships with real GNP and
the real end-use energy price. Real end-use energy
prices are weighted average prices of petroleum, gas,
coal, and electricity deflated by the GNP deflators.
The income elasticity, or ratio between energy de-
mand growth and GNP growth when energy prices
remain constant, is assumed to be 1.0 in the OECD
countries. The long-run price elasticity-which deter-
mines the impact of energy price changes on energy
demand-ranges from -0.5 to -0.6 in the OECD
countries with up to an eight year lag. The shares in
total demand by individual fuels-oil, natural gas,
coal, and electricity-are generally determined by
the prices of individual fuels relative to the end-use
Energy Demand
Recent long-term projections of energy supply and
demand indicate only moderate growth in non-Com-
munist energy demand through 1990 (see table 2).
Non-Communist energy consumption is expected to
rise at an average annual rate of 1.7 percent for the
decade-from 94 million barrels per day oil equiva-
lent (b/doe) in 1980 to about 112 million b/doe in
1990. Given the worldwide economic recession and
the accompanying decline in energy demand early in
the decade, however, much higher energy demand
growth of about 2.3 percent per year is expected from
1985 to 1990. Most of this growth is expected to be
met by nonoil fuels, primarily coal and nuclear power.
energy price. Estimates of OPEC and LDC oil de-
mand are based on historical relationships between
oil demand, GNP, and oil prices; judgmental factors
are also included
Oil supply availability, including OPEC and non-
OPEC production as well as net Communist exports
to the non-Communist world, is determined judgmen- 25X1
tally and exogenously imposed on the model. Energy
supplies in OECD countries for hydropower and
nuclear power are also exogenous variables based on
current capacity plans. In some cases-coal in the
United States and natural gas in Canada, for exam-
ple-supplies are not constrained and are assumed to
The model calculates a demand path based on
growth and price assumptions. As oil demand reaches
available supply, the model determines a higher
market-clearing price and feeds back the effects to
determine new, lower levels of economic growth. The
model is also used to estimate the impacts of oil
supply disruptions and the sensitivity of energy de-
Coal's share of total non-Communist energy con-
sumption is expected to increase from 19 percent in
1980 to 21 percent by 1990. Nuclear energy and
hydropower combined are expected to meet 15 per-
cent of non-Communist primary energy requirements
by the end of the decade, compared with 10 percent in
1980. Although consumption of natural gas is project-,
ed to increase during the period, forecasters expect
gas to maintain its 19-percent share of total energy
demand through the 1980s. In sharp contrast to all
other fuels, oil's share of energy consumption is
projected to decline, falling from 52 percent in 1980
to 44 percent by 1990F I 25X1
 II
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Table 2
Non-Communist World: Summary of
Energy Supply and Demand Projections
1980
1982-
1985
??
1990
Range b
Midrange
Estimate
Range b
Midrange
i Estimate
Total non-Communist energy
consumption
94
92
97.4-112.2
99.7
101.6-126.5
111:5
Non-Communist oil
consumption
49.5
45.5
44.0-50.8
47.0
46.7-52.8 -
4915
I I
OECD
38.0
33.7
32.1-38.7
34.2
32.3-39.0
34!6
Rest of non-Communist
world
.11.5
11.8
11.8-13.2
12.8
13.5-15.6
14!9
I
Non-Communist oil supply
49.9
44.2
44.2-51.1
47.6 .
46.5-53.1
4915
OECD
14.8
15.3
13.9-15.9
15.6
12.2-15.6
14!2
OPEC
27.7
19.9
18.6-25.8
22.0
21.6-27.7
2414
Other LDCs
5.6 .
6.9
8.0-8.7
8.4
9.1-10.2
9!5
Centrally planned
economies' exports
1.2
1.5
0.8-1.8
1.0
0.0-1.8
0:8
I
Refinery gain
0.6
0.5
.0.6-0.8
0.6
0.6-0.7
016
Stock change , ,
0.4
-1.3
0.0-1.3
0.6
-0.2 to 0.5
0.0
US total energy consumption
37.5
34.9
34.2-37.9
36.5
35.4-41.4
3817
Oil
17.0
15.2
14.4-18.0
15.4
14.4-17.4
1513
Nonoil
20.5
19.7
18.0-23.0
21.1
20.6-25.8
231.4
Net imports
Oil
6.2 '
4.2
4.4-8.0
. 4.8
4.4-7.7
5.5
Gas
0.4
`0.5
0.1-1.0
0.7
0.0-1.6
. 1l0
Coal
-1.2
-1.3
-0.9 to -2.6
-1.5
-0.9 to -3.3
-2.5
West European total energy
consumption
25.6
243
.
25.3-28.4
26.2
27.4-31.2
28.7
Oil
13.3
11.7
11.7-13.0
12.0
11.7-13.5
12.2
Nonoil
12.3
12.6
13.3-15.4
14.2
14.7-18.3
16.4
Net imports
I
Oil
10.4
8.7
8.1-9.5
8.4
8.4-10.5
9.2
Gas
0.4
0.4
0.8-1.1
1.0
0.8-2.7
' 1U
Coal
1.1
1.0
1.0 to -1.5
1.2
- 0.3-1.8
- 11.5
Japanese total energy
consumption
7.5
7.3
.. 7.1-8.1
7.6
7.6-9.5
8.4
I
Oil
Nonoil
Net imports
Oil
4.5
4.1-5.0
4.5
3.9-5.4
4.7
Gas
0.4
0.6-0.7
0.6
0.6-1.0
J 0.9
Coal
1.0
1.1-1.2
1.1
1.2-1.4
11.4
25X1
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secret
The consumer response to the 1979/80 oil price
increase has been much greater than generally had
been expected. Oil consumption in the OECD coun-
tries dropped by about 20 percent or nearly 7 million
b/d from 1979 to 1982. During the same period,
energy consumption in the industrialized countries
fell by 8 percent or roughly 7 million b/doe. Although
slower economic growth affected demand, most ana-
lysts believe increased conservation was the main
factor behind the decline. The ratio of energy con-
sumption to GNP, a yardstick of conservation, de-
clined at an average annual rate of 3.6 percent from
1979 to 1982, while GNP rose at an average annual
rate of 0.7 percent. By 1982 it took 3.4 barrels of oil
equivalent to produce $1,000 of GNP (1980 dollars)
The 7-million-b/d decline in oil consumption reflects
a combination of price-induced conservation, substi-
tution of other forms of energy for oil, and slower
economic growth. Consumers directly cut oil use and
accelerated investment in energy saving devices. In
addition, many large consumers such as electric
utilities switched to alternative energy sources in-
cluding coal, hydropower, and nuclear power. Nonoil
energy supplies increased by about 700,000 b/doe or 2
percent in the four years following the oil price
increases of 1979 and now account for half of the
OECD's energy requirements. As a result of conser-
vation and substitution, the ratio of oil consumption
to economic activity in the OECD countries has
dropped by 20 percent since 1979.
The United States, Canada, Ja and Fra= Italy, the United
Kingdom, and West Germany.
Analysis of energy data indicates that the 1979/80 oil
price runup had a more pronounced impact on conser-
vation than the 1974 price increase (see figure 1):
? Continuing effects of earlier price increases and
structural shifts in industrial output contributed to
efficiency gains.
? Although crude prices rose more in percentage
terms in 1973/74, the absolute oil price increase
was substantially larger in 1979-$16 per barrel
compared with $8 per barrel.
? Because of earlier price increases, crude oil now
constitutes a larger share of final product prices
than in the early 1970s.
? Governments have relaxed price controls and al-
lowed a more complete passthrough of crude oil
Led by falling real oil prices in the United States,
however, the real energy price to final consumers in
the seven major industrialized countries fell by about
1 percent in 1982, while the combined Big Seven a oil
price fell 5 percent (see figure 2). The drop in real
crude oil prices slowed the rate of conservation in
1982. Moreover, lower oil prices and the continuing
recession reduced the competitive advantage of other
fuels because downward movement in other energy
prices lagged the oil price decline. Future substitution
patterns will hinge on the price competitiveness of
fuels to users in the major sectors. Preliminary data
indicate that prices of natural gas in several major
markets have started to flatten or decline in recent
months, and we expect other real energy prices also to
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Figure 1
OECD: Energy/GNP and Oil/GNP Ratios, 1973-82
I I I I I I I I I I I I I I I I I I I Ill 1111.1\' I I I I I I I I I 1111 III 111
1973 75 80 82 1973 75 80 82 1973 75 80 82 1973 75 80 82 1973 75 80 82
Figure 2
Big Seven: Real Energy Price Trends, 1978-82
Japan I
West Germany
Canada
120 20
Electricity
Coal
1
1978
-Weightedverage.
b Weighted average of real retail oil prices.
I I I 1 1
1978 79 80 81 82
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 Figure 3
World Energy Reserves, 1983
oil
670 billion barrels
Gas Coal
540 billion barrels of oil equivalent 3,400 billion barrels of oil equivalent
OECD
9.2
OECD
15.9
United States
4.4
United States
6.7
Other
4.8
Canada
3.2
Communist Countries
12.7
Other
6.0
USSR .
9.4
Communist Countries
42.5
Other
3.3
USSR
41.0
Middle East
55.1
Other
1.5
Saudi Arabia
24.2
Middle East
25.5
Kuwait
9.6
Iran
16.0
Iran
8.3
Saudi Arabia
3.9
Other
13.0
Other
5.6
Other
23.0
Other
Mexico
7.2
Algeria
Libya
3.2
Mexico
Venezuela
3.2
Other
Other
9.4
OECD
45.8
United Sta}es
27.8
United Kingdom
6.5
Australia
5.3
West Germany
5.0
Other
1.2
Communist Countries
46.6
USSR
24.1
China
14.4
Poland
4.5
Other
3.6
Other
7.6
South Africa
3.7
Other
3.9
 I !I
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I I
Energy demand is projected to increase significantly
faster in the developing countries than in the OECD
countries because of expectations of higher economic
growth, more rapid population increases, and the
growing tendency for energy intensive industries to
migrate to the LDCs. OECD demand is expected to
increase slowly as the effects of past conservation
investments and long-term structural changes in ener-
gy use continue to reduce energy requirements per
unit of economic output. By 1990 OECD's share of
non-Communist energy demand is expected to decline
to about 76 percent, compared with a share of 85
The Resource Base
The size and location of energy reserves vary among
fuels, according to industry estimates. Proved reserves
of all fuels, however, appear adequate to sustain
present rates of consumption well into the next
century:
? Proved world oil reserves approximate 670 billion
barrels, equal to more than 30 years of supply at
current rates of consumption. More than half of
total world oil reserves are in the Middle East and
another 13 percent rests in Communist countries
(see figure 3).
? World gas reserves approximate 540 billion barrels
oil equivalent, equal to more than 50 years at
current consumption levels. Gas reserves are also
found predominantly in politically sensitive areas of
the world with Communist countries and the Mid-
dle East containing over two-thirds of proved world
gas reserves. OECD countries-which account for
more than half of world consumption-contain only
about 16lpercent of the world's reserves.
? World coal reserves are sufficient to last more than
225 years at current rates of consumption. More-
over, OECD countries contain nearly half of proved
levels. Producing-country tax policies also influence
company investment decisions. In general, forecasters
believe the proper investment climate and government
policies exist to ensure development of supplies suffi-
cient to meet projected demand requirements. The
supply situation will vary, however, among fuels and
for each major consuming region. None of the supply/
demand forecasts assumes any supply disruptions in I 25X1
I I I
Demand Projections{ Inon-
Communist oil consumption range from 44 to 51
million b/d,in 1985 and 47 to 53 million b/d in 1990
(see table 3). Although we believe that our midranges
consumption estimate of about 47 million b/d in 1985
and 50 million b/d in 1990 is a reasonable base case
the wide range in the forecasts indicates the considers 25X1
able uncertainty inherent in predicting future oil
25X1
25X1
All the projections we examined indicate that oil
consumption in the OECD countries will be stagnant
for the balance of the decade. Consumption estimates
for OECD in 1990 cluster at around 35 million b/d,l
some 3 million b/d less than consumption in 1980 and
only about I million b/d above depressed 1982 levels:
? US oil consumption is projected to recover to about
15.4 million b/d in 1985, then decline to.15 3
million b/d in 1990.
? West European oil consumption is expected to in-
crease moderately during the decade to 12 million
b/d in 1985 and to 12.2 million b/d in 1990.
? Little or no growth is expected in Japanese oil
consumption to 1985, but forecasters projecta slight
increase in the late 1980s with consumption growing
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1 .1
Energy Supplies
While the resource base is ample, translating reserves
into production will be the key in determining supply
availability. Development of supply capacity depends
largely on expectations of future demand and price
 Table 3
Non-Communist Oil Supply and Demand
Range
Midrange
Estimate
Range
Midrange
Estimate
Non-Communist consumption
49.5
45.5
44.0-50.8
47.0
46.7-52.8
49.5
Total OECD
38.0
33.7
32.1-38.7
34.2
33.0-39.0
34.6
United States
17.0
15.2
14.4-18.4
15.4
14.5-17.4
15.3
Western Europe
13.3
11.8
11.7-13.0
12.0
11.7-13.5
12.2
Japan
5.0
4.5
4.1-5.0
4.5
3.9-5.4
4.7
Canada
1.9
1.6
1.2-1.9
1.6
1.2-2.0
1.6
Other
0.8
0.7
0.7-0.8
0.7
0.8-0.9
0.8
Total LDCs
11.5
11.8
11.8-13.2
12.8
13.5-15.6
14.9
OPEC
2.9
3.2
3.1-3.8
3.7
3.2-5.0
4.8
Non-OPEC
8.6
8.6
8.3-9.5
9.1
9.0-10.9
10.1
Supply
49.9
44.2
44.2-51.1
47.6
46.5-53.1
49.5
Total OECD
14.8
15.3
13.9-15.9
15.6
12.2-15.6
14.2
United States
10.1
10.2
9.1-10.1
10.0
8.0-10.1
9.2
Canada
1.7
1.5
1.3-1.6
1.5
1.0-1.7
1.4
Western Europe
2.5
3.2
3.0-3.8
3.6
2.8-3.6
3.1
Other
0.5
0.4
0.4-0.7
0.5
0.5-0.7
0.5
Non-OPEC LDCs
5.6
6.9
8.0-8.7
8.4
9.1-10.2
9.5
Of which:
Mexico
2.1
3.0
3.3-3.7
3.5
3.5-4.5
4,1
Refinery gain
0.6
0.5
0.6-0.8
0.6
0.6-0.7
0.6
Net centrally planned
economies' exports
1.2
1.5
0.7-1.8
1.0
0.3-1.8
0.8
Total non-OPEC supplies
22.2
24.2
23.4-26.4
25.6
23.8-27.5
25.1
Demand for OPEC oil
27.7
19.9
18.6-25.8
22.0
21.6-27.7
24.4
Inventory change
0.4
-1.3
0.0-1.3
0.6
-0.2-0.5
0.0
According to the forecasts, more than 75 percent of
the growth in non-Communist oil consumption from
1982 to 1990 is expected to occur in the developing
countries, particularly the oil-producing countries. Oil
demand growth is also projected to be strong in the
non-oil-producing LDCs, where a lack of infrastruc-
ture and funds to support investment in alternative
energy sources will constrain oil substitution efforts.
Total LDC oil demand is projected to increase about
3 percent per year, rising to 12.8 million b/d in 1985
and 14.9 million b/d in 1990. About half of the
3-million-b/d increase in total LDC oil demand dur-
ing the period is expected to occur within OPEC,
where consumption is projected to approximate 3.7
million b/d in 1985 and 4.8 million b/d by 1990
compared with consumption of 3.2 million b/d in
 II
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Supply Outlook Non-OPEC Supplies. Most forecast-
ers expect non-OPEC supplies including net Commu-
nist exports and refinery gain to rise through 1985,
peaking at 25.6 million b/d and remaining near that
level through 1990. Most of the increased production
during the decade is expected to occur in Mexico and
other developing countries. Oil production in the
North Sea should increase to a peak of 3.2 million b/d
in 1985 before falling sharply in 1990 as substantial
declines in UK production more than offset gains in
Norwegian oil output. Oil production in most other
developed countries is also projected to decline by
1990 as are net Communist exports:
? Estimates of US production range from 9.1 million
to 10.1 million b/d in 1985 and 8.0 million to 10.1
million b/d in 1990. Although there is a wide range
in the projections, the consensus opinion has US oil
production declining by I million to 1.5 million b/d
during the decade to about 9 million b/d in 1990.
? Estimates of Canadian oil production cluster at
around 1.5 million b/d in 1985 and 1.6 million b/d
in 1990. These estimates assume that the disputes
between Ottawa and the provinces that have slowed
development of promising frontier areas will be
resolved. Otherwise, Canadian oil production proba-
bly will approximate 1.4 million b/d in 1990.
? West European oil production is projected to peak
at 3.6 million b/d in 1985 then decline to 3.1 million
b/d in 1990. All of the increase through 1985 is
expected to occur in the North Sea, but by 1990
increased production in Norway and Denmark will
be insufficient to offset declines in West Germany,
France, Italy, and the United Kingdom. Crude oil
production in the United Kingdom is projected to
fall from about 2.6 million b/d in 1985 to nearly 1.6
million b/d by 1990.
In general, most projections indicate that oil
production in the non-OPEC LDCs will increase
during the decade, rising to roughly 8.4 million b/di in
1985 and 9.5 million b/d by 1990. About 40 percent
of this increase is expected to occur in Mexico, where
forecasters estimate production at around 3.5 million
b/d in. 1985 and 4.3 million b/d in 1990. While we
expect Mexican production to grow substantially dur-
ing the decade, we believe that production could be' as 25X1
in
much as 200,000 b/d less-
1990 because the poor quality of onshore reserves will
limit Mexico's ability to offset declines in older
producing areas. In addition, financing problems aI `25X1
soft oil demand are delaying investment in new
offshore capacity that will be needed to achieve the
higher estimates of output.
According to our analysis, only a few other developing
countries will show significant increases in oil produc-
tion in the rest of this decade. Brazil and Angola will
each add more than 100,000 b/d to their output fr om
1982 to 1990, and we expect Indian oil production) to
increase by about 200,000 b/d during the balancelof
the decade. The Ivory Coast, Malaysia, and Egypt are
each expected to show an. increase of 50,000 b/d or
less from 1982 to 1990, and oil production in other
LDCs is expected to peak around. 1985. On balance,
our assessment of oil supplies available from develop-
ing countries in 1990 is about 500,000 b/d below the
midrange industry estimate derived from current fore-
casts. casts. In our judgment, the combined prospects of
moderate growth in oil consumption and flat real oil
prices will discourage exploration and investment in
Third World areas that may be perceived as high risk.
? Net Communist oil exports are also projected to
decline during the 1980s. Although estimates vary,
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 OPEC Supply Availability. Lower oil revenues have
already led to substantial cutbacks in spending on
development and maintenance of available capacity in
OPEC countries. As well as having less money to
invest, oil companies and producing-country govern-
ments are discouraged from adding production capac-
ity for oil that forecasts indicate will not be needed.
As a result, most oil companies have trimmed their
projections of future OPEC supply availability and
now expect most of the anticipated gains in available
capacity from Iran and Iraq in a postwar environment
to be partly offset by erosion in other producers.
Given the demand outlook, we believe OPEC's avail-
able capacity in 1990 probably will be on the order of
Surplus capacity in OPEC will be increasingly con-
centrated in the Persian Gulf region. On the basis of
industry demand forecasts, we expect that by 1985
only about I million b/d of excess capacity will be
located in OPEC producers outside the Persian
Gulf-down from nearly 3 million b/d at present.
Much of the remaining surplus in several years will be
in Libya and could be unavailable to counter a supply
disruption elsewhere.)
In the Persian Gulf, an end to the Iran-Iraq war
would lead to an increase in production capacity in
these two countries as they attempt to rebuild their
economies. Within a few years after the war, Iraq an d
Iran combined could have about 8 million b/d of
capacity. The reemergence of Iraq, in particular,
would reinforce pressure on other producers to restrict
oil sales-especially Saudi Arabia. The Saudis al-
ready have decided to reduce operating capacity by
about 2 million b/d to 8 million b/d, partly by
"mothballing" certain equipment. Other Persian Gulf
states with surplus capacity-such as Kuwait and the
United Arab Emirates-have taken similar steps to
save money. Outside the Persian Gulf, Venezuela has
drastically scaled down development plans for its vast
Orinoco heavy crude reserves, and other producers are
taking similar cost-saving measures that will postpone
Demand for OPEC Oil: Market Implications.
Despite the outlook for lower capacity in OPEC,
industry forecasts indicate that capacity will be ample
to cover the range of projected demand for OPEC oil
through 1990. Based on estimates of non-Communist
oil demand and non-OPEC supply availability, de-
mand for OPEC oil will rise gradually during the
remainder of the decade and range from 20 million to
26 million b/d (22 million b/d midrange estimate) in
1985 and 22 million to 28 million b/d (24-25 million
b/d midrange estimate) in 1990. While this outlook
implies surplus available capacity of about 6 million
b/d for the midrange case in 1990, only about 2
million b/d would be surplus should oil consumption
Natural Gas Markets
Recent forecasts project non-Communist natural gas
consumption to increase from about 18 million b/doe
in 1980 to 18.4 million b/doe in 1985 and 21 million
b/doe by 1990. Although the developing countries'
share of non-Communist gas demand is expected to
remain relatively small compared to that of the
OECD, more than half of the increase in non-
Communist consumption through the rest of this
decade is expected to occur in the LDCs. LDC gas
consumption is projected to increase 6 to 7 percent per
year to about 4.6 million b/doe in 1990. Most of this
increase is expected to occur in the oil-producing
countries. As with forecasts of oil demand, projections
for gas demand growth in the developed countries
have been scaled back from year earlier levels. Most
forecasters now project gas demand growth in the
OECD of about 2.3 percent per year for the rest of the
1980s. Even with these revised growth estimates,
however, the OECD countries are still expected to
account for about 80 percent of non-Communist as
consumption in 1990.
The three major consuming OECD regions-Western
Europe, Japan, and North America-are separate
natural gas markets in terms of consumption trends,
major sources of natural gas supplies, and import
dependence (see table 4). During this decade, both
Western Europe and Japan are expected to experience
stronger growth in gas consumption than North
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Table 4
International Natural Gas Trade
by Major Consuming Region, 1990
Western
Europe
Midrange
Estimate
Japan
Midrange
Estimate
North
America
Midrange
Estimate
Domestic production
3.2 ?
NEGL
10.2
Net import require-
ment
1.1
0.9
1.0 b
Contracted supplies
Soviet, OPEC, and Far
East exporters
Maximum
0.44
Libya
0.05
USSR
0.7-0.8
Existing
0.4
United Arab Emirates
0.055
Brunei
0.13
Indonesia
0.385
Malaysia
0.155
Australia
0.155
North American
exporters
Supply gap
-0.1 to
-0.02
-0.06
-0.08,
Note: I billion cubic meters equal approximately 16,400 b/doe.
est European production have increased
from forecasts o last year probably because of expected increases
in Dutch production as export policies are liberalized. Estimates of
UK gas production have also increased slightly.
b US import requirement only.
c Algerian contract estimates do not include Spain as contracts are
being renegotiated.
a Under US regulatory review.
. Soviet contract estimates exclude any Soviet gas from Urengoy
for Italy as volume probably will be renegotiated.
r Potential.
s Volumes currently authorized for export.
h US/Mexican gas import contract has no specific term but will
remain in force subject to gas availability and the discretion of both
seller and buyer.
i Considering currently licensed exports only, potential US shortfall
in 1990 could be as high as I I billion cubic meters (0.18 million
b/doe) if midrange gas demand estimate is accurate and Algerian
liquefied natural gas deliveries cease.
Estimates place West European gas consumption at
approximately 4 million b/doe in 1985 and 4.3 million
b/doe in 1990. The decline in West European gas
consumption from 3.6 million b/doe in 1980 to 3.3
million b/d in 1982 means that forecasters expect gas
demand growth in Western Europe to average about
3.0 percent per year from 1982 to 1990. All major
countries except the United Kingdom are expected to
register substantial increases in gas use, although a
lack of infrastructure could moderate gas demand
growth in Italy in the early years.
Projections of indigenous gas production in Western
Europe hover at around 3 million b/doe in 1985 and
3.2 million b/doe in 1990. These production estimates
are more optimistic than forecasts of a year ago,
largely because of industry expectations that Dutch
gas production in 1990 will be higher than previously
anticipated. The Hague has already given the authori-
zation to expand gas exports because of increased
reserves and lower projections for domestic consump-
tion, although specific volumes have not been formal-
ized. Estimates of UK gas production have also
increased slightly in view of recent North Sea tax
According to the midrange consumption and produc-
tion projections, Western Europe will require net
natural gas imports of 1.1 million b/doe in 1990, or
about 20 percent less than the 1990 import require-
ment anticipated last year. Supply contracts with the
USSR, Algeria, and Libya currently total 1.2-1.3
million b/doe, more than sufficient to meet the
projected 1990 requirement. This surplus in contract-
ed supplies for the 1980s will allow some countries to
reduce or defer gas purchases from certain suppliers
or shut in domestic production. We believe the surplus
could also delay or prevent development of more 25X1
costly Norwegian gasfields, which will be needed to
gas supplies in the mid-1990s. I 25X1
Japanese gas consumption is also projected to increase
rapidly during this decade, growing about 10 percent
per year from about 450,000 b/doe in 1982 to,
700,000 b/doe in 1985 and 900,000 b/doe in 1990.
Most of this increase is projected to occur in the
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 electricity generation sector as utilities construct new
gas-fired facilities and continue conversions away
from oil. Japan's domestic production of natural gas is
expected to remain negligible at about 50,000 b/doe
through 1990, and Japan will therefore continue to
rely on imports of liquefied natural gas (LNG) to meet
gas needs. Virtually all of Japan's gas import require-
ments during this decade are expected to be met by
scheduled projects or currently contracted supplies.
Indonesia will be Japan's largest supplier of LNG,
providing more than 40 percent of total needs in 1990.
In the North American market, the recession and
sharply escalating natural gas prices caused gas con-
sumption in the United States to decline by about 1
million b/doe from 9.9 million b/doe in 1980 to 8.9
million b/doe in 1982. Beginning early this year,
however, falling oil prices caused some moderation in
gas price increases. Most forecasts now project US
gas demand to recover and to increase by about 1
percent per year from currynt levels to 9.2 million
b/doe in 1990. Estimates of US gas production in
1990 approximate 8.2 million b/doe, resulting in an
import requirement of about I million b/doe. Canada
and Mexico are expected to remain key suppliers of
natural gas to the United States through the 1980s,
with contracts to supply 800,000 b/doe and 50,000
b/doe, respectively. Algeria is also contracted to
provide about 100,000 b/doe of LNG to the US
market. We believe any shortfall between currently
contracted supplies, domestic production, and US
demand could be met by additional supplies from
Canada and perhaps Mexico. Domestic gas consump-
tion in Canada and Mexico is expected to grow from
about 1.4 million b/doe in 1982 to'approximately 2.0
Coal and Nuclear Prospects
Demand for coal, nuclear power, and hydropower will
depend in large part on electricity requirements.
Roughly two-thirds of coal consumed in the industri-
alized countries is used to generate electricity. We
estimate that OECD electricity demand growth will
approximate 2 percent per year during the remainder
of the decade. Nuclear power is expected to meet the
bulk of the increase in demand, and we expect
continued conversion away from oil in this sector. In
most foreign markets nuclear power has the competi-
tive edge for electric power-generation, followed by
trimmed projections of non-Communist coal con-
sumption for the 1980s, primarily as a result of lower
expectations for electricity and energy demand
growth in the OECD countries. Lower oil prices and
the prospect of a soft energy market have also had a
dampening effect on some industrial plans to convert 25X1
to coal because lower prices extend the payback
period on fuel switching. Our analysis of key coal-use
sectors agrees with projections that coal demand in
the industrial countries will increase more moderately
than previously anticipated, growing about 3 percent
per year to nearly 20 million b/doe by 1990:
? West European consumption is expected to approxi-
mate 6.3 million b/doe in 1990, up about 900,000
b/doe from present levels.
? Japan is projected to increase coal consumption by
only 100,000 to 200,000 b/doe through the decade
to a total of about 1.6 million b/doe in 1990.
? The United States is expected to continue as a
major consumer and producer of coal. About 60
percent of the projected increase in OECD con-
sumption is expected to occur in the United States,
where demand probably will reach 9-10 million
Coal supplies are expected to be abundant in this
decade. According to some estimates based on expan-
sion programs planned or under way, supply availabil-
ity in 1990 could be 40 percent above projected
demand. While we agree that coal use is unlikely to be
constrained by supply in this decade, we believe that
several capacity additions will have to be delayed or
deferred to bring supply and demand into better
balance by 1990 without major erosions in the price of
 i
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We expect most countries to continue development of
hydropower wherever possible, although nuclear ca-
pacity additions probably will not reach the levels
projected in 1982. Industry forecasts indicate that
non-Communist nuclear power consumption will rise
from about 3 million b/doe in 1980 to roughly 8
million b/doe in 1990, while hydropower is expected
to rise by only about I million b/doe during the
period. Government policies could largely determine
the relative contributions of nuclear power and coal to
OECD energy requirements in 1990. For example, the
governments in the United Kingdom and West Ger-
many subsidize coal production and encourage the use
of domestic supplies, while French energy policy
Near-Term Market Risks
Based on the continued uncertain political climate in
the Middle East and especially the growing economic
pressure that may compel Iraq to escalate the war
with Iran, we believe there is an increased probability
of the Persian Gulf oil production capability being
damaged or of supplies through the Strait of Hormuz
being interdicted. The impact of any disruption of
Gulf oil exports in the near term would depend on the
duration of the disruption and the availability of non-
Gulf oil, alternative fuels, and petroleum stockpiles.
The current combination of surplus production capac-
ity and weak consumption affords industrialized coun-
tries considerable protection against a short-term oil
supply disruption. Current available surplus capacity
that could offset a supply cutback stands at about 8
million b/d, but only some 3 million b d of that
surplus is outside the Persian Gulf.
If only Iranian exports were disrupted, the impact
would be minimal for most consumers. Surplus avail-
able capacity is sufficient to absorb the loss of Iranian
exports, currently averaging 1.9 million b/d. Spot
prices would begin to rise, however, if buyers antici-
pated?a further spreading of the conflict. At a mini-
mum, Iran's customers would be forced to line up
alternative supplies. Turkey, Spain, and Italy rely on
Iranian oil for at least 16 percent of import needs, and
25X1
If Jazireh-ye Khark (Khark Island) were shut down the Iraqi pipeline through Turkey severed, and Ku-1
waiti exports cut off, the impact would be substantial-
ly more severe. The loss of 3.5 million b/d of exports
from these countries would eliminate most of the
remaining surplus capacity in the market and leave
oil-importing countries in a high-risk situation. While
other producers could replace most of these lost
supplies by increasing production, the uncertainty
surrounding the length of such a disruption and the 25X1
risk to other supplies in the Gulf would almost
certainly cause upward price pressures. Among major
importing countries, Brazil and Turkey rely on im-I
ports from Iraq and Kuwait for more than 20 percent
of their oil supplies. Whether price increases could be
sustained would depend largely on market perceptions
of the length and severity of the disruption.
The United States has a large stake in the continued 25X1
flow of oil from the Persian Gulf even though US oil
imports from the Gulf are small (2 percent of US oil
consumption). Gulf oil constitutes about 30 percentlof
non-Communist world oil supply. Last year about 40
percent of Western Europe's and 60 percent of Ja-
pan's oil needs came from Persian Gulf countries.
Denial of all or most of the sourced supply for a
substantial period of time would create a worldwide
oil shortage much greater than the 1973 and 1979
shortages. Our analysis indicates that a prolonged
closure of the Strait of Hormuz would stop current,
exports of 8-9 million b/d and cause oil prices to
double or triple, depending on the level of demand
consuming countries. The economic recovery, in
OECD countries would be slowed or interrupted.
n
25X1
LDC oil importers also would be hurt and their ability
to service foreign debt greatly reduced. The United
States could not insulate itself from the disruption of
the world oil market. In addition, under the Interna-
tional Energy Agency (IEA) agreement, the United
States is obligated to share in the supply shortfall.
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I i.
 Approved For Release 2009/05/19 : CIA-RDP85T00283R000300050008-2
The longer term impact would depend on how the
Persian Gulf political and military situation was
We believe that rising prices following a major pro-
longed interruption of Persian Gulf oil exports would
have severe repercussions on the international finan-
cial system, which is already strained from LDC
payment problems. The initial oil price shock would
be destabilizing, particularly for those banking cen-
ters and countries with high exposure to LDCs that do
not export oil. The major industrialized countries
would be faced with the prospect of full-fledged
recessions. International Monetary Fund resources
would be inadequate to handle the new large loan
Implications of Import Dependence
Despite prospects for ample energy supplies through
1990, forecasts indicate that the major industrialized
countries will remain heavily dependent on imported
energy, particularly oil. Japan and Europe are expect-
ed to depend on imports for more than 80 percent and
40 percent of their energy supplies, respectively, while
the United States will import about 15 percent of total
energy supplies:
? Although West European oil use is projected to hold
fairly steady during the decade, oil imports are
projected to increase to about three-fourths of total
oil demand by 1990. Western Europe could be
importing nearly one-third of total gas needs from
non-OECD sources in 1990, and foreign coal will
supply about one-fifth of requirements.
? Japan will continue to rely on imports for nearly all
of its oil, gas, and coal requirements.
Projections indicate that the United States will
depend on oil imports to meet about one-third of
requirements in 1990. Foreign gas supplies are
expected to meet about 10 percent of gas needs by
the Gulf are susceptible to having supplies disrupted
by foreign military or terrorist attack. Most oil in the
region must transit the Strait of Hormuz; an action
such as sinking a tanker or mining the Strait could
effectively close the area to commercial shipping. A
change in regime or political policies could also pose a
threat to oil flow patterns. While it is difficult to
predict a major internal or external disruption in oil
exports in any particular exporting nation or region,
we believe that the probability of some sort of disrup-
tion occurring within non-Communist countries is
Energy supply disruptions have occurred frequently in
the past, and the probability that some future disrup-
tion will occur is quite high, particularly for oil and
natural gas. Since a large proportion of oil used by
consuming countries will continue to be imported, the
industrialized countries will remain vulnerable to
unexpected supply cutoffs. Indeed, as long as the
Iran-Iraq war continues, the supply outlook from
these countries remains uncertain and the potential
exists for spreading the supply disruption to other
regions in the Persian Gulf. Increased dependence on
natural gas imports also raises the risk of an oil and
gas disruption, particularly in Western Europe and
Technical and accidental supply disruptions, such as
pipeline leaks or fires, are generally limited in dura-
tion, severity, and impact. Deliberate supply disrup-
tions resulting from political, military, or other dis-
putes-such as disagreements on price-are more
serious. In these circumstances the duration and
magnitude of supply losses are more difficult to
predict. Specific conditions on the eve of disruptions
also significantly influence market reaction,
including:
? Availability and location of excess supply capacity.
? Level of commercial and strategic stocks.
? Position in the business cycle and the strength of
energy consumption growth.
Fuel-switching capabilities.
? The extent of international cooperation.
Supply Disruptions
The threat posed by Iran and Iraq is not the only
event that could disrupt the flow of oil in the Persian
Gulf region. Because of the concentration of highly
vulnerable oil facilities, most producing countries in
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Since 1950 oil supplies from major exporting coun-
tries have been interrupted on 14 occasions. Although
most of these disruptions have had little impact on the
oil market, three separate incidents during the 1970s
caused severe price pressures:
? Libya's move to reduce foreign company production
in 1970, coupled with the pipeline sabotage in Syria,
resulted in a 25-percent rise in oil prices.
? The 1973/74 Arab oil embargo helped support a
quadrupling of crude oil prices and contributed to a
sharp drop in worldwide GNP growth.
? Supply losses resulting from the Iranian revolution
more than doubled oil prices between late 1978 and
Losing the Supply Cushion
The present excess in production capacity will protect
the market from all but a major supply disruption for
at least the next year or two. Toward the end of the
decade, however, the expected erosion of excess pro-
duction capacity points to a return to a period of
increased energy vulnerability. Our own analysis,
using CIA's linked econometric model and assuming a
healthy recovery in 1984 and an OECD growth rate
of 2.7 percent during 1985-90, indicates that oil
demand would rise to about 53 million b/d by 1990.
Under these conditions, oil demand would approach
our estimates of available capacity and create pres-
sures for real price increases
Expected prices and demand levels are major factors
influencing supply availability, as are the tax policies
decline, are discouraging investments in new high-cost
supply projects and prolonging industrialized coun-
tries' heavy reliance on imported energy, particularly
oil. Because of the long leadtime in finding and
developing new resources, any delays in new invest-
ment would facilitate the erosion of the supply
cushion that protects the market against unexpected
disruptions. Further declines in oil prices would exac-
erbate ongoing events and further reduce future sup-
ply availability. Current soft market conditions and
cutbacks in demand projections have already caused
delays and cancellations in several investment projects
Oil and gas exploration activity are down sharply in
response to weak oil prices, and we believe this trend
will cause the present supply cushion to erode more
25X1
rapidly than most forecasts expect. The number of
active drilling rigs at the end of March 1983uin non-
Communist countries stood at 3,447-only half the
level recorded at the end of 1981 (see figure 4). All
major producing areas except the Middle East have
experienced a drop in activity with the United States
and Canada suffering the sharpest decline, largely the
result of a general trimming of budgets by oil compa-
nies. We expect the prospect of weak energy prices to
continue to discourage development of new energy 25X1
supply capacity in this decade. Less capacity'develop-
ment will bring supply and demand nearer equilibri-
um; we believe the adjustment process0
will also shorten the period in which the market will
be relatively immune to real price pressures and
increase its vulnerability to supply disruption's. In the
case of oil, for example, we believe that the combina-
tion of these events could reduce the supply cushion 13-
4 million b d below levels currently estimated in other
forecasts. 125X1
Other Risks
In addition to the possibility of supply interruptions,
we believe there is substantial risk that current fore-
25X1
25X1
casts have. failed to accurately gauge trends in key
economic variables. Forecasts of long-term energy 25X1
markets have been off the mark in the past: in 1975,
for example, some long-term forecasts indicated that
non-Communist oil consumption would exceed 60
million b/d in 1980; actual use in 1980 was 50 million
b/d. As was the case with the past projections,
uncertainties regarding economic growth, price
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Table 5
Selected Energy Investments Recently
Canceled or Postponed in IEA Countries
Project Original Status Projected Output Project Original Status
Completion Completion
Date Date
Alsands 1988 Indefinitely 137,000 b/d
(Canada) postponed
(United States) half (November
1982)
(Canada) postponed b/d Oil shale
Gas pipelines , Colony (United 1987
Alaska (United 1985 Completion date 180,000 b/doe
States/Canada) now 1989 (April
Indefinitely 50,000 b/d
postponed (May
1982)
(United Hat Creek 1992 Indefinitely 2,000 MW
States/West (Canada) postponed
Germany) (January 1983)
Ohio Valley NA Canceled 68,000 b/doe Hemweg NA Canceled
Synthetic Fuels (December 1981) (Netherlands) (January 1983)
(United States) Dordrecht NA Canceled
Moerdijk (Shell) NA Canceled NA (Netherlands)
(Netherlands) Nuclear plants
Troup, Texas NA NA 60,000 b/doe
Lignite (United
States)
Coal liquefaction
SRC 11 (United NA Canceled 15,000 b/doe
States/West
Germany/Japan)
26 plants Late 1980s Canceled 32 GW
(United States) through 1995
trends, and the responsiveness of supply and demand use during the last three to four years. In addition,
to changes in energy prices hinder current efforts to there is little empirical evidence from past events to
predict long-term energy market trends. Small suggest how the market will react over time to the
changes in key variables compounded over time can decline in real and nominal energy prices that is now
considerably alter long-term supply and demand bal- taking place. While we believe that additional invest-
ances. For example, using an annual economic growth ment in energy-saving equipment will take place,
rate of 3 percent versus 2 percent for the period further erosion in energy prices could cause much of
results in an increase of 6 million b/d in energy this investment to be shelved and necessitate the .
demand by 1990 j continued use of more energy-intensive capital stock.
We also believe there is a tendency among forecasters
to underestimate future energy requirements because
many simply extrapolate the declines in oil and energy
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F
W'Mg 120
Another factor which could cause differences in oil
requirements during any period up to 1990 is the
business cycle. Since most projections do not attempt
to account for variations in the business cycle, consid-
erable caution must be used in assessing,the market
trends presented in the forecasts. Even if GNP growth
averages 2.7 percent annually during the period, there
would probably be sharp variations from year to year,
which would cause differences in the level of energy
and oil demand. The observed annual growth pattern
in OECD countries over the course of the most recent
business cycle (1976-82) yields an average growth rate
of about 2.7 percent, although year-to-year variations,
ranged from 4.9 percent in 1976 to -0.1 percent in
1982. Replicating these year-to-year growth patterns
through 1990, instead of using a smooth 2.7-percent
annual growth rate, yields a difference of as much as
3.6 million b/doe in OECD energy consumption in
certain years. Given these conditions, 1990 energy
consumption and oil use would be 1.8 million b/doe
and I million b/d, respectively, below levels projected
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Continued soft energy markets could considerably
alter long-term supply and demand prospects. If non-
Communist oil consumption continues to decline in
the short term, nominal prices could again come
under downward pressure, which in turn could in-
crease future demand requirements.' Under this cir-
cumstance, we would expect other energy prices to
decline also, perhaps with a short time lag. Weak
energy prices would dampen conservation and substi-
tution efforts while, at the same time, encouraging
more rapid economic growth and higher energy de-
mand. In the United States, for example, price de-
clines are already reducing incentives to conserve
gasoline, as evidenced by a pickup in the sales of large
cats. During the first half of 1983, intermediate,
standard, and luxury cars accounted for 45 percent of
the new car registrations, compared with 35 percent
in 1981 (see figure 6). Using the CIA linked econo-
metric model, we estimate that a fall in the price of
crude oil from $29 to $25 per barrel in 1984 would
lead to an increase of 1.4 million b/d in OECD energy
demand by 1985. The model estimates that nearly 90
percent of this increase in energy demand would be
met by oil, with natural gas and coal accounting for
Oil Cutoff
In the current market, excess available capacity of 8
million b/d is sufficient to absorb all but a major
supply disruption. From our survey of recent market
forecasts, however, we have concluded that gradual
erosion of surplus available capacity will make energy
markets increasingly vulnerable to supply disruptions
around 1990d t 25X1
least 2-3 million b/d of surplus capacity is nee ed to
keep the oil market stable. We have examined two oil
disruption scenarios for 1990, each lasting one year
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Figure 6
US Market: New Car Registrations, 1971-83
19n71 72
six I onths.
1 ? First I
under midrange supply and demand forecast condi-
tions. Commercial stockpiles are assumed to be in the
normalloperating range, based on the historical rela-
tionship between stock levels and expected consump-
tion'. No attempt was made to estimate the amount of
government-owned stocks that would be used during
the I disruption because governments have not yet
established definite plans to use compulsory stocks
during,, disruptions.
The two scenarios are:
? Case ~I. A loss of 12 million b/d in production
capacity resulting from, for example, a cutoff of oil
flows through the Persian Gulf.
? Case II. A loss of 7 million b/d in capacity
associated with an escalation of the Iran-Iraq war
that affects neighboring countries
The oil supply cutoffs in 1973 and 1979 and the
subsequent oil price runups resulted in higher infla-
tion, increased unemployment, and lower GNP
growth. Both oil price shocks appear to have contrib-
uted to adverse trends for the OECD economies for
three to five years (see figure 7). Because of the many
economic variables that come into play, the precise
impacts of future supply disruptions are difficult to
gauge. Using the CIA linked econometric model, 25X1
however, we have attempted to measure the order of
magnitude of economic impacts from a supply disrup-
tion. On the basis of the midrange supply and demand
forecast for 1990, a net oil reduction was calculated
I
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 Figure 7
OECD Economic Indicators and
Oil Price Trends, 1973-82
Crude Oil Prices Consumer Prices
Percent change Percent change
Real GNP Unemployment
Percent change Millions
--
1973 75 80 82 1973 75 80 82
for each hypothetical disruption after adjusting for
the 2-million-b/d cushion that industry believes is
needed to keep the market in equilbrium. The CIA
model was then used to calculate the impact on GNP
and oil prices. Simulations for the first-year effect on
OECD economies contrasted to a base case (no dis-
ruption) showed that:
? For Case I, GNP loss amounts to 2.8 percentage
points, and real oil prices rise about 100 percent
above the base case level.
? For Case II, GNP is reduced by roughly l percent-
age point, and real oil prices rise by 35 percent
Gas Disruptions
By 1990 gas supplies from Algeria and the Soviet
Union could supply one-third of overall gas demand in
Western Europe and a much higher percentage in
France and Italy. The seasonal nature of gas require-
ments would tend to magnify the potential impacts if
a disruption occurred in the winter, when average gas
requirements are double those of summer. The avail-
ability of possible supply offsets would help determine
the vulnerability of individual countries, including:
? The level of potential surge capacity from excess
indigenous production.
? The volume of gas made available by cutting off
interruptible contracts.
? Surge capacity from the Netherlands.
In the event of a supply disruption of Soviet or
Algerian gas lasting 12 months, Western Europe 25X1
probably could compensate for the shortfall by in-
creasing domestic production, withdrawing gas from
storage, and increasing imports from uninterrupted
sources. While the physical distribution system could
handle such a disruption, we believe West European
countries have not yet achieved the planning and
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Figure 8
Gas Flows From The Netherlands, 1980
Million cubic meters per day
I I I
Western Europe West Germany
Peak Jan- 1980
month- Mar
Peak Jan- 1980
month- Mar
I'eak Jan- 1980
month- Mar
cooperation necessary to avoid problems? Moreover,
the effect of the disruption would vary from country
to country because much of the present and planned
as storage capacity could be needed just to meet
seasonal increases in winter demand (see figure 8). For
example, our analysis indicates that Italy would have
a difficult time coping with a disruption in Soviet and
Algerian gas supplies in 1990 because of limited
flexibility to increase Dutch imports and insufficient
storage, France and West Germany probably would
have to cut back service to some customers and draw
.down inventories to dangerously low levels. All Euro-
pean purchasers would also need assurances from The
Hague that the Dutch would be willing to surge
production during a supply cutoff.
I
Japan i
expected to remain heavily dependent on
LNG imports from Indonesia and Malaysia through
the decade. Based on estimated supply and demand
requirements in 1990, Japan will rely on Malaysia
and !Indonesia to supply about 60 percent of total gas
Peak Jan- 1980
month- Mar
110
needs. Japan's dual switching capability would help
offset a major gas supply disruption as long as
alternative oil supplies were available: Japanese elec-
tric utilities-the principal gas consumers-maintain
a significant ability to switch to alternative fuels.
Currently, 62 percent of LNG-fired capacity can be
switched to alternative fuels, and by 1990 the utilities
will have the capability to cut gas consum tion b
nearly 40 percent of total gas use.
Simultaneous Oil and Natural Gas Disruption
The impact of a simultaneous oil and gas disruption
would be most severe in Western Europe. A dual
supply disruption, particularly in the winter, would
eliminate most of Western Europe's contingency op-
tions for coping with a supply cutoff since the bulk of
fuel-switching capability in industry is between oil
and gas. A disruption in gas supplies from Algeria and
the Soviet Union, combined with the Case I oil
disruption, could cause a 3-million-b/doe energy sup-
ply shortfall equal to more than 10 percent of estimat-
ed 1990 energy requirements. In addition to a sharp
runup in prices, physical shortages would probably
occur in the residential sector.
25X1
25X1
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Benefits to the USSR
Because the Soviet Union is a major net exporter of
both oil and natural gas, Moscow is a major beneficia-
ry in a large disruption of non-Soviet supplies. With
the price increases resulting from the Case I disrup-
tion scenario, Soviet oil export earnings would approx-
imately double, rising to about $17 billion (1982
dollars) in 1990, assuming net Soviet oil exports of
800,000 b/d. Our Case II disruption scenario would
generate $3 billion (1982 dollars) in additional earn-
ings for the USSR in a single year for oil exports
alone. These calculations could underestimate the
increase in Soviet hard currency earnings following a
disruption because the USSR sells most of its oil on
the spot market, where prices would be likely to
increase more rapidly than the average world oil
price. Because natural gas prices are linked to a
combination of crude and oil product prices, the
USSR would also gain substantial incremental earn-
ings from natural gas sales to Western Europe in the
event of an oil supply disruption. Assuming that
natural gas prices rise in line with crude and oil
product prices, Moscow would earn an additional $8
billion (1982 dollars) from gas exports under the Case
Given the potential risks inherent in the energy
market and continued heavy reliance by.the OECD on
imported energy, government policies designed to
reduce oil dependence and increase energy security
will be critical in avoiding a recurrence of the eco-
nomic problems associated with the oil price runups in
the 1970s. The prospect of flat or declining real oil
prices through the balance of the decade will encour-
age private industry to be increasingly selective about
new exploration and development expeditures. Tax
policies and the general environment toward foreign
investment in prospective oil-producing OECD and
LDC countries will therefore largely determine the
extent of industry activity. Some OECD members
have already recognized this trend:
? The United Kingdom, faced with little industry
interest in marginal North Sea oilfields and fore-
casts of sharply declining production after 1985,
made significant modifications to offshore petro-
leum taxes in early 1983. As a result of these
changes, several applications for development of 25X1
small fields have already been filed.
? Although Norwegian officials have stated that al-
terations to Norway's present tax structure are not
required, special tax incentives were recently grant-
ed to Phillips Petroleum to make an enhanced oil
recovery project at Ekofisk economically feasible.
Implementation of reasonable tax policies will play a
key role in future non-OPEC LDC oil and energy
production. According to the World Bank, LDCs
must attract the capital of the international oil com-
panies to optimize potential resource development.
Funds will also be required from international finan-
cial institutions to enable development projects de-
signed to enhance domestic energy supplies where
there is no prospect for an export project. This will
especially be the case for natural gas development in
the LDCs.I 25X1
In addition to measures encouraging new production
of oil and natural gas, we believe the OECD countries
should continue to develop policies encouraging con-
servation and substitution and build strategic inven-
tories of oil and natural gas: 25X1
? Countries other than the United States, West Ger-
many, and Japan could consider establishing strate-
gic oil reserves, which
would facilitate the use of government stocks during
The growing use of gas in Western Europe and
Japan and the expected increase in gas use in the
less flexible residential sector will also make ade-
quate gas storage an important security consider-
ation for the future.
Finally, we believe energy policies promoting diver-
sification of suppliers of oil and natural gas and
encouraging more development and trade of indige-
nous OECD energy supplies would help promote
energy security. 25X1
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 Appendix C
Future OPEC Supply
Availability
The projection of a slight rise in available capacity
stems primarily from an assumption that the Iran-
Iraq war will end and the expectation that politically
imposed production ceilings in several other countries
will be lifted, rather than from an expectation that
additional capacity will be developed. We believe that
OPEC's maximum sustainable capacity-the level of
output that could be reached within 3 months without
regard to political constraints-will actually decline
from an estimated 34. million b/d currently to about
32 million b/d by 1990. This discussion focuses on
available capacity, which more accurately measures
the capability of producers to respond quickly to a
supply disruption.
We expect most of the erosion in.available production
capacity to occur in Saudi Arabia, where crude oil
production in the first half of 1983 was less than 5
million b/d. The Saudis already are taking steps to
reduce operating capacity to 8 million b/d from a
level of 10 million b/d in 1982. The lower operating
Table C-1
OPEC: Available Capacity a
Algeria
Kuwait
1.2
1.2
Kuwait-Saudi Arabia Neutral
0.6
0.4
Libya
2.1
2.2
Nigeria
2.1
1.8
Qatar
0.6
0.5
Saudi Arabia
8.1
8.0
United Arab Emirates
1.6
2.0
Venezuela
2.4
2.2
Natural gas liquids
1.0.
1.7
? Available capacity includes those facilities on line and capable of
almost immediately to a decision to raise production.'
ndin
r
espo
g
Production ceilings imposed by individual producers for policy 25X1
reasons are taken into account where applicable, as are physical ,
limitations on Iraq's exports attributable to the Iran-Iraq war and
the closure of the Iraq-Syria pipeline. Our estimates for OPEC's
maximum sustainable production capacity-the level that can be
reached within three months with no political constraints-are 34
million b/d in 1983 and 32 million b/d in 1990.
capacity will include only those facilities on line and
capable of responding almost immediately to a Saudi
decision to raise production. This will remove 2
million b/d of capacity that would have been readily
available to.offset a disruption elsewhere. The Saudis
at this stage still intend to maintain the capability to
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 restore capacity to 10 million b/d within a year, but
problems in maintaining mothballed equipment-
ut into question Saudi abili-
ty to restore production much above 8 million b d
under any circumstances.
Kuwait's position resembles the Saudis'. A combina-
tion of lower oil revenues and the lack of a market for
additional output are reinforcing Kuwait's longstand-
ing policy of conserving oil resources. Like the Saudis,
the Kuwaitis have reduced their expenditure projec-
tions for maintaining oil production capacity, and we
believe available capacity in 1990 will be close to the
current self-imposed production ceiling of 1.25 million
The UAE is proceeding with plans to develop the
supergiant Upper Zakum reservoir, which will provide
the largest addition to capacity. Most of this will be
offset by declines in capacity at more mature fields in
Abu Dhabi; production of crude oil in the other
emirates probably will continue to decline as well.
Some new condensate finds will boost output of gas
liquids. Abu Dhabi' has long made it clear that
conservation will remain an important consideration
in production. In recent years this policy has led to the
imposition of ceilings on production considerably be-
low the.level of technical capacity. We expect avail-
able capacity to be about 2 million b/d by 1990.
25X1
25X1
25X1
25X1
Of the remaining OPEC countries, Iraq, Libya, and
the UAE have the most resource potential to raise
production capacity. Limited demand is likely to
constrain capacity development in all three. Iraqi
production has not exceeded 1 million b/d for more
than a year because of a lack of export outlets, and
ongoing efforts to develop new routes are not likely to
improve export capabilities much before 1985. Once
hostilities with Iran cease, we expect Baghdad to
move aggressively to restore its export capability.
Baghdad also still intends to implement prewar plans
to develop substantial additional capacity, but we ,
believe limited finances and the difficulty Iraq faces
in marketing additional output will slow development.
If the war were to end in the next several years, Iraqi
efforts to increase output without offsetting reduc-
tions by other OPEC members could force, oil prices
to drop sharply. In our judgment, the Iraqis are likely
to build capacity to a level of about 4.5 million b/d by
1990, which, according to industry. demand forecasts,
would still be more capacity than they can use.C
Libya's capacity will probably remain fairly stable
despite the potential for growth. Development of
promising offshore deposits involving extensive out-
side participation has been slowed by the combined
effects of theweak market, a border dispute with
Tunisia, and a poor business climate: The withdrawal
of US companies also is contributing to the erosion of
capacity in onshore fields. On balance, the slowed rate
of expansion of offshore capacity will probably rough-
ly offset the erosion of onshore capacity, resulting in a
Iran and Venezuela. both have resources available to
raise capacity sharply, but only at considerable ex-
pense-Iran by installing an extensive-gas injection
system at its major onshore oilfields and Venezuela by
developing its heavy oil reserves in the Orinoco Belt.
Tehran has begun resurrecting plans for more gas
injection, albeit at a much reduced scale from:that
planned before the revolution. Although successful
implementation of these plans could boost Iranian
capacity to a level of about.445 million b/d for '
several years, production at this level probably would
result in declining capacity by the end of the decade.
In view of marketing constraints caused by the weak
oil market and pressure from Iran's clerics for a
conservative approach toward economic growth, we
believe.Tehran is more likely to maintain capacity '
near 3.5 million b/d. Even this strategy would require
considerable investment either in gas injection for.
onshore fields or in offshore development.
Venezuela postponed plans.for development of its '
heavy oil reserves following:the $5 per barrel drop in
OPEC's benchmark price in early 1983. Consequent-
ly,. most replacement capacity in the. years ahead will
come from improved recovery methods and from
deeper exploration. in currently producing basins: Be-
cause the Venezuelan oil industry is fully national-.
ized, we expect cash flow problems resulting from
lower oil revenues to have a detrimental impact on
exploration and development.. Venezuela's available'
capacity, therefore, is likely to erode to about 2.2
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Nigeria and Indonesia both rely heavily on production
from numerous, relatively small offshore fields, which
require a.high level of exploration to sustain capacity.
Both also rely on foreign oil companies for explora-
tion. The pace of future exploration-as in the past-
will be largely determined by the attractiveness of the
terms offered by Lagos and Jakarta. Although Indo-
nesia has shown a willingness to be flexible in its
contract terms, resource limitations are likely to
constrain its capacity level to about 1.4 million b/d by
1990. Because of pressing financial needs and excess
capacity, Nigeria has cut outlays for exploration. We
expect revenue problems to continue to hamper capac-
ity development, resulting in a level of about 1.8
The smaller producers in OPEC-Algeria, Qatar,
Ecuador, Gabon, and the Kuwait-Saudi Arabia Neu-
tral Zone-are largely resource constrained from
developing higher capacity. Qatar is delineating its
potential giant offshore Northwest Dome gasfield but
has not developed plans for exploitation or marketing
the gas and associated small quantities of condensate.
In general, total crude capacity for these areas, which
now approximates 2.5 million b/d, is likely to fall to
While overall crude oil production capacity is likely to
deteriorate, NGL production will probably expand by
700,000 b/d during the decade. Most of the increase
will come from the development of nonassociated
natural gasfields as well as some condensate fields.
Algeria and Indonesia will be the major contributors
I to the expansion. Development of gasfields in the
UAE, Qatar, and Nigeria could also offer some
potential, particularly given recent condensate discov-
eries in the UAE. The Saudi and Kuwaiti gas-
gathering systems are essentially complete, and addi-
tional expansion of Saudi Arabia's network is unlikely
to occur unless demand for crude oil improves signifi-
cantly later in the decade.
Rising domestic consumption of petroleum products
by OPEC countries will account for most of the
growth in LDC oil use and will begin to reduce
OPEC's exportable surplus by the late 1980s. Internal
oil use by members amounted to 1.6 million b/d in
1973-less than 5 percent of their available produc-
tion capacity. Spearheaded by a 350-percent increase
during the past decade in gasoline and distillate fuel
oil consumption in the transportation and electric
power sectors, oil demand within OPEC today has
risen to about 3.5 million b/d, approximately 13
percent of available capacity. While we estimate that'
growth in consumption will slow for the remainder of
this decade to annual increases of about 5 percent-3
percentage points lower than the previous 10-year
average-internal demand within OPEC will still rise
to about 5.0 million b/d by the end of the decade'
The countries with the largest exportable surpluses- 25X1
Saudi Arabia, Iran, and Iraq-have invested their oil
revenues heavily in energy-intensive development
projects and account for the largest block of OPEC !25X1
consumption. Currently they use 1.7 million b/d, .
which we estimate will rise to more than 2.3 million ,
b/d by 1990. OPEC's "high absorbers," the countries
with large populations relative to their oil export
earnings-Indonesia, Nigeria, Algeria, Venezuela,
Ecuador, and Gabon-are expected to show the great
est overall increase in share of total demand, and by'
the end of the decade this group probably will be
using 2.1 million b/d. Kuwait, the UAE, Qatar, and
Libya-the "low absorbers"-will increase domestic
petroleum use by only about 125,000 b/d between
, This figure is slightly higher than the midrange of recent industry
estimates but includes bunkers and refinery losses, which are
25X1
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The 100 non-OPEC LDCs constitute about 20 per-
cent of oil production and 15 percent of oil consump-
tion in the non-Communist world. According to some
forecasts, they could account for more than 30
percent of both oil supply and demand in the non-
Communist countries by 1990. Although these coun-
tries are not homogeneous and have vastly different
consumption patterns and production capabilities, as a
group they will have a substantial impact on the
international oil market in the coming years.
Oil Supply Through 1990
Non-OPEC LDC production capability toward the
end of the decade will be primarily determined by
exploration and development programs undertaken
during the 1980-85 period. Such programs have been
cut back or curtailed in many countries during the
past two years because of the soft world oil market,
country financial constraints, and poor geological
prospects. A number of small non-oil-producing
LDCs-with some oil reserve potential-have recent-
Iy revised existing or instituted new petroleum laws to
been lukewarm in most instances. Industry forecasts
for total non-OPEC LDC oil production range from
9.1 million to 10.2 million b/d in 1990. Because of the
slowdown in activity in recent years, we believe actual
production will peak around 1987 and decline slight-
ly-because of natural field depletion-toward the
During the decade, relatively substantial production
increases from Angola, Brazil, India, and Mexico will
largely offset production declines in many of the
smaller producers. By 1985 these four countries will
account for more than 50 percent of total non-OPEC
LDC oil output; their share will rise to about 60
percent by 1990:
Mexico will continue to be the non-OPEC LDC
production leader, with crude output probably rising
by just over I million b/d to around 3.8 million b/d
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by 1990, and NGL production remaining at about
300,000 b/d. The soft oil market apparently has led
Mexico to shelve plans for a faster rate of develop-
ment aimed at raising production to 4.5 million b/d
by the late 1980s. We believe that the poor quality
of much of Mexico's unexploited oil reserves and
limited new geologic prospects would have prevent-
ed Mexico from fulfilling this goal in any case. In
addition, current financial difficulties have led to
cutbacks in exploration and development that will
keep Mexico's capacity below its resource potential
for most of the decade.
? Petrobras budget cuts have led to a scaling down of
Brazil's oil exploration program during) the past
year. Although even small discoveries are being
brought on line continuously via early production I
systems, Brazil's oil production is not likely to
exceed 425,000 b/d by 1990. We question Brazil's
ability to sustain output above that level in view of
the country's seemingly limited geologic potential.
? Gulf Oil's Cabinda gas-injection program will raise
Angolan oil production by 15,000 to 20,000 b/d by
1985, and the Takula field development program
could add another 75,000 b/d by that time if oil
market conditions are favorable. In addition, devel-
opment of some offshore oil discoveries) in Block 3
by Elf Acquitaine will contribute to the doubling of
Angola's current oil production to at least 250,000
We expect an extensive 1980-85 oil exploration and
development program to lead to a 200,000-b/d
increase-to a level of 600,000 b/d-in India's
crude output by 1990. Domestic technology and
financial resources will not be sufficient to meet the
government's ambitious goal of producing 600,000
25X1
25X1
f i
b/d by 1985.0 1
25X1
 Egypt, whose 1982 oil production totaled 665,000
b/d, will continue to rank second among non-OPEC
LDC producers through the decade. We judge oil
production to be geologically constrained at some
850,000 b/d. If the oil market tightens and produc-
tion is pushed, this peak could occur around 1985
We also expect small production increases from Ivory
Coast, Sudan, and Colombia through the end of the
decade. If further testing bears out optimistic esti-
mates of reserve prospects for Ivory Coast's Espoir
and Gulf fields, production could hit 120,000 b/d by
output level of 50,000 b/d. Recent exploration activi-
ty in Colombia has given promising indications that a
string of small- and medium-sized finds may occur
during the next few years, adding to the country's
Consumption data for many non-OPEC LDCs is poor,
and industry analysts do not adequately understand
the relationship between oil demand and economic
activity in these countries. Our analysis of past trends
in apparent oil consumption in the non-OPEC LDCs
indicates that there is no consistent relationship be-
tween oil demand growth and the rate of GNP
growth. Estimates of future oil demand/GNP rela-
tionships, therefore, are largely subjective, and there
is room for a wide margin of error.
Other factors that complicate the non-OPEC LDC oil
demand equation include:
? The duration and extent of the economic recovery
and its unknown impact on LDC GNP growth and
energy intensity.
? The current and future financial situation in many
LDCs and the extent to which they can finance oil
imports.
? The rapidity and degree of the shift from agricul-
ture to industry in the LDCs.
? The implementation and effectiveness of LDC oil
conservation measures.
Given a weak market over the medium term, some
LDC governments may postpone politically sensitive
moves such as removing subsidies on.oil products. In
addition, weak oil prices would dampen the incentive
25X1
25X1
Because of these uncertainties, industry projections of
LDC oil consumption through 1990 vary widely. .
Current industry estimates of non-OPEC LDC oil
demand in 1985 range from 8.3 million to 9.5 million
b/d; for 1990 the range is 9.0-10.9 million b/d. We
estimate oil use in 1983 at about 8.6 million b/d.
Slower economic growth and recent LDC financial
problems will probably cause continued delays or 25X1
curtailments of alternative energy projects in major
oil-consuming countries. At the same time, however,
these problems may also limit oil imports and force
delays in developing new energy-intensive industry.
While conservation measures in some of the largest
consumers-Mexico and Egypt-are difficult to im- 25X1
pose for political reasons, financial needs may force
price hikes and the elimination of subsidies that would
curtail oil use. Until recently, oil demand in these
countries had been increasing at annual rates exceed-
ing 10 percent and is projected to continue to grow at
relatively high levels.
Since seven countries-Mexico, Brazil, India, Argen-
tina, Egypt, South Korea, and Taiwan-account for
60 percent of total non-OPEC LDC apparent oil
consumption, factors affecting their demand growth
will have a substantial impact on the aggregate.
During the decade, alternative energy development
plans in each of these countries could be changed
because of economic, financial, or political factors:
? Phase II of Mexico's nuclear program was suspend-
ed last year because of budgetary problems. Con-
ventional oil-fired power plants will probably fill a
large portion of the expected gap for electricity
generation because of the country's limited hydro-
power and coal resources. We believe the growing
transport sector will also place greater demands on
Mexico's oil resources despite some inevitable prod-
uct price increases.
 ? Brazil's development of nuclear and hydropower
resources has been pushed back substantially be-
cause of financial problems and the government's
lower estimates for electricity demand. Further.
delays in the future could cause higher-than-antici-
pated oil demand. According to the World Bank,
however, Brazil's commercial energy intensity has
declined in recent years through improved efficiency
and conservation measures. Brazil's alcohol pro-
gram is unique among the non-OPEC LDCs be-
cause of both its size and its success. Industry
experts estimate that alcohol production will rise to
160,000 b/doe by 1990.
healthy pace through the decade. However, the
government plans to increasingly satisfy electricity
demand with coal. Possible future delays and cost
overruns-which have been prevalent in the past-
in India's nuclear power development program
unfulfilled. Hydropower has been given the highest
priority under the national energy development pro-
gram. Several large projects are under way, and the
government plans massive expenditures to raise
hydro's contribution to electricity generation to
more than 60 percent by 1990. Financial difficul-
ties, however, are likely to force a slowdown in this
program as well.
? Oil consumption in Egypt has been growing at a
rate of some 13 percent annually since 1975, and we
believe it will continue to rise at a rapid rate because
of population expansion and the country's limited
choice of alternative energy sources.
? According to government officials, South Korea
plans to run its burgeoning industrial sector on coal
and some of its power plants on Indonesian LNG to
cut oil intensity during the 1980s. In addition,
several oil-fired power plants are being converted to
run on coal, and new coal-fired plants will be built.
South Korea's ambitious nuclear power program
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Appendix F
International Natural Gas
Markets in the 1980s
imost all industry projections of the natural gas
arkets through the 1980s indicate only moderate
major gas-consuming regions-Western Europe, Ja-
pan, and the United States-will become increasingly
dependent on imported natural gas:
By 1990 Western Europe is expected to rely on
imports for as much as 30 percent of total gas
requirements, with the bulk coming from the Soviet
Union.
Japan will be importing around 95 percent of its
total gas supplies by the end of the decade.
In the United States, if recent demand/supply
estimates prove accurate, dependence on imported
gas supplies will double to around 10 percent of
Although surplus capacity in all three regions is
currently sufficient to handle even a major supply
disruption, growing dependence on imported gas could
pose some problems for Western Europe in the late
1980s, especially in the event of a coincident
disruption of supplies from the USSR and Algeria.
Moreover, unless West European purchasers make a
political commitment during the 1980s to subsidize
high-cost indigenous projects, such as Norway's Troll
field, no new North Sea supplies would be available to
help offset disruptions in the following decade because
of the long leadtimes required to bring gas reserves on
about 3 percent in 1981 and slipped an additional 6
percent in 1982. In Japan, although gas use has
increased steadily since 1973, the rate of growth has
fallen sharply, averaging less than 3 percent per
annum during the last two years. US gas consumption
has fallen by more than 10 percent since 1980
The falloff in non-Communist gas consumption can be
traced to the economic slowdown that began in late
1980 combined with the sharp escalation in gas prices.
In Western Europe the nominal price of Dutch gas
exports, the basis for most European gas pricing, has
more than doubled since 1979, eliminating most of the
price advantage gas maintained over competing' fuels
throughout the 1960s and 1970s (see figure F-1). Gas
prices in Japan and the United States have followed a
similar upward patternF
their projections of non-Communist gas consumption.
These revised forecasts suggest to us that non-Com-
munist gas demand will increase to about 1.12 tcm in
1985 and 1.25 tcm in 1990 D If this 25X1
demand materializes, gas would probably retain its
share-roughly 19 percent-of total projected non-
Communist energy requirements in 1990. While de-
mand growth is expected to be most rapid in the
LDCs, OECD countries are still expected to account
for about 80 percent of non-Communist gas use in
1990: Western Europe and Japan are expected to
experience stronger growth in gas consumption than
After growing from 1 trillion cubic meters (tcm) in
1973 to 1.1 tcm in 1980, non-Communist gas con- Western Europe
sumption has declined during the last two years, Forecasts of West European gas consumption approx-,
dropping to about 1.0 tcm in 1982. In Western Europe imate 245 billion cubic meters (bcm) in 1985 and 260,
demand for natural gas declined abruptly in 1980 bcm in 1990, compared with about 205 bcm in 1982.
after two decades of uninterrupted growth and has All major countries except the United Kingdom are
continued to slide. West European gas use declined expected to register substantial increases in gas use.
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 Figure F-I
Average Prices for Oil and Natural Gas,
1973-82
United States
40
30
Heavy fuel oil
Rotterdam
Border price Dutch
gas-France'
Border price Dutch
gas-West Germanya
Indonesian LNG
delivered
Bruneian LNG
delivered
Average light fuel
oil prices
Average heavy
fuel oil prices
Average residentia
price US gas
l
West Germany, Italy, and France combined are
expected to account for more than half of all West
European gas consumption in 1990. Most of the
growth in West European gas demand probably will
occur in the residential/commercial sector, and one
major firm expects this sector to account for nearly
Japan
Because of Japanese efforts to reduce oil use and the
clean-burning properties of gas, demand for natural
gas is likely to grow rapidly 1980s. 25X1
apanese gas use 2bXl
will rise from about 26 bcm in 1982 to 42.5 bcm in
1985 and 55 bcm in 1990-about 12 percent of total
Japanese energy use. The bulk of the increase in gas
demand will occur in electric utilities, which currently
account for more than three-fourths of Japanese gas
consumption. Although gas use in the residential/
commercial sector will also trend upward, the increase
in this sector will be constrained by the lack of a gas
distribution infrastructure outside Japan's major cit-
United States
Because of recent moderations in gas price increases,
most forecasters now project some growth in US gas
use during the 1980s. Midrange estimates place 1990
gas consumption at 560 bcm-some 7 percent above
around 80 bcm during the 1980s. Imports, as in 1982,
will account for most of increased supplies (see figure
F-2):
? Completion of the Soviet gas export pipeline project
will add some 20 bcm to contracted European
supplies, with the potential for deliveries of another
20 bcm.
 gas reserves and a need to increase budget revenues,
Gasunie, the government gas marketing company,
has recently stated that an increase in gas sales is
justified, and we expect sales of an additional 5-10
bcm annually to be authorized.
? In the Far East, Indonesia is expected to nearly
double gas shipments to Japan in the 1980s. Malay-,
sia has recently begun shipments, and we expect. I
? On the basis of current contracts, Algeria is slated
to triple gas shipments to Western Europe to about
26 bcm by 1990. We believe production problems
will keep deliveries well below this level.
? Norway is expected to supply around 29 bcm of
natural gas to West European countries in 1990-
approximately the 1980 level. Increased production
from Statfjord and associated fields will be offset by
declining output from Ekofisk.
? Although Dutch gas exports are scheduled to dwin-
dle to around 20 bcm by 1990, additional gas export
commitments are possible. Spurred by increasing
25X1
 Figure F-2
Major Natural Gas Market:
Sources of Gas Supply, 1982
Western Europe
Demand: 207 billion cubic meters
Libya 0.5
Algeria 4.0
Abu Dhabi
12.0
Mexico 0.5
Algeria 0.5~
Canada 4 0
301385 1283
The bulk of internationally traded gas, we believe, Import Dependence
will continue to move via pipeline during the 1980s.
Pipeline gas exports totaled about 150 bem in 1982 or Western Europe, Japan, and the United States will
80 percent of total gas exports, with the Netherlands, become increasingly dependent on imported natural
USSR, Norway, and Canada accounting for 95 per- gas during the 1980s. Import dependence and major
cent of pipeline exports (see table F-2). Only a small sources of supply, however, vary between the three
number of countries have the facilities to receive and regions.
distribute LNG, and many countries have been dis-
suaded from importing LNG by the high capital and
transport costs associated with such projects (see
 Table F-2
Estimated-World-Gas Trade in-1982
Total gas
Total natural gas
Canada
United States
Bolivia
Argentina
US
Mexico
Austria
Belgium
Denmark
Finland
France
Italy
Luxem-
bourg
Nether-
lands
Spain
Switzer-
land
UK
West
Germany
East .
Europe
USSR
Japan
Total
2.4
27.1
0.3
3.0
8.7
0.1
0.8
20.2
14.6
0.4
2.7
2.2
1.3
10.7
33.2
33.1
2.5
23.7
187.0
2.4
24.8
0.3
3.0
8.4
0.1
0.8
13.3
14.6
0.4
2.7
0
1.3
10.7
33.2
33.1
2.5
0
151.6
0
22.1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
22.1
0
0.3
0
0
0
0
0
0
0
0
0
0 i
0
0
0
0
0
0.3
2.4
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2.4
Norway
0
0
0
0
1.8
0
0
2.2
0
0
2.7
0
0 I
10.7
6.8
0
0
0
24.3
Netherlands
0
0
0
0
6.6
0
0
5.9'
5.3
0.4
-
0
0.9
0
15.8
0
0
0
34.9
USSR
0
0
0
3.0
0
0
0.8
4.1
9.3
0
0
0
0
0
10.6
33.1
0
60.9
Afghanistan
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
2.5
0
2.5
Total LNG
0
2.3
0
0
0.3
0
0
6.9
0
0
0
2.2
0
NEGL
0
0
0
23.7
35.4
United States
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
1.3
1.3
Algeria
0
2.3
0
0
0.3
0
0
6.9
0
0
0
1.4
0
NEGI.
0
0
0
0
10.9
Libya
0
0
0
0
0
0
0
0
0
0
0
0.8
0
0
0
0
0
0
0.8
Arab
United
Emirates
0
0
0
0
0
0
0
.0
.
0
0
0
0
0
0
0
0
0
3
.0
3.0
Indonesia
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
12
12.4
1
2.4
Brunei
0
0
0
0
0
. 0
0
0
0
0
0
0
0
0.
0
0
0
7.0
7.0
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Western Europe
On the basis of the midpoint estimate of gas consump-
tionl and production in recent forecasts, we estimate
that West European natural gas import demand will
1 11
approximate 67 bcm in 1990. Reliance on non-OECD
gas supplies could vary from 25 to 30 percent depend-
ing on how the projected supply surplus is eliminated
(seeltable F-3). For some countries, however, levels of
dependence will be higher:
West Germany-Europe's largest gas consumer-is
expected to rely on the Soviet Union for more than a
third of its 1990 gas requirements.
? France has supply contracts with the Soviet Union
and Algeria to cover more than a half of its 1990
gas needs.
? Italy may sign to take additional Soviet gas to cover
import needs through 1990, thus bringing Italian
reliance on Soviet gas to around a third by the end
Although we believe contracted supplies should be
ample to meet projected demand in Western Europe
through 1990, growing dependence on imported gas
could pose problems in the late 1980s. France, Bel-
gium, and Italy, for example, could realize a shortfall
in contracted supplies from Algeria because of pro-
duction problems in Algeria's largest gasfield. We
estimate that on average Algeria will meet only about
half its annual gas export commitments in the late
1980s and early 1990s. If demand materializes as
expected, such a shortfall could result in additional
European purchases of Soviet gas late in the decade or
higher levels of domestic production unless additional
Dutch gas supplies are available. Moreover, the Sovi-
ets-who will supply around 20 percent of West
European gas requirements by 1990-have on occa-
sion been forced to curtail deliveries to Western
Europe and could repeat this action for technical or
25X1
 Table F-3
Western Europe:
Natural Gas Supply and Demand
1982 1990
Midrange
Estimate
Contracted supplies
Algeria n
Minimum
Libya 0.8 3
USSR 24.8 43-47
from forecasts of last year, probably because of expectations of
increased Dutch production as export policies are liberalized.
Estimates of UK gas production have also increased slightly
because of recent North Sea tax modifications-
b Algeria contract estimates do not include Spain because contracts
are being renegotiated. Spain may agree to import 2 bcm (0.03
million b/doe) from Algeria.
Soviet contract estimates exclude any Soviet gas from Urengoy for
Italy because kolume
(and/or price) will probably be renegotiate ownwar from the 6
to 8 bcm originally discussed.
On balance, the available alternatives-increased do-
mestic production, additional Dutch imports, and
storage withdrawals-appear to be adequate to bal-
ance a Soviet gas disruption in 1990, provided steps
are taken to ensure cooperation among European
purchasers and suppliers. Still, this does not preclude
some upward pressure on energy prices. Moreover, in
the event of an embargo lasting 12 months, storage
would be depleted, leaving Europe extremely vulnera-
ble to major gas shortages should the embargo contin-
Table F-4
Japan: Natural Gas Supply
and Demand
1982
1990
Midrange
Estimate
Consumption
25.7
55.0
Domestic production
2.0
2.0
Net import requirement
23.7
53.0
Contracted supplies a
58.0
USSR (Sakhalin)
4.6
United Arab Emirates
3.0
3.4
Alaska
Supply surplus
Potential suppliers
a Based on projects under construction or agreed to.
c Subject to approval by Canadian federal and provincial 25X1
authorities.
Japan
Current forecasts indicate that Japan will rely on
imports for around 95 percent of its gas needs by the 25X1
end of the decade. Indonesia and Malaysia are expect-
ed to supply around 60 percent of 1990 requirements
(see table F-4). If all of the LNG projects now agreed
to or under construction are completed as scheduled,
we believe supplies to Japan will begin to exceed
demand in the mid-1980s. Based on the prospect of a
surplus; the Japanese are not concerned over potential
delays in development projects with the Soviet Union,
Although Japan will rely on imports for the bulk of its
natural gas needs, increasing fuel-switching capability
will give the Japanese some measure of protection
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i n oecret
against a gas disruption. The Japanese electricity
generating industry-the principal gas consumer-
maintains a significant ability to switch to alternative
fuels. Currently 62 percent of LNG-fired capacity can
beswitched to alternative fuels, and by 1990 the
utilities will have the capability to cut gas consump-
tion by nearly 40 percent of total gas use. Moreover,
Japan is expected to be importing LNG from six
sources at that time.
United States
US dependence on imported gas supplies is expected
to double to around 10 percent of total gas require-
ments by the end of the decade. If recent demand/
supply estimates prove accurate, the United States
could experience a gas supply shortfall of about 5 bcm
in 1990 unless contracts are arranged for additional
supplies (see table F-5). We believe incremental gas
exports would be available from Canada and perhaps
Mexico to meet most potential shortfalls; such exports
would require authorization from regulatory agencies
Security Implications and Options for Western Europe
On the basis of existing contracts and market fore-
casts, European countries will import increasing
amounts of natural gas during the next several years.
Because of the long leadtime required to bring new
gas supplies on stream, the Europeans have few
options to expand indigenous gas production before
the mid-1990s. Given the high cost of developing
Norwegian gasfields and the present weak market, we
believe it is extremely doubtful that projects would be
undertaken on economic considerations alone. Indeed,
present market conditions will require a political
commitment by the Europeans to ensure timely devel-
The Dutch could substantially minimize non-OECD
gas imports in the future if they are willing to extend
export contracts. West European purchasers probably
would have to show their willingness to maintain
Dutch supplies by paying higher prices. The Nether-
lands might also be persuaded to sell more gas with a
Table F-5
United States: Natural Gas Supply
and Demand
1982
1990
Midrange
Estimate
Consumption
523
561.0
Domestic production
497
500.0
Net import requirement
26
61.0
Contracted supplies
56.0
Algeria
2
6.0
Canada
22
47.0 b
Mexico c
2
3.0 a
Supply gap 5.0
Under US regulatory review.
Volumes currently authorized for export. In addition to long-term
licenses, volumes of up to 2 bcm may be exported for periods of two
years. In our judgment, it is likely that Canada's NEB will also
license natural gas exports from offshore fields along the east coast
to the northeastern United States.
-Net
n US-Mexican gas import contract has no specific term but will
remain in force subject to gas availability and the discretion of both
seller and buyer. Volume of gas provided may also be renegotiated
upward at the discretion of both parties.
Considering currently licensed exports only, potential US shortfall
could be as high as II bcm if midrange gas demand estimate is
accurate and Algerian LNG deliveries were to cease.
commitment from Norway to replace these supplies in
later years. Such an arrangement would have to be
commercially attractive to the Dutch, however, before
it would be attempted. The Dutch could also increase
European energy security by maintaining strategic
gas reserves. Commitments between individual coun-
tries and the Netherlands would need to be clearly
defined, however, and the Netherlands probably
would demand a premium price to maintain this
25X1
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Coal Outlook:
A Buyer's Market
have trimmed their estimates of non-Communist coal
consumption in 1990 by 10 to 20 percent. If all
expansion programs under way or planned in the
major coal-exporting countries are realized, supply
availability on the international market in 1990 could
be some 40 percent above projected demand. Because
of the industry's high fixed costs, aggressive price
competition among suppliers is likely, and we would
expect the current downward pressure on coal prices
to continue in the absence of a major oil or coal supply
disruption. As a result, West European countries and
Japan-which will become increasingly dependent on
imports-should have little difficulty in securing am-
ple coal supplies at relatively stable prices, but we
expect the United States to be hard pressed to
compete with the lower prices and aggressive market-
Recent Trends
The oil shocks of the 1970s sharply increased coal
consumption and trade. Between 1973 and 1981 non-
Communist coal use rose by about 25 percent (3.5
million b/doe) and, provided half of the growth in
Western energy requirements. With fairly flat domes-
tic production in Western Europe and Japan during
the 1970s, non-Communist trade in coal rose rapidly,
from around 1.7 million b/doe in 1973 to nearly 2.9
million b/doe in 1981. The surge in demand following
the 1979 oil shock, combined with supply disruptions
in IPoland and Australia during 1980 and 1981, led to
tight market conditions, and prices soared. Prices for
steam coal delivered to Western Europe and Japan
jumped by more than 50 percent during 1980 and
1981 and cost the European Community an additional
$500 million in 1981 alone.
25X1
Rapid growth in demand and tight market conditions,
however, ended abruptly in 1982, when non-Commu-
nist coal use and trade virtually stagnated. Depressed
demand arising from the world economic recession, 25X1
high stocks, and rapidly rising supply availability
created a buyer's market. place
surplus export capacity at around 30 percent this
year, compared with less than 5 percent in 1981. Spot
prices for steam coal delivered to West European
ports plummeted nearly 25 percent last year and
continued to slide in 1983. This spring major coal
purchasers in Western Europe and Japan obtained 15-
to 25-percent price reductions in annual contract
Because of reduced prospects for economic growth
through the balance of the decade, most government
and industry analysts have trimmed their proiections
of non-Communist coal consumptions
? Current country coal forecasts by the International
Energy Agency are 700,000 b/doe below projections
25X1
25X1
25X1
25X1 ~
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 These revised forecasts and our own analysis of key
coal use sectors suggest that non-Communist coal
consumption will increase from 18.9 million b/doe in
1982 to about 23 million b/doe in 1990 (see table
G-2), with coal's share of total energy use holding
steady at about 21 percent. Economic growth pros-
pects lead us to agree with those forecasts that put
non-Communist coal demand at the low end of the
projected range in 1990. The lower projections gener-
ally assume a moderate rate of economic growth in
non-Communist countries-averaging around 2 to 3
percent annually for the balance of the 1980s. This, in
turn, will lead to a more moderate rate of growth in
coal use because two-thirds of non-Communist con-
sumption is used to generate electricity, which is still
closely linked to economic growth (see figure G-1).
In the industrial sector, only a slight increase in
metallurgical coal requirements for steel production is
likely, based on the economic outlook and continued
technological improvements in steel production. The
recent decline in oil prices will tend to dampen
conversions to coal in other industries because rela-
tively lower oil prices extend the payback period of
fuel switching. As for synfuels, growth in coal use will
be small: escalating capital costs, declining oil prices,
and reduced government funding have led to many
cancellations and delays in s nfuel projects around
the world.
OECD is projected to grow from around 16 million 25X1
b/doe in 1982 to about 19 million b/doe by 1990.
Although this forecast is nearly 10 to 15 percent
 becret
Table G-2
Non Communist Coal Supply
and Demand Projections
Million b/doe
1980
1982-
1985
Range
Midrange
Estimate
1990
Range
Midrange
Estimate
Non-Communist demand
18.8
19.6
18.6-22.4
20.4
20.5-26.9
23.0
Consumption
18.2
18.9
18.6-22.4
20.4
20.5-26.9
23.0
OECD
16.2
16.2
15.8-17.9
17.5
16.4-20.6
19.0
Rut of non-Communist world
2.0
2.7
2.0-5.4
2.9
2.1-6.3
4.0
Inventory change
0.6
0.7
0.0
0.0
0.0
0.0
Non=Communist supply
18.8
19.6
18.6-22.4
20.4
? 20.5-26.9
23.0
Production
18.4
19.3
18.6-22.4
20.4
20.5-26.9
23.0
OECD
15.9
16.3
15.2-21.0
17.0
15.7-24.6
19.0
Rest of non-Communist world
2.5
3.0
3.8-4.9 b
3.0
4.3-7.0
4.3
Net Communist exports
0.4
0.3
0.4
0.4
0.3-0.5
0.5
Consumption
7.5
7.5
8.0-8.8
8.4
8.3-10.9
9.5
Production
9.0
9.0
8.9-11.0
9.6
9.2-13.3
11.0
Net exports
1.0
1.2
0.9-2.6
1.2
0.9-3.3
1.5
iWesiern Europe
Consumption
5.4
5.4
5.2-6.0
5.6
5.4-8.4
6.3
Production
4.4
4.4
4.3-4.4
4.5
4.4-8.1
4.5
Net imports
1.2
1.2
1.1
1.1
0.3-1.8
1.8
(Japan
I Consumption
1.2
1.3
1.3-1.6
1.4
1.4-2,0
1.6
.I Production
0.2
0.2
0.2-0.3
0.2
0.2-0.3
0.2
iNote: Both Western Europe and the United States accumulated
coal) inventories in 1980 and 1982.
? Preliminary.
Is Midrange estimate of LDC coal production in 1985 excludes
noncomentional solids.-
below mutvidual government suomissions w Me inn,
coal is still likely to expand its share of total energy
uselfrom 22.5 percent in 1982 to around 25 percent by
1990. Because the bulk of OECD coal reserves are in
North America and Australia, OECD coal trade will
expand to help meet the increased demand, but non-
OECD sources will still account for about 5 percent of
United States
Coal use in the United States-the world's largest
coal producer, consumer, and exporter-is likely to
rise from 7.5 million b/doe in 1982 to between 9 and
25X1
25X1
25X1
25X1
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Synthetic fuels
Other industry (steam coal)
Iron and steel industry
(metallurgical coal)
1980 1990
Non-Communist
World
1980 1990
Japan
1980 1990
United States
1980 1990
Western Europe
meet the added demand in both domestic use and
export sales. Coal mines in development, expansion, or
planning stages could increase production capacity by
more than 5 million b/doe by the end of the decade,
Japan 25X1
Sharply lowered prospects for economic growth have _
transformed the outlook for Japanese
the past year alone, 25X1
Western Europe
Recent forecasts of West European coal needs indi-
cate only moderate demand growth through the end
of the decade. Most forecasters place 1990 coal
requirements at about 6.3 million b/doe, compared
with consumption of approximately 5.4 million b/doe
in 1982. Rising consumption combined with fairly flat
domestic production is expected to increase West
European dependence on imported coal from about 20
men s y nearly 15 to 25 percent. These recent
forecasts lead us to believe that Japanese coal use will
approximate 1.6 million b/doe in 1990-only some
200,000 to 300,000 b/doe above the 1982 level. With
domestic production likely to stagnate or decline
during the remainder of the decade, Japanese depend-
ence on imported coal will climb from about 85
percent in 1982 to about 90 percent by 1990.7 25X1
 I
Figure G-2
Major Coal Movements by Sea, 1982
700564(547564)12-83
I -
Prospects for reduced growth in demand, combined
with rapidly rising supply availability, should cause
the buyers' market in coal to persist for the remainder
of the 1980s. Completion of planned expansion pro-
grams in the major coal-exporting countries could
raise export capacity in 1990 to about 7 million
b%doe-around 40 percent above projected import
demand (see table G-3). Because of the industry's high
fixed costs, aggressive competition among suppliers is
likely, and we would expect the downward pressure on
coal prices to continue in the absence of a major oil or
coal supply disruption. In turn, West European coun-
tries and Japan should have little difficulty in secur-
ing ample supplies of coal at relatively stable prices.
As the high-cost supplier, however, the United States
will be hard pressed to compete with the bargain
basement prices and aggressive marketing tactics of
competitors. The National Coal Association is already
projecting a 30-percent drop in US coal exports this
year. Last year, US coal exports contributed nearly $6
than 50,000 jobs in the coal-mining industry.
Table G-3
Potential Seaborne Coal Export
Capability and Projected Imports
Seaborne coal demand 2.4
2.8
4.0
Supply availability 2.6
5.7
7.0
United States 1.0
2.8
3.3
Australia 0.6
1.1
1.4
South Africa 0.4
0.5
0.6
Canada 0.2
0.3
0.5
West Germany 0.1
0.1
0.1
United Kingdom 0.1
0.1
0.1
0.2
0.1
0.2
0.3
China NEGL
0.1
0.2
Other NEGL
0.1
0.2
0.2
2.5
2.9
25X1
25X1
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i I ecrer
~ Appendix H
OECD Electricity Prospects
Despite recent cutbacks in electricity demand fore-
casts, we expect electric power generation to account
for anlincreasing share of total energy consumption in
the industrialized countries. On the basis of our
analysis, we believe OECD electricity consumption
will rise from 23.6 million b/doe in 1982 to about 28
million b/doe in 1990 with nuclear power, coal, and
hydropower meeting both the higher electricity input
requirements and reducing the amount of oil used.
Although foil's share of electric power generation is
expected to continue its downward trend during the
remainder of the decade, continued heavy reliance on
oil- fired generating capacity will leave Italy and
Japan particularly vulnerable to oil supply disrup-
tions.
Re' cent Trends
Electricity demand growth has consistently outpaced
GDP growth in the OECD countries. From 1960 until
1973 electricity demand grew at a rate of nearly 7.5
percent, while economic growth averaged slightly
higher than 5 percent. Electricity demand in the
OECD countries now accounts for about 15 percent of
total final energy consumption,'compared with about
9 percent in 1960. Because of the thermodynamic
inefficiencies of converting heat to electricity, power
generation requires the consumption of nearly three
timeslas much energy as is generated in the form of
electricity. Thus, while electricity demand currently
accounts for less than one-sixth of total final energy
consuimption, energy inputs into electric power gener-
ation account for nearly one-half of total final energy
deman
d
1
973/74 oil embargo and subsequent energy
The 1
price increases have altered the relationship between
energy consumption, electricity demand, and econom-
ic growth. From 1973 to 1980 the rapid increase in
the real price of all forms of energy kept total energy
demand from increasing in the OECD countries. The
price of electricity, however, was held down by gov-
ernment regulation, low-cost supplies of hydropower,
and increasing quantities of nuclear-electric power.
As a result, electricity prices increased only half as
fast as oil and gas prices, and electricity demand grew
at a 3.0-percent annual rate while GNP grew 2.5
With the price increases of the 1970s many countries
decided to diversify their sources of electric power
generation and reduce their relative dependence on
politically unstable sources of oil supply. Substantial
increases were planned for nuclear, coal-fired, and
hydroproduction. France, for example, in 1974 in-
creased its planned nuclear-electric generating capac-
ity for both 1980 and 1985 by'two-thirds. Orders for
new nuclear units in the OECD countries, which had
averaged 33 per year since the mid-1960s, reached a
.peak of 62 in 1974. Rapidly escalating construction
costs, high interest rates, more stringent environmen-
tal requirements, and slowing growth rates for elec-
tricity demand, however, led to the deferral or cancel-
lation of many of these projects in the ensuing years.
A total of 90 nuclear power reactor orders have been
canceled in the United States alone since 1974, and
Continued conservation gains, lower growth prospects,
and increasing real electricity prices should further
reduce the growth rate for electricity demand. We
expect electricity prices to increase in real terms as
large new and expensive generating capacity enters
the rate base and as regulatory bodies pass through
cost increases to improve the utilities' financial health.
Electricity demand forecasts for OECD countries
have been reduced repeatedly in the past few years.
For example, IEA forecasts of projected electricity
use in 1990 for the Big Seven OECD countries, which
account for about 85 percent of OECD electricity
 Table H-1 Terawati-hours a
OECD: IEA Projections of Electricity
Consumption for 1990
Forecast Date
1978
1980
1982
Total OECD
8,696
7,473
6,384
Big Seven
7,392
6,352
5,426
Canada
535
535
438
Frances
460
455
336
Italy
420
313
271
Japan
1,091
937
822
United Kingdom
396
337
252
United States *
3,855
3,274
2,862
West Germany
635
501
445
Other OECD '
1,304
1,121
958
a One terawatt-hour represents the equivalent of 5,041 b/doe
primary energy.
b Not estimated by lEA.
c Extrapolated from lEA data.
consumption, were cut by nearly 27 percent from
1978 to 1982 (see table H-I). Indeed, we believe that
these forecasts are still too high, and we project total
1990 electricity demand in these countries to be some
We also expect the relationship between electricity
demand and economic growth to weaken further.
During the remainder of the 1980s, we project elec-
tricity demand growth to average about 2.1 percent,
compared with recent forecasts of GNP growth of
about 2.5 percent. As a result, we now project OECD
electricity demand in 1990 at 5,510 terawatt-hours
(TWh)-27.8 million b/doe-up about 19 percent
from 1980 demand (see table H-2). The majority of
this increase will be met by nuclear power generation
(see table H-3), with the remaining portion filled
Nuclear Power
Nuclear plants remain cost competitive with coal-
fired plants in Europe, Canada, and Japan. Even in
the United States, nuclear power enjoys a small cost
advantage in urban areas because coal plants must be
Table H-2
OECD: CIA Estimates of
Electricity Consumption
Total
4,634
4,673
4,843
5,513
Canada
308
313
317
381
Franceb
219
224
238
293
Italy
166
165
170=
188=
Japan
531
527
536=
626=
United Kingdom
242
232
240
261
United States
2,191
2,183
2,282 =
2,563
West Germany
329
328
341 =
378
Other OECD
648
701 b
719 =
824
a Preliminary.
b Extrapolated from lEA data.
c Adjusted.
25X1
25X1
built with extensive antipollution equipment. As a
result, current electric power construction programs
in the OECD countries are heavily dominated by
nuclear power, despite the fact that numerous nuclear
power plants have been canceled, postponed, or de-
layed primarily as a result of slack growth in electric-
ity demand.25X1
At the present time, 141 nuclear power plants totaling
more than 139,000 megawatts-electric (MWe) are
under construction in the OECD countries. Eleven of
these units are undergoing low-power startup and
testing operations. A total of 223 nuclear power plants
are in operation in the OECD countries with an
,installed capacity of more than 139,000 MWe. Based
on current construction schedules and electricity de-
mand forecasts, we believe that nearly all of this
nuclear power capacity will be fully utilized as it
comes on line. France, however, will have consider-
able surplus nuclear generating capacity by the end of
the decade.25X1
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Table H-3
OECD: Net Nuclear-Electric
Power Generation
Terawalt-hours Table H-4
OECD: Changing Fuel Mix for
Electricity Generation
Country
1
1980
1982
1990
France
58
103
172
Italy
2
6
17
Japan
76
98a
135
United Kingdom
32
39
68
United States
251
283
626
West'Germany
60
110
Other OECD
93 a
193
Coal
According to a number of recent studies in the OECD
countries, coal has a substantial economic advantage
over oil and gas for electricity generation and is the
primary fuel for new thermal-electric power plants.
Coal-fired generating capacity is expected to grow
most rapidly in Japan, West Germany, and the
United States. The electric power industry in Japan is
reducing its dependence on imported oil by diversify-
ing its fuel mix with moves to coal and LNG. West
Germany has an aggressive construction program for
coal-fired electric power plants, in part to maintain
employment in its coal-mining industry. In addition,
the construction of new oil- and gas-fired electric
generating units is prohibited by West German law.
Because of problems with nuclear plant construction,
we expect coal to be the preferred fuel for new power
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Hydro/Geothermal
20.2
20.5
Coal
42.6
36.7,.'
Natural Gas/LNG
10.5
8.2
Petroleum
15.6
9.6
Lower projections for electricity demand, however, I
are severely affecting coal-fired electric power plant
construction programs. Based on the long construction
leadtimes and. large capital investment costs, we be-
lieve nuclear power plants already under construction
are likely to proceed at the expense of planned coal-
fired capacity. In France, for example, Paris expects
its aggressive nuclear power program to cut electric
utility coal consumption by more than half by 1990.
Even in Japan, where our analysis indicates that coal
consumption by electric utilities will increase substan-
tially during the decade, lower-than-expected growth
in electricity demand has reduced the need for new
coal-fired electric power plants and has resulted in
delayed or postponed.
9,000 MWe of coal-fired capacity
already have been scrapped or delayed until the
1990s. As a result of these conflicting trends, coal's
share of electric power. generation is expected to
decline from 43 percent in 1980 to about 37 percent in
1990 (see table
25X1
25X1
25X1
 Figure H-1
Big Seven: Net Installed Generation
Capacity at Yearend, 1982
Fuel-Switching Capability
Significant progress has been made in reducing
OECD dependence on gas and oil as fuel for electric
power generation. Indeed, gas and oil inputs to elec-
tric power generation have declined from 36 percent
in 1973 to 23 percent in 1981, the last year for which
complete OECD data is available. Taking the Big
Seven countries as a proxy for the OECD as a whole,
oil- and gas-fired units currently account for nearly
40 percent of total electricity generating capacity and
only about 20 to 25 percent of total electricity produc-
tion (see figure H-1). The shift from oil-fired electric-
ity generation, combined with the introduction of
dual-fired generating capacity (see figure H-2), is
increasing the flexibility of OECD countries to deal
with energy supply disruptions. As a result, we believe
the OECD countries as a whole are better able to
withstand an oil supply disruption in the electric
power generation sector than they were a few years
ago. The situation, however, varies considerably from
country to country
Since Italy is almost totally dependent on imported
oil, its electric power generating sector is particularly
vulnerable to an oil supply disruption. Indeed, such a
disruption would adversely affect about 36 percent of
Italy's electric power generating capacity. Because
natural gas is a backup fuel at many oil-fired electric
power plants in Italy, a simultaneous disruption of oil
and gas supplies could idle more than half of the
country's generating capacity, according to our analy-
sis. With only two nuclear power plants under con-
struction, Italy will remain highly vulnerable to oil
Japan also is almost totally dependent on imported oil.
An oil supply disruption would adversely affect nearly
41 percent of Japan's electric power generating capac-
ity. Natural gas accounts for another 14 percent of
electric power generating capacity, according to
OECD data, and Japan plans to increase gas imports
in an effort to decrease dependence on oil. While an
ambitious nuclear power program, combined with the
slowing growth rate for electricity demand, should
cushion Japan against potential energy supply disrup-
tions, heavy dependence on imported oil and gas will
leave the country highly vulnerable to energy supply
France and West Germany are both heavily depend-
ent on oil imports, but both have made considerable
progress in reducing their dependence on oil-fired
electric generating capacity. Industry statistics show
that oil-fired capacity now is aimed primarily at
meeting peak-load demand for electricity. Slowing
growth for electricity demand and increases in nucle-
ar generating capacity will further insulate the elec-
tric power sectors in these countries from energy
supply disruptions. Indeed, we believe that unless
economic growth rebounds substantially, France will
be able to phase out all of its oil- and gas-fired electric
 ail ,I _
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Figure H-2
Big Seven: Electricity Generation Dual Switching
Capacity pacity at Yearend, 1982
Percent
Oil/gas/coal 0.2-
OiI/coal 2.7
301368 12-03
In the United Kingdom only about 10 percent of
electric power production comes from oil- and gas-
fired generating capacity. In Canada the correspond-
ing figure is 4 percent. The Provinces of New Bruns-
wick, Nova Scotia, and Newfoundland, however,
depend on oil and gas for a disproportionate share of
their electricity supply. According to recent OECD
data, Canada and the United Kingdom are nearly
self-sufficient in oil and gas production, decreasing
the threat of energy supply disruptions to their elec-
tric power sectors. As is the case in other countries,
slowing demand growth for electricity and increased
nuclear power generation should act to ease the
impact of supply disruptions in the next few years.
Coal/oil/gas I.O1
Coal/gas 7.t~
Coal/oil A
10.0
I
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