The first reaction to the 1973-74 quadrupling of oil prices and the oil embargoes was fear of immediate national and international economic dislocation. But an additional doubt soon emerged concerning the longer term availability of oil and the consequent need to move from dependence on petroleum to greater reliance on other forms of energy.
This second, and now dominant, concern is illustrated by the appearance of three independent studies, from the U.S. Central Intelligence Agency (CIA), the Organisation for Economic Co-operation and Development (OECD), and the Workshop on Alternative Energy Strategies (WAES), all within a few months of each other, all arriving at similar results. They conclude that if present policies continue, severe stringency in the oil market will develop, probably around the mid-1980s.
The CIA report states: "In the absence of greatly increased energy conservation, projected world demand for oil will approach productive capacity by the early 1980s and substantially exceed capacity by 1985." The OECD press release concludes that by 1985 "if OECD countries maintain current policies and practises their demand for imported oil could rise to 35 million barrels per day. . . . This level of demand . . . might exceed the quantity of oil that exporting countries, particularly OPEC, would be willing to make available." Finally, WAES concludes: "The supply of oil will fail to meet increasing demand before the year 2000, most probably between 1985 and 1995, even if energy prices rise 50 percent above current levels in real terms."
As might be expected, this convergence of views stems from similar assumptions about the future. On the demand side, all studies project similar rates of economic growth, and include among their price assumptions constant oil prices. On the supply side, all studies project an increase in oil production from Alaska and the North Sea which will stabilize OECD import demand from OPEC up to 1980. Thereafter they project increased reliance on OPEC. The estimates of demand for OPEC oil by 1985 imply that Saudi Arabia would have to double its output from present levels, though all studies question Saudi Arabia's willingness to do this, given the financial and investment implications.
A feature common to all reports is the explicit emphasis on government policy as a major variable. This is a new development—a previous OECD forecast prepared only one year earlier did not include policies as a variable—which reflects a belief that the price rise induced by OPEC will not alone be sufficient to bring supply and demand into balance.
The differences in the studies, indicated by the year in which stringency in the oil market is expected to develop, derive from some differences in assumptions or from choice of scenario emphasized. Thus the CIA, by assuming that the Soviet bloc will become a significant net importer, estimates that the shortage will begin by 1981, which is much earlier than the other projections. The WAES study, on the other hand, by allowing for higher oil prices, oil reserves, and nonrestrictive OPEC production policies in some of its scenarios, pushes the date backward to 1995 or later.
These studies have all been criticized, both for their assumptions and their methodology. The oil prices assumed are not high enough to permit adequate development of oil supplies from shale and tar sands, coal liquefaction, or substitute fuels. Furthermore, there is still considerable controversy over the size of oil reserves. If they turn out to be higher than estimated, then future oil supplies could be greater.
Critics have taken exception to the concept of "gaps" between supply and demand for oil, pointing out that such gaps can never occur. Shortfalls in supply are met by price increases or by some form of rationing, but by definition supply must equal demand. The answer to this argument, at least from WAES, is that the concept of "gaps" is nonetheless useful because "the existence of gaps in our projections really illuminates the degree of change that must and will occur" in the assumptions (on growth, prices, government policies) underpinning the scenarios. In these terms, all studies point to the need, sooner rather than later, for considerable readjustment in energy consumption or in the pattern of energy supplies—substituting more abundant fuels for oil—if growth rates are not to suffer.
These views, particularly the OECD analysis, clearly underpin the decision recently adopted by the Governing Board of the International Energy Agency, which establishes as an objective of IEA member countries holding total oil imports to current levels (about 26 million barrels a day) in 1985. This objective may not be difficult to achieve in the next few years as supplies of Alaska and North Sea oil develop. But it will require new policies if this production levels off as expected in the 1980s.
The U.S. share in fulfilling this OECD-wide objective was not made known. But to judge from the World Energy Outlook, U.S. imports would have to fall to just over 4 million barrels a day, substantially below existing levels and below the 7 million barrels a day for 1985 originally envisaged in President Carter's energy plan.
A version of this article appeared in print in the January 1978 issue of Resources magazine.
