ABU DHABI, 27 September 2005 — Oil markets could be headed for a supply crisis in the next two decades as non-OPEC production will soon stagnate and major OPEC producers will not likely meet soaring demand, experts said yesterday.
“I think we have already started to feel the (supply) crisis,” said Jean-Pierre Favennec, director of the Center for Economics and Administration at the Institut Francais de Petrole (IFP). Five major Gulf producers are required to pump 51.8 million barrels per day (bpd) by 2030 or 43 percent of global demand of 121.3 million bpd, according to International Energy Agency (IEA) projections, he said.
“But these countries (Saudi Arabia, Kuwait, United Arab Emirates, Iran and Iraq) can pump a maximum of 38 million bpd by that year,” Favennec said on the sidelines of an oil and gas conference. The three-day conference, titled “Gulf oil and gas: Ensuring economic security,” is organized by the Emirates Center for Strategic Studies and Research to explore future trends in the oil industry.
A rapid increase in demand by emerging economies, especially China and India, is responsible for the overall surge in global demand for oil, Herman Franssen, president of International Energy Associates, US, said. “Currently, five billion people in developing countries use two barrels of oil per year, while people in developed nations use 18 barrels per year on average,” he said.
If the Chinese and Indians increase consumption from two to four barrels a year, that would cause global demand to rise 85 million bpd, which is the entire world production at present, Franssen said.
Fear over future supply shortages is further strengthened by the fact that neither Iraq nor Iran are in a position to raise their output substantially in the near future and that non-OPEC production will cease to increase soon. “Non-OPEC production is expected to reach a plateau in the middle of the next decade. Iran is not in a position to increase and Iraq is constrained by security problems. So, the focus will be on the (Gulf Cooperation Council) GCC states,” Franssen said.
Franssen however doubted if the GCC nations would want to boost output substantially. “I think it is in their interest to raise output by a few million bpd and preserve their oil wealth over a long period rather than diminishing their reserves fairly quickly by boosting production substantially,” he said.
Kuwait’s national representative at OPEC Nawal Al-Fezai said the level of prices and security of demand will determine the size of expansion in GCC production. “GCC states have abundant reserves and can raise output, but we must first see the level of prices and if there is sufficient demand. We can’t produce oil that has no buyers,” she said.
Favennec told the conference that if every citizen of the world’s six billion population consumes oil as a US citizen does, oil resources will be good for only eight years. But if they consume like citizens of Senegal, for example, oil will last for more than 100 years, he said.
“So, the key issue here is the need to reduce oil consumption in order to avoid a major supply crisis,” Favennec said.
The experts also believe that the Gulf states which need to carry out painful reforms to secure long-term economic prosperity. With state coffers overflowing with petrodollars, and housing and stock markets booming, Gulf states should avoid repeating the mistakes of the oil boom in the 1970s and early 1980s when they squandered a golden opportunity to diversify and reform their economies.
“States in the region have no choice but to embark on the painful changes,” said Tareq Yousef, a professor of economics at Washington’s Georgetown University. Yousef warned that “in the next 10 to 15 years, oil (revenue) is unlikely to achieve what it achieves now.”
“We are starting to see a repetition of the past,” he said, citing a lack of strategies to deal with chronic economic ills across the Gulf. Yousef said future economic security in the Gulf does not depend only on the ability of the region’s member states to manage oil resources effectively and to engage in successful regional integration.
He said Gulf states must tackle pressing development challenges facing their economies, including job creation, sustainable growth and reducing the role of the state in the economy.
“This region needs to make three realignments in its economy: from public to private sector, from closed to open economies and from oil-oriented to more diversified economies,” he said. “Even though the private sector has expanded and become a big player, labor markets continue to be dominated by public sector employment, reinforcing the role of the state as a dominant force in the economy,” Yousef said.
While the short-term prospects look promising for GCC states due to tight oil markets ensuring high prices and abundant cash flow through the end of 2006, experts said the medium- and long-term were not guaranteed.