How close is the current oil market to the 1970s crude crisis?
We’ve been asked if the current oil market is similar to that of the 1970s oil price crisis. While some similarities exist, we find that the differences are far more significant, particularly when thinking about the medium-term outlook.
The Arab oil embargo of 1973 resulted in a five-fold price increase in the price of crude. Crude prices averaged somewhere near $2 per barrel for about 100 years — plus or minus 50 cents per barrel — but increased to an average of about $10 per barrel. The rise was partly a function of consumers hoarding oil due to a fear of shortages, but for the sake of this article, the important issue to note was that this price rise set several fundamental factors in motion.
Global oil demand continued to grow through the decade, but in 1979 we saw the start of a massive four-year-long decline in demand for crude because of fuel switching. Coal, natural gas and nuclear energy began to displace petroleum fuels that were used for heating and electricity. In the 1970s, approximately 31 percent of global petroleum consumption was used for heating and electric power generation which compares to about three percent today. The drop in demand was almost 10 percent of the global total over that four-year period or about six million barrels per day.
The other fundamental shift unleashed by the oil price rise of the 1970s was the enormous expansion of non-Organization of the Petroleum Exporting Countries’ oil supply. Significant gains came from five key areas: Notably the UK and Norwegian sectors of the North Sea, China’s Daqing province and its South Sea, Alaska’s Prudhoe Bay, Russia’s western Siberian region and Mexico’s offshore Cantarell field. The ten million barrels per day of extra supply was disproportionately large and ended up compounding the effects of the contraction in global demand.
The result of these two factors resulted in a near-50 percent cut in OPEC oil production. This created a massive rise in the group’s level of spare oil production capacity. This capacity overhang plagued the body for nearly two decades. From an oil market perspective, the concern over that period is generally related to over-supply and downward price spikes.
The current environment and what we forecast looking forward does not lead to the threat of a production capacity overhang. Demand today is much more inelastic, given almost all petroleum use is for transportation and petrochemicals. Short of the invention and commercial application of ‘fusion in a jar,’ oil demand will keep growing at about half the rate of the world’s gross domestic product for decades to come.
In a sense, the fuel switching card was played 40 years ago. While there are some who believed electric vehicles will permanently displace oil in the global energy mix, our work suggests that the global fleet of petrol-powered vehicles will continue to overwhelm the mix.
Also, we do not see prospects for a massive expansion in non-OPEC oil supply. All of the fields we cited above that sourced supply growth in the 1970s are in various stages of decline. Importantly, the only meaningful expansion in non-OPEC output over the past decade came from US shale, which we see as being in its twilight phase.
We expect non-OPEC oil supply gains will prove to be disappointing. As we have noted in our work for some time, disproportionately smaller gains from non-OPEC supply will basically result in oil geological pressures being exacerbated by anti-carbon lobbying and virtue signaling pressures from environmental, social and governance mandates.
What all this means is that we see the medium-term oil market outlook as being one that is production-capacity challenged, a view that runs quite at odds with the consensus forecast. These structurally bullish pressures are already clear in our forecasts, which is one reason why we have taken the non-consensus view that current emergency inventory releases by the Organization for Economic Co-operation and Development nations would prove ineffective in trying to lever down crude oil prices.
• Michael Rothman is the president and founder of Cornerstone Analytics, a US-based consultancy focusing on macro-energy research. He has nearly 40 years of experience covering the global energy markets and has been attending OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon