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09/17/91

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Dependence upon Persian Gulf oil to grow

STANFORD -- Dependence upon Persian Gulf oil will grow steadily over the next two decades, and is shared by energy policy experts with widely differing views on oil market trends agree. And this outlook holds over a range of oil price and economic growth conditions.

A working group of 36 leading experts from industry, government and universities reported this finding in a new study released by the Energy Modeling Forum of Stanford University. The working group's conclusions are based partly upon a comparison of the results from 11 existing models of the world oil market.

Rising oil demand and stable-or-declining supply outside the Middle East will increase the demand for oil from the politically volatile Persian Gulf. Even with steadily higher oil prices, that region's market share is expected to rise from 34 percent in 1990 to 42 percent by 2000 and to 45 percent by 2010 (using the average of the models' results).

About two of every three barrels consumed within the United States are likely to be imported by 2010 under these conditions.

Growing dependence of the world economy on these supplies will remain a critical policy issue for major oil-consuming countries. Higher future oil prices would help slow future demand growth and increase production outside the Middle East, but the dependence upon the Persian Gulf will still grow, according to the report.

"Our results indicate that it will be difficult and costly to reduce the U.S. dependence upon oil imports from today's levels," said W. David Montgomery, a vice president of Charles River Associates who chaired the working group while he was assistant director of the U.S. Congressional Budget Office. "For this reason, policy measures should not rely upon limiting oil imports alone but should also include oil stockpiles, macroeconomic stabilization policies and other actions to help the economy adapt to future price shocks."

Despite the common view of growing Persian Gulf dependence, the group was sharply divided on how fast the world's demand for oil would grow. Years of fluctuation in energy prices, economic growth and shifting government policy have resulted in strong disagreement about how these factors would affect future oil demand.

"Analysts must draw lessons about future demand patterns from a limited historical experience," said Hillard Huntington, executive director of the Stanford Energy Modeling Forum. "This experience includes sudden and sharp shifts in trends for oil use, price and economic growth, resulting in considerable uncertainty about how future oil use will respond to different conditions."

Group members had surprisingly different views of the effect of lower oil prices during the late 1980s on future oil- demand trends. Some analysts expected that these lower prices would strongly stimulate oil demand growth during the 1990s, as the economy begins to gradually replace its energy-using equipment. Others disagreed, causing a wide discrepancy in oil demand projections as early as 1995.

While the study placed much less emphasis on projecting what the future oil price would be, the group examined the factors influencing oil prices over the longer run.

Persian Gulf oil production would need to expand very rapidly to keep inflation-adjusted oil prices from rising over the next two decades. Some modelers, foreseeing low demand growth and expanding OPEC output, projected oil prices growing slowly to between $20 to $25 (in 1990 dollars) by the year 2000. Substantially higher oil prices -- in the range of $30 to $40 -- were projected by modelers anticipating either rapid demand growth or constrained Middle Eastern oil production.

The report concluded that uncertainty about world economic growth, oil supply-and-demand responses to prices and economic growth, and political developments in oil-producing and oil-consuming countries make it extremely difficult to project future oil prices.

The Energy Modeling Forum was founded in 1976 to improve the use and usefulness of energy models in helping policymakers and corporate decisionmakers understand important issues. Each study brings together a number of model developers and potential model users in order to improve communication between the two groups.

The summary report, International Oil Supplies and Demands, is available for $15 (prepaid) from the Energy Modeling Forum, 406 Terman Center, Stanford University, Stanford, CA 94305-4022; telephone (415) 723-0645.

Besides Huntington, the Stanford participants in the forum are Alan Manne, operations research and James Sweeney and John Weyant, engineering-economic systems.

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