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Global Oil Trends

Authors: Lionel Beehner, and Toni Johnson
Updated: October 18, 2007
This publication is now archived.

Introduction

With the gap between global supply and demand narrowing, energy has reclaimed its place near the top of the geopolitical agenda. Oil prices have remained high and show no signs of abating, sparking an increasing interest in Washington to secure future supplies of oil and natural gas. The economic growth of China and India have added pressure on a market that experts say is in a trend of tight supply. Oil’s history is studded with price shocks and rapid fluctuations in supply and demand. Yet a look at the world’s major oil producers, many of them politically volatile places already pumping at near capacity, suggests the latest market fluctuations have deeper causes.

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Which nations produce the most oil?

Four of the five biggest oil-producing continues—Saudi Arabia, Iraq, United Arab Emirates, Kuwait—lie in the volatile Middle East (the other is Canada). Others, including Venezuela, Russia, Libya, and Nigeria, are either fraught with political uncertainty or run by strongmen hostile to U.S. interests. Here's an inside look at some of the most volatile energy havens, as well as their economic and political outlooks:

  • Saudi Arabia. Saudi Arabia, which holds 22 percent of the world's known reserves, produces roughly 10.5 million barrels per day (bpd); global daily consumption is 82 million bpd. The kingdom has said it hopes to increase daily production to 12.5 million bpd by 2009. However, some experts say Saudi Arabia’s oil fields, whose capacity and condition are kept secret, are not as bountiful as Saudi officials claim. “The Saudis don’t have that spigot any more,” said Paul Roberts, author of The End of Oil, in a June 2005 Council on Foreign Relations meeting. “They don’t have the capacity to just flip the switch any more. It's been used up.” Others, including Matthew Simmons, have called on the Saudi government to publish audited field-production reports. “‘It would then take anybody less than a week to say, ‘Gosh, Matt is totally wrong,’ or ‘Matt actually might be too optimistic,’” says Simmons, head of Simmons & Company, a company that advises energy investors. Saudis have dismissed demands by Simmons and others to open up their books. “Our record...is to understate rather than overstate our reserves,” said Prince Saud al-Faisal, foreign minister of Saudi Arabia, in a September 2005 Council on Foreign Relations meeting. “When you want to believe or disbelieve somebody, you look at his record. You don’t go and audit his books.” D. Barry McKennitt, executive director of the U.S. National Association of Petroleum Investment Analysts, also notes that much of the new supply is predicted to come from heavier-grade crude, which many refineries, especially in the United States, are unable to handle.

    Saudi Arabia has also been accused of using its oil profits to finance mosques and madrassas that spread a violent, anti-Western brand of Islam, experts say. “Without its oil windfall, Saudi Arabia would have had a hard time financing radical Islamists across the globe,” wrote journalist Peter Maass in the August 21, 2005, New York Times Magazine. As such, relations between Washington and Riyadh have soured since September 11, 2001, partly because fifteen of the nineteen hijackers were of Saudi descent, but also because Americans see the Saudi regime as complicit in funding Islamic fundamentalism. On the flip side, Washington has been increasingly viewed unfavorably by Saudis since its March 2003 invasion of Iraq, argues Roger Kubarych, CFR's Henry Kaufman adjunct senior fellow for international economics and finance, writing recently in The International Economy.
  • Russia. The world’s second-largest producer and exporter of oil, Russia employs less than 1 percent of its workforce in the oil and gas sector, despite the fact its energy industry comprises roughly a quarter of the country's gross domestic product (GDP). (The official figure of 9 percent is distorted by questionable accounting practices, economists say.) Oil and gas make up roughly two-fifths of all Russian exports, leaving some investors wary of investing in such a resource-dependent market: A $1 per barrel change in the price of oil, for instance, results in a $1.4 billion change in Russian revenues. In its favor, Russia created a cushion for such changes by developing an oil-stabilization fund, worth some $44 billion, which can only be tapped to reduce its deficit or finance pension funds.

    The bulk of Russia’s 60 billion barrels of proven oil reserves lie in Western Siberia. A good portion, roughly 14 billion barrels, is also found on Sakhalin Island, a body of land north of Japan that is frozen seven months of the year and formerly housed Soviet prisoners. There are two joint, start-up production projects underway there: Sakhalin-1 and Sakhalin-2, the former led by ExxonMobil, the latter by Royal Dutch/Shell. Both projects are part of what is known as “production-sharing agreements,” where foreign oil firms front the investment capital while the Russian government gets a share of the revenues and retains rights over the oil and gas reserves. In 2007, the Russian government updated the agreement by pressing Shell to give up majority control of Sakhalin-2 to state-owned Gazprom, which some critics said was the first effective attempt to nationalize a foreign oil or gas project in Russia.

    The trouble with these projects, including those in Western Siberia, is getting the product to market, experts say. Given Russia’s climate and geography, it is short on deep-sea water ports. Also, Russia’s capacity to transport its oil has not caught up to production. Russia produces roughly seven million barrels of oil per day, but can only ship around four million via major pipelines. The rest must be transported by rail or river.

    Another hindrance is politics. The so-called Yukos affair, the government’s October 2003 arrest of Mikhail Khodorkovsky, formerly Russia’s richest man and head of the oil goliath Yukos, shook investor confidence in Russia’s economy. In the year after Khodorkovsky’s arrest, capital flight—only $2.9 billion in 2003—soared to $9 billion. Further, the sight of Khodorkovsky being hauled off to a Siberian penal colony for an eight-year prison term on what most say were politically motivated fraud and tax evasion charges, did not soothe investors’ nerves. “The oil market has been stalemated because of the Yukos affair,” says Anders Aslund, a senior associate with the Carnegie Endowment for International Peace and expert on the Russian economy. “When you’re fighting over property rights, you don’t do big projects.”
  • Venezuela. A founding member of Organization of Petroleum Exporting Countries (OPEC) in 1960, Venezuela has emerged as the world's fifth-largest exporter of oil, comprising 15 percent of all U.S. imports. In December 2005, the state-run firm, Citgo, began selling directly to select areas of the United States, including Massachusetts and the Bronx borough of New York City. Nearly all of the foreign investment into Venezuela is energy-related, and oil comprises one-third of the country’s GDP. But the country's leftist president, Hugo Chavez, who has direct control over Venezuela's oil revenues, has threatened to cut off oil exports to the United States, used in his words to “subsidize Mr. Bush.” Much of the animosity stems from 2002, when Washington—in Chavez’s view—supported a failed coup in Caracas. Chavez has also befriended longtime U.S. enemy, Cuban leader Fidel Castro, invited primarily state-run firms in China and Iran to invest in its oil sector, and purchased small arms from Russia that some fear may end up in the hands of Colombian guerillas. In 2007, Chavez forced international oil companies operating in the country to turn over majority control of their projects to a state-owned company, PDVSA, and remain as minority partners, or face a complete nationalization of operations in Venezuela’s Orinoco River basin. Experts expressed concern about the future of the country’s ability to produce oil since much of the revenue is going to social programs and not into oil infrastructure.
  • Nigeria. Nigeria produces roughly 2.5 million bpd, but because of mismanagement and corruption must buy back refined fuel from outside countries, often non-oil-producers like Spain, at a mark-up. While the country has earned an estimated $280 billion from oil exports over the past thirty years, its government has invested little in expanding or maintaining refining capacity in recent years. Another issue is poor security. Attacks on pipelines and other facilities, mostly by locals upset with their share of oil revenues from the Niger Delta, are common occurrences.
Where is demand for oil the greatest?

The world’s thirst for energy is doubling every ten years, experts say. The United States, home of the SUV, consumes the most at roughly a quarter of the world's energy. U.S daily demand, currently at 21 million bpd, has continued to rise in recent years, notwithstanding the higher prices at the pump. And despite being an oil producer, the United States imports 60 percent of its energy needs. Its top oil suppliers in 2004 were Canada and Mexico, with Saudi Arabia, Venezuela, and Nigeria making up the rest of its top five. Across the Atlantic in Europe, which is far more dependent on petroleum supplies from the Middle East, energy needs are expected to double between 2000 and 2030, according to the Economist.

However, most of the rising demand for oil comes from Asia. China, whose number of automobiles and rate of oil consumption is growing by 12 percent to 15 percent per year, has emerged as a forceful player in energy markets. James Dorian, an energy consultant, told the Washington Post he expects the number of cars and trucks in China to jump from 20 million to 120 million by 2020; on U.S. roads, by comparison, there are some 230 million vehicles. Yet Peter Huber, senior fellow at the Manhattan Institute for Policy Research, downplays China’s importance. “It’s still the developed economies that account overwhelmingly for [oil] demand,” he told the Council on Foreign Relations in June 2005. “China is a factor, but the notion that they have structurally changed our energy markets is not correct.” India’s demand for oil is also surging in proportion to its economic output. Although the country only consumes nearly 3 million bpd, its energy needs are expected to increase between 4 percent and 7 percent a year.

What is being done to meet the global surge in demand?

A number of new refineries—some 100 projects in total—are in their infancy. Once completed, they are expected to add as much as 10 million bpd of extra refining capacity. However, some of those projects are expected to come online in 2008, which could give the world “its biggest margin of spare fuel supply capacity in years, relieving one of the major risk factors that has lifted oil prices. ” (Reuters) Most of the new refineries are based in Saudi Arabia or the surrounding region and are being financed by foreign firms. None are currently being built in the United States, where, because of low profit margins and environmental concerns, not a single new refinery has been built since the 1970s. Hurricanes Katrina and Rita, which struck the Gulf Coast last summer and fall, also shook the U.S. economy by taking several oil refineries offline. The U.S. Congress blocked a bill to open up an Arctic wildlife refuge in Alaska to oil drilling, which would have increased oil production by an estimated 1 million bpd and continues to debate whether to end a moratorium on new offshore drilling outside the Gulf of Mexico. In addition to expanding energy supplies, a number of conservation efforts aimed at curbing global demand continue both in the United States and abroad. Some of these efforts include developing alternative energy sources and hybrid technologies, imposing taxes on carbon emissions, and mandating fuel-efficiency standards.

What effect have higher energy costs had on other economies?

The cost of crude oil has hit $80 per barrel, nearly quadruple what it was in 2002, and is predicted by some experts to go as high as $100 per barrel in the next few years. Yet, so far there has been no global recession. That, however, is small solace to the hundreds of millions around the world facing higher costs for transporting goods, commuting to work, or heating homes and offices. Globally, escalating oil demand has resulted in a large redistribution of wealth from energy importers to energy producers, whose current account surplus has soared in recent years. Saudi Arabia alone has been reported a surplus of $76 billion for 2006.

But this fact has not necessarily lifted the GDPs of oil-exporting states, nor has it generally trickled down to raise per capita income. First, higher oil prices have inflationary effects on the whole economy, raising the prices of virtually every product, economists say. Second, they drive up the value of the local currency, which in turn makes other goods less competitive abroad. Third, countries flush with petrodollars often put off needed structural reforms to maintain their competitiveness, or they poorly spend their surpluses. Finally, in theory, rising fuel costs should push the development of alternative energy sources, such as solar or wind power, bio-ethanol, or hydrogen fuel cells, which do not work to most oil producers' comparative advantages.

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