Academic journal article Harvard International Review

Gulf Bottleneck: Middle East Stability and World Oil Supply

Academic journal article Harvard International Review

Gulf Bottleneck: Middle East Stability and World Oil Supply

Article excerpt

Richard N. Cooper is Boas Professor of International Economics at Harvard University.

Since the disturbances caused by the Iraqi invasion of Kuwait six years ago, the international flow of oil has gone uninterrupted and unimpeded, but that tense summer of 1990 rekindled memories of the volatile oil prices of previous decades. In 1973, 1979, 1980, and 1990, major disruptions in the flow of Middle Eastern oil caused world oil prices to surge, and in 1986, the practical collapse of the Organization of Petroleum Exporting Countries (OPEC) led to a 50 percent drop in prices. The Middle East remains the key to the stability of global energy markets. With the world's dependence on the region poised to increase dramatically, what are the prospects for continued calm in Middle Eastern oil markets?

Middle Eastern oil implies reserves located in the Persian Gulf because other oil sources in the Middle East are far less important: Algeria and Libya are relatively inelastic suppliers, Egypt consumes most of the oil it produces, and Sudan is inhospitable to foreign investors. This leaves the Arabian peninsula oil producers--Saudi Arabia, the United Arab Emirates (UAE), Kuwait, Oman, Qatar, and Yemen, in order of oil exports--and Iraq and Iran as the primary international suppliers of oil in the Middle East.

Fueling Global Growth

The world economy is in relatively good balance at present and can look forward to reasonable growth over the next decade or two. Economic performance in Japan and Europe has been lackluster recently but will likely improve early in the next century. Growth is robust in the Far East, South Asia, and Latin America, while the United States is growing at or near its potential. Growth in the former Soviet Union will pick up from the no-growth adjustments of the past few years, and even Africa may turn in a better performance, although that continent is economically too small to affect the world economy.

Modern economies are still based heavily on energy, though the efficiency with which it is used is improving steadily and is vastly greater than it was 25 years ago. Developing countries, in particular, are relying increasingly on hydrocarbon fuels as they move from subsistence to manufacturing economies. Oil is still the unmatched fuel for transportation, and with modernization, the demand for transportation has increased substantially. Synthetic oil can be made from coal and from natural gas, but it remains uncompetitive in cost relative to petroleum.

Taking these and various other factors into account, the US Department of Energy projects world demand for oil to grow by 30.4 million barrels per day (mmbd) between 1995 and 2015, or by 44 percent (rather less than the projected 49 percent growth in total energy demand). Of this increase in demand, only 7.5 mmbd are projected to come from today's developed countries of Europe, Japan, and North America. The remaining 22.8 mmbd increase in demand will be generated by today's relatively poor countries, including 14.1 mmbd from Asia (excluding Japan). China alone will increase its demand for oil--and thus its oil imports--by five mmbd.

Perhaps surprisingly, the world will not have difficulty supplying these increased quantities of oil. Technological developments have greatly improved the prospects for, and reduced the costs of, identifying and developing new oil reserves, both on land and under water. But the most economical oil remains in the Persian Gulf region, and if the countries of that region are willing to undertake the necessary investments in exploration and development, this great increase in demand can be satisfied at only modest increases in price. The US Department of Energy projects that the price of oil in 2015 will be US$25.43 a barrel (in 1994 dollars); other forecasters assume an even lower price.

Based on these price and investment assumptions, oil production outside of OPEC will grow by less than three mmbd between 1995 and 2015, leaving a 28 mmbd increase to come from OPEC countries. …

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