II Energy Management as a Global Problem

Jahangir Amuzegar
Published Date:
April 1983
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For the first time in postwar history, if not indeed the history of the modern world, energy management has become an overriding global economic, strategic, and political issue. Worldwide inflation, continued slow growth of industrial economies, high and widespread unemployment, and the discouraging prospects for the poorer non-oil developing countries are often linked to the so-called energy crisis. The emergence of this phenomenon is of crucial significance not only in the internal development strategies of the major oil exporting and large oil importing countries but also in the ongoing North/South relations, the old East/West competition, and the new North/North and South/South cooperation.

Not until the early 1970s was there a cohesive, long-term national (or global) energy policy anywhere in the world, and certainly not in the major oil consuming countries.2 For all practical purposes, it was the major oil companies—“the Seven Sisters”3—that determined what could be called a global energy policy; and it was they who implemented it. These companies had a disproportionately large political leverage, both at home and in the oil exporting developing countries. Since the Middle East and the other offshore oil deposits were controlled and managed by foreign concessionaires, there was little practical difference between “domestic” and “foreign” oil.4

After the 1970s, however, the relationship between oil exporting governments and the major oil concessionaires underwent drastic changes, owing mainly to OPEC’s rising stature and power. These changes affected not only the process of oil price determination but also the whole operation of world petroleum markets, and indeed the very structure of the world oil industry. With the tenfold increase in the nominal price of crude oil between 1973 and 1981, a cheap energy century seems to have come near its end, and an expensive energy era seems to have dawned.

The Rise and Fall of Energy “Kings”

In a short span of less than two centuries—a fleeting moment in terms of the hundreds of millions of years of fossil fuel formation—the world has witnessed the successive ups and downs of three basic sources of energy: wood, coal, and petroleum. Up until the mid-eighteenth century, the management of energy resources posed no particular national or international concern. Most people lived largely stationary and frugal lives, requiring a modest consumption of energy. The pastoral nature of domestic production and the limited movement of goods and services across local boundaries required little use of nonhuman power beyond readily available supplies (animal power, waterfalls, wood, wind, and sun), all of them, interestingly enough, renewable energy resources. Major transitions to nonrenewable sources took place in the nineteenth century with the emergence of coal, and in the twentieth century with the surge of oil and gas. The world before the eighteenth century was spared the task of energy management for yet another reason: economic development in most parts of the world was not only stationary but also was not energy intensive. Coal and hydrocarbon fuels, which now make up over 90 per cent of present world energy sources, were then exotic fuels.5

Dawn of World Dependence on Fossil Fuels

The invention of the steam engine (1760), the cotton gin (1793), and the light bulb (1879) opened the way for the spread of industrialization in the West.6 Large-scale industries required much more efficient fuels than water mills and wood boilers. The emergence of railroads as the fastest and cheapest intercity means of transportation was particularly responsible for a dramatic increase in the use of coal for both steel making and boiler fuel. In the United States, coal consumption increased over thirty times during the second half of the nineteenth century. By 1907, some 78 per cent of U.S. energy needs were supplied by coal—for locomotive boilers, ship engines, electric motors, and residential central heating.

The successful drilling for oil in 1857 not only placed Titusville, Pennsylvania, at the center of the world oil map but also ushered in a new energy era. Soon after, extensive exploration in the United States and elsewhere led to discoveries of vast new deposits of “black gold” and to extensive new uses for oil and gas. In less than eighty years, oil and gas replaced all other sources of energy as the number one fuel. Oil and gas, under new and improved techniques of exploration, extraction, refining, and distribution, became the cleanest, cheapest, most efficient, and most versatile sources of energy.7

After World War I, world coal production and use gradually declined.8 Just as the cheaper, more controllable, and more abundant coal had ousted wood from the energy scene a century before, so did the low-cost, easy to transport, and easy to store oil and gas rapidly take over the lion’s share of the industrial, commercial, and residential markets in transportation, heating, and air conditioning and in the manufacture of synthetic products. Even in the generation of electricity, where coal still continues to be widely used, oil and gas have made swift and substantial inroads.

As automobiles were transformed from a rich man’s toy at the turn of this century to a common and often indispensable means of transportation—first in the United States and gradually in other parts of the world—global gasoline consumption increased dramatically. The relatively low production costs and the fairly high efficiency of oil and gas in their manifold uses gradually brought them to such prominence that there were no competitive substitutes.

Up until the development of the sellers’ market in 1973–74, however, there was little or no concern (except among a small circle of petroleum experts) about the rapid pace of world oil consumption. In fact, oil industry executives were forecasting that oil use in the 1970s would be larger than in the previous ten decades. But from the mid-1970s onward, when, for the first time since oil discovery the annual global oil depletion began to exceed the yearly addition to world stocks, the world began to face a new energy problem.9 This change in the oil supply and demand balance was one of the factors that led to the subsequent sharp rise in oil prices.

In retrospect, from a minute 1,200 barrels a day, on the average in Pennsylvania in 1859, world oil production reached over 65,000,000 barrels a day in 1979. Used at first largely for domestic lighting in the form of kerosene (substituting for whale and vegetable oils), the versatility of “rock oil” gradually enabled the petroleum industry to develop hundreds of uses for its product—fuels, lubricants, pharmaceuticals, food, clothing, and industrial raw materials.

Nearly all the economic “miracles” of the postwar period have been based on inexpensive hydrocarbon fuels. Dramatic successes in doubling and redoubling farm output throughout the world must be attributed to petroleum-based fertilizers, gasoline-run farm equipment, and large-scale production—all of which were facilitated by easy access to markets through cheap transportation. In short, the surge in automobile ownership and use in the world, the spread of suburbia, the dieselization of locomotives, direct-conversion steel plants, and a host of other postwar industrial achievements have all been oil or gas induced. At present, the industrial world’s technology, military might, standard of living—its very lifestyle—are hostage to oil.

Geo-Economics of Petroleum

The world’s addiction to fossil fuels—however many the risks of escalating dependence or the dangers of abrupt withdrawal—could not have produced a “crisis” had it not been for the geo-economics of oil. That is to say, the sharp increases in the price of oil would not have produced such enormous payments imbalances in the 1970s if known world petroleum reserves had not been markedly skewed in favor of a few countries in a small geographical area.

As is often the case with minerals, the world’s known major oil deposits are not located where petroleum demand matches domestic supply. This fundamental mismatching of demand and supply looms large with regard to both reserves and productive capacity (Table 1).

Table 1.Major World Regions: Oil Reserves, Production, and Consumption
AreaPopulation 1 (millions)Reserves 2 (million barrels)Reserves Per Capita (barrels)Production 3 (thousand barrels a day)Consumption 4 (thousand barrels a day)Consumption Per Capita 4 (barrels a day)
Western Europe35522,923692,82512,985.038
Middle East170369,2852,17212,4641,685.009
Western Hemisphere595115,28719415,99021,970.037
Centrally planned economies1,38585,1156214,65012,800.009
Sources: Oil and Gas Journal (Tulsa, Oklahoma), December 27, 1982; British Petroleum Company, Ltd., BP Statistical Review of the World Oil Industry, 1981; and International Bank for Reconstruction and Development, World Development Report, 1982 (Washington, 1982), and Fund staff estimates.

1980 estimates.

As of January 1, 1983.

1982 daily average.

1981 daily average.

Sources: Oil and Gas Journal (Tulsa, Oklahoma), December 27, 1982; British Petroleum Company, Ltd., BP Statistical Review of the World Oil Industry, 1981; and International Bank for Reconstruction and Development, World Development Report, 1982 (Washington, 1982), and Fund staff estimates.

1980 estimates.

As of January 1, 1983.

1982 daily average.

1981 daily average.

Estimates of world oil reserves are unfortunately a chancy exercise, and a highly complex one. Geological surveys are inadequate, and there are complicated questions of definition as to what constitutes oil “reserves.”10 Furthermore, national data on domestic reserves are often unpublished, if not actually a state secret. Still further, the availability of oil supplies is a function of oil prices and the state of technology: each upward change in the oil price makes the exploitation of “recoverable” oil from known reservoirs easier, and thus increases the reserve estimates. Each improvement in technology also changes the existing economic and operational conditions, thus producing new, higher figures. In fact, global oil reserves have increased by nearly ten times over the past quarter century as crude oil prices have surged by nearly twenty times and new methods of secondary and tertiary recovery have been improved.

What is commonly referred to as oil reserves are proven and economically recoverable oil deposits in place. By this definition, the world had an estimated 670.2 billion barrels of crude petroleum at the beginning of 1982.11 Of this amount, 370 billion barrels were located in the Middle East, and over 438 billion barrels in OPEC territories, with, as yet, only a modest domestic demand for oil. By contrast, the major users of petroleum (e.g., the United States, Western Europe, Japan, and most other OECD countries) were endowed with less than 60 billion barrels of their own.

The estimated capacity in the market-oriented economies for producing crude oil and gas liquids shows similar differences in supply and demand. In 1981, the capacity of the member countries of the Organization for Economic Cooperation and Development (OECD) for hydrocarbon supplies was 14–17 million barrels a day, while the OPEC countries had a capacity of 32–36 million barrels a day; the non-OPEC developing countries had a combined capacity of 5–9 million barrels a day.

A reinforcing aspect of this particular geo-economic parameter is that OPEC itself consists of 13 nations with vast differences in “life leases” on oil. Saudi Arabia—the world’s largest oil exporter—has more than one fourth of the world’s proven oil reserves and represents one of OPEC’s lowest-cost producers. Within OPEC, six countries with relatively small populations (Saudi Arabia, Iraq, Kuwait, the Libyan Arab Jamahiriya, the United Arab Emirates, and Qatar) possess a combined production capacity of 23–26 million barrels a day, more than 70 per cent of the total.

On the consumption side, similar heterogeneities exist among net oil importers. Except for the United States, the United Kingdom, and Norway, other Western industrial oil users and some of the more advanced developing countries (e.g., Brazil, the Philippines, South Korea, and India) have relatively small oil reserves. Even the United States has been facing increasing demand pressure on its dwindling petroleum deposits. At the end of World War II, U.S. production and use were more than half of the world’s petroleum output. But, with only about one third more population in 1960 than in 1940, U.S. oil consumption grew threefold. For some time, while U.S. annual consumption was on the rise, the estimates of proven reserves were also revised upward. Thus, until 1964 the United States preserved its world dominance in terms of both oil production and consumption—still being the number one oil producer, ahead of the entire Middle East.

From the mid-1960’s, however, oil consumption in the United States, Western Europe, and Japan increased rapidly, without substantial new local finds except for Alaska and the North Sea. Dependence on imported oil for all OECD countries, with the exception of the United Kingdom and Norway, steadily increased. And the gap in the oil consumption level between the rich North and the poor South widened. At the end of the 1970s, the United States and Canada, with only 6 per cent of the world’s population, consumed more than five times the world average per capita, while the developing nations of Asia, Africa, and Latin America, with more than 70 per cent of the global population, got along with less than half of the worldwide average—a difference of more than 10 to 1 per capita. The ratio of the developed world’s average to that of the poorest developing countries was about 30 to 1. Within the developing countries, the commercial energy used by the rural population (which accounts for 40–80 per cent of the population) was less than 15 per cent of the national total.12

Oil as an Energy Source

The future of petroleum in the world economy is a matter of conjecture. The sharp divergence in the estimates, projections, and guesswork regarding the “oil balance” (see Chapter V) clearly indicates the nonscientific and somewhat artistic nature of petroleum forecasting. At the core of the projection difficulties lie a number of imponderables regarding the behavior of oil demand and supply in the 1980s and beyond. The major factors affecting demand include (i) the uncertain rate of economic growth in the major oil consuming countries, and, to a lesser extent, the development trend within the OPEC and the other developing countries; (ii) the unclear trend in energy conservation in terms of both increasing energy efficiency and changes in lifestyles; (iii) the unpredictable behavior of oil prices; and (iv) the influence of price and income elasticities of the demand for oil. On the supply side, the crucial elements include (i) uncertain prospects for the global expansion of production capacity in oil and gas; (ii) the rate of progress in the development of alternative sources, particularly coal, nuclear power, and heavy oil; (iii) the level of “desired” production and capacity utilization chosen by OPEC members; and (iv) the “constraints and incentives” under which non-OPEC suppliers may be expected to supplement OPEC production. Supply and demand uncertainties involve a host of noneconomic variables that make projections particularly hazardous. Adding to these difficulties is the fact that demand and supply determinants are not unrelated. Economic growth, for example, in both industrial and developing countries, is dependent on the price of oil as well as its efficiency in use. The development of alternative sources in the oil importing countries and the output targets in OPEC countries are also dependent on a certain sustained level of crude prices.

On the basis of the foregoing discussion, the following observations may safely be suggested. First, no one really knows just how much oil (and gas) is left inside the earth’s crust.13 Second, the differences in energy supply projections are based chiefly on the contemplated time frames: given sufficient time—that is, not one or two decades but a half century or so—there is greater expectation that adequate alternatives to oil can be developed. Third, any oil shortage in the next two decades is more likely to develop from renewed high growth in oil demand than from limitations on oil supply (short of unexpected output interruptions owing to noneconomic factors). Fourth, the high rate of demand growth for oil during the 1960s was due largely to the falling crude prices in real terms (more than 60 per cent between 1960 and 1970), which reduced the demand for alternative sources, thus impeding their development. Fifth, the external oil-related payments imbalances are, in some observers’ opinions, not likely to be “automatically” rectified, and may require accommodating international arrangements. And, finally, the adjustment of these imbalances for the world as a whole requires close cooperation among the large oil exporters, the principal oil consuming countries, and the major oil companies.

Oil Exporters’ Strategies and the Adjustment Process

Notwithstanding the inevitably substantial margins for error in the estimates of the future “oil balance” (e.g., by the year 2000), the short-run world oil situation requires close and immediate attention because of the existence and possible continuation of large global payments imbalances. The oil-related surpluses and deficits among the world petroleum trading partners require (in addition to concerted, coordinated global efforts toward better use of oil) two short-to-medium-term solutions: (i) appropriate domestic development strategies by the oil exporting developing countries, and (ii) a responsible global adjustment scheme among the oil exporting developing countries, the oil importing developing countries, and the oil importing industrial countries.

Domestic Strategies

The common problem faced by the oil exporting developing countries is how best to transform a dormant pool of valuable but depletable oil reserves into a permanent flow of present and future income needed to raise their standards of living. The domestic policy implications of this objective involve a series of decisions regarding the level of oil production, conservation, and export; the use of oil revenues for current consumption or for future income generation; the allocation of oil receipts to domestic real capital formation (including social infrastructure) versus foreign financial or real assets; and, finally, foreign assistance. Each of these decisions is predicated on the oil exporting country’s national priorities. Each decision in turn leads directly into others regarding the scale and pattern of domestic diversification and hence the choice of specific fiscal, monetary, trade, and exchange options perceived to be best suited to the country’s longer-term interests. Within each of these combinations of policy, there are individual country variations.

The right choice of a development strategy for the oil exporting developing countries is particularly significant for two basic reasons: First, oil revenues, which under-gird development activities in most of these countries, cannot be relied on as a perpetual source of finance owing to the nonrenewable nature of oil deposits. These “revenues” are, in the oil exporters’ view, not a continuous stream of future incomes flow, but rather a “cashed” value of a given stock of capital that is transformed from one form (oil reserves) to another (financial assets).14 Unless these assets are further transformed into a sustainable revenue base, economic development (and its expected concomitant, higher standards of living) cannot be ensured.

Second, the startling similarity in undesirable consequences (i.e., inflationary pressures, cost overruns, delayed completion of projects, incomes gap, urban overcrowding, and social tension) experienced by the major oil exporting countries under vastly different political, social, and cultural backgrounds seem to raise questions about the appropriateness of chosen development models. A serious examination should be made of available and suitable options.15

Global Adjustment

The need for continued concern about the speed and direction of the international adjustment process in the 1980s arises from the following likely developments. First, while serious oil conservation in the West, and partial oil substitution, might reduce global demand for oil, the future share of petroleum in total world energy consumption is still likely to be substantial (see Chapter V). Second, while OPEC’s prominence on the world petroleum scene may be slipping under a lower world demand for oil and growing oil supplies from other sources, the Middle East is likely to continue to be the world’s largest oil producing bloc, and OPEC oil is still projected to account for a substantial percentage of the total world oil supply in the rest of this century. Third, the maintenance of a world “oil balance” will depend on appropriate and predictable oil prices as a spur to both oil conservation and necessary investments in oil substitution. Fourth, OPEC prices could rise again in real terms in the next few years if the world economy grows normally, no new major non-OPEC sources of petroleum are discovered, and there are no dramatic breakthroughs in energy technology. Fifth, short of a regional war, internal turmoils, or politically inspired embargoes, the combination of high exports and rising oil prices is likely to give some major oil exporting countries new payments surpluses, matched by deficits in other parts of the world. Finally, as almost all the demand growth for oil in the coming decades is likely to come from the non-oil developing countries, questions arise regarding their ability to pay for their oil needs and their access to the capital markets to borrow sufficient funds to finance their development.


Some industrial countries (e.g., the United States) did in fact regulate the supply and price of domestic oil through pro rata allocation to producing oil wells and quotas on imported crude. But this could hardly substitute for a comprehensive long-term energy policy.


British Petroleum Company, Ltd., Shell Oil Company, Exxon Corporation, Texaco, Inc., Gulf Oil Corporation, Standard Oil Company of California, and Mobil Corporation.


In 1973, the major oil companies owned more than 19 million barrels a day of crude oil outside North America. By 1978, the figure had declined to about 7 million barrels a day, and the trend was continuing.


Coal and oil were, of course, known and used in different parts of the world in their “natural” forms as sources of heat and light, but there was no commercial use.


For a highly engaging brief account of energy history, see Stewart Udall, The Energy Balloon (New York, 1974).


The unplanned and highly competitive free energy market—supporting a narrow, microeconomic definition of efficiency—encouraged oil and coal companies to try to expand their markets at each other’s expense, involving substantial waste. It also drove energy-using utilities and industrial enterprises to demand lower prices, which, while rational from a short-term microeconomic viewpoint, was in disregard of a longer-term perspective of world energy needs.


The share of coal in total world energy consumption declined from 90 per cent at the turn of the century to 56 per cent in 1950 and 20 per cent in 1973, while oil consumption grew from 8 per cent in 1900 to 29 per cent in 1950 and 53 per cent in 1973. In the United States, the share of oil in total energy consumption steadily rose from a paltry 0.1 per cent in 1860 to more than 40 per cent in 1960, while that of coal rose from 16 per cent to as much as 77 per cent in 1910 and then declined to 28 per cent in 1960. Fuel wood, which accounted for over 90 per cent of U.S. energy needs in 1850, provided no more than 3 per cent in the middle of the twentieth century.


Global oil consumption after World War II expanded at a high annual compound rate of 7.5 per cent. Even during the 1970–73 period, world oil and energy consumption continued their postwar trend. It was only after 1973 that this historical trend was reversed. Oil’s share in total energy use fell after 1973.


Proven oil reserves are official estimates of the amount of petroleum that can be extracted through known technology and at current world prices from oil fields already discovered. They are distinguished from probable reserves, which indicate additional barrels that may be recovered from existing fields by more advanced methods but still at current prices. A third category is potential reserves that are “in place” but may be retrieved only with newer technology and probably at higher prices. Possible deposits in fields yet to be discovered, or too remote and inaccessible under existing transport facilities, are referred to as “oil resources,” of which the world is “guesstimated” to contain as much as 2.3 trillion barrels.


A report on the global exploration prospects by the Italian Ente Nazionale Idrocarburi indicates the possibility of more than one trillion barrels of oil to be discovered in the next twenty years or so—more than twice as much crude as the world has consumed so far in history. The largest finds are likely to be in the Middle East and Africa, with Saudi Arabia, Iraq, and Iran the biggest winners. In Africa, Chad is a favorite. The outlook for Europe and the United States is less favorable. In Latin America, Mexico is singled out as a candidate for one more massive discovery. See Marcello Colitti, “Size and Distribution of Known and Undiscovered Petroleum Resources in the World with an Estimate of Future Exploration,” OPEC Review, Vol. 5 (Autumn 1981), pp. 9-65.


For the role of energy in the economic development of the developing countries, see Joyti K. Parikh, Energy System and Development: Constraints, Demand and Supply of Energy for Developing Regions (Oxford University Press, 1980).


Part of the uncertainty arises from the technical definition of crude oil as a natural mixture of hydrocarbons in a liquid state in porous rock reservoirs and flowing from wells at atmospheric pressure. Some experts believe that by this definition only 1 per cent of nature-made oil in place is considered proven and recoverable. The other 99 per cent consists of oil that can be pumped under pressure plus nonliquid petroleum (tar sands, etc.).


For an interesting theoretical argument against considering petroleum receipts as “income,” see Salah El-Serafy, “Absorptive Capacity, the Demand for Revenue, and the Supply of Petroleum,” Journal of Energy and Development, Vol. 7 (Autumn 1981), pp. 73-88.


In this connection, see Jahangir Amuzegar, “Oil Wealth: A Very Mixed Blessing,” Foreign Affairs, Vol. 60 (April 1982), pp. 814-35.

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