VI The Imperatives of Energy Interdependence

Jahangir Amuzegar
Published Date:
April 1983
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The energy crisis of the 1970s is the energy challenge of the 1980s and beyond. Economically competitive substitutes for oil will have to be found; energy (and particularly oil) efficiency in the production sector will have to be increased; and a reasonable rate of growth of gross world product through interparty cooperation will have to be maintained. The crisis will persist as long as ready and cheap alternatives to oil are not found, conservation measures are not continued and expanded, and world economic growth (and particularly the growth of output in the developing countries) should remain so slow that it creates or perpetuates global political tensions, unused productive capacity, and international economic inequities.150

A meaningful response to this challenge would call for the promotion of efficiently diversified and viable economies by the oil exporting developing countries, the adoption of noninflationary but growth-oriented economic policies by the oil importing industrial countries in a nonprotectionist trade environment, and the expansion of food and fuel supplies in the oil importing developing countries through appropriate mobilization of owned and borrowed resources. All of these would require close global cooperation.


Energy specialists, petroleum experts, and oil market analysts are in total (and rather rare) agreement that any practical and effective management of global energy requires taking as much pressure as possible off the demand for oil. Every barrel of oil conserved, and every barrel of energy produced at competitive costs from oil substitutes (coal, nuclear fission, water, solar, geothermal, wind, biomass, fusion, etc.), would be a step in the direction of a more “balanced” energy management. It goes without saying that the effect on world economic development of the 1973–80 oil price rises would not have been so profound and persistent if the world could have rapidly and effectively shifted from petroleum to other sources of energy. A ready availability of alternative supplies would have reduced the impact of the oil shock on many fragile developing economies and enabled oil-dependent countries to reallocate their energy investments toward long-term independence from oil imports. Unfortunately, the move away from oil and a substantial shift from exhaustible fossil fuels to more permanent and renewable sources of energy have so far proved more difficult than at first thought.

Future Oil Supply and Demand: The Equation’s Unknowns

Ever since oil was discovered in commercial quantities in the middle of the nineteenth century, oil geologists and resource analysts have worried about its near-term exhaustion. And yet, the world has always found larger new oil deposits for its seemingly insatiable fuel needs. The cry of “wolf” and the disbelief have now become a permanent and an integral part of petroleum’s folklore. While a large group of oil executives, academicians, environmentalists, public officials, and international organizations are presently convinced that this time the wolf is for real, there are many skeptics who simply refuse to believe that the “Petroleum Age” is nearing its end.

In the past ten years, there have been nearly one hundred studies and projections of future energy supply and demand—mostly in the developed countries—by public and private organizations. Of these, almost one fourth have dealt exclusively with the supply and demand of oil.151 Owing to widely different projections by energy economists and oil experts of the behavior of petroleum supply and demand in the coming decades, a reasonably accurate and intelligent estimate of the future oil balance is not easy, nor is a reconciliation of the various scenarios.

A study by the U.S. Central Intelligence Agency in early 1977 offered a most pessimistic forecast of the future oil situation to that date.152 Among he study’s major findings was the projection that world demand for oil would exceed productive capacity by 1985, causing a sharp rise in oil prices. The disturbing picture was based largely on the assumption that the U.S.S.R. would become a net importer of oil in the early 1980s. The Agency revised and updated its forecast in mid-1981, assuming this time that, while Soviet oil production actually peaked in 1980, the U.S.S.R. might still be able to keep exporting oil through 1985.153 The Agency’s original forecast was challenged by many oil analysts who anticipated a smaller demand for and ampler supply of energy owing to higher price elasticities. Other Western experts on the Soviet economy have taken issue even with the Agency’s latest estimates.

An equally bleak forecast was offered by a multinational group of businessmen, public officials, and academics.154 The study predicted a probable energy crisis in about 1985 and a “crippling” energy shortage before the end of the century—reaching 15–20 million barrels a day by the year 2000. A 1977 world energy outlook published by the Exxon Corporation assumed an annual increase in energy consumption of 3.9 per cent up to 1990, most of which had to be met by oil. It was estimated that the share of oil in the world energy supply would decrease only from 53 per cent to 48 per cent. A report by the OECD in 1977 (updating its 1974 report)155 estimated that the OECD’s net oil imports in 1985 would range between 32 million and 39 million barrels a day (depending on different GDP growth rates in member countries) and that OPEC supplies would total 35.5 million barrels a day, or just a thin margin above the mid-range of production possibilities.156 A report by the International Energy Agency157 claimed that by 1985 a mid-range world oil demand could reach 45 million barrels a day; OPEC’s mid-range producing capacity was estimated at 44 million barrels a day and its likely mid-range production prospect at 35 million barrels a day—again auguring a very tight market, if not an actual shortage.

Taking issue with these pessimistic forecasts have been the so-called energy optimists, who have ridiculed any imminent energy Armageddon and who have seen no energy shortage in either the near or even distant future.158 Among these optimists, Peter Odell estimates the present world oil reserves at 4,500 billion barrels, and concludes that higher real energy prices could assure oil availability for at least three generations.159 Similarly, a 1978 study by the Rand Corporation (for the CIA) also concludes that future conventional crude production will be the equivalent of 60–90 years of current world consumption based on an estimate of world oil reserves within a range of 1,700 to 2,300 billion barrels.160 Other optimists argue that there is a 90 per cent chance that the oil industry will continue to grow beyond the year 2010 and a 10 per cent chance that the peak may not be reached before the third quarter of the twenty-first century.

Still others argue that with a willingness on the part of industry to invest more, drill deeper, contend with harsher environments, and share profits there are probably still some 1.5 trillion barrels of oil (three times the proven reserves) left to be extracted. Potential natural gas reserves may turn out to be upward of ten times the proven stock.161 Some optimistic forecasts have such astronomical figures as 1,000 to 20 million years of energy out of natural gas!162

In between the two extremes is a variety of other projections based on different assumptions of world oil prices, world economic growth, factors affecting the supply of alternative energy sources, and others.163

While these studies and projections are in a constant state of proliferation and revision, they all point to the necessity of developing alternative sources of energy in order to reduce world dependence on oil—a dependence which has become “a kind of technological trap.” The trap can be lifted only when another energy transition is made from oil to a new era of renewable sources. The next twenty to fifty years will be crucial for this transition.

Future of Oil Substitutes

The substitutes for petroleum are grouped according to their physical availability, ease of extraction, and state of exploitation technology. By these criteria, the known alternatives can be classified as conventional, exotic, or futuristic. Coal, hydropower, and nuclear energy are conventional. Energies derived from the sun, the earth’s hot lava, waves, winds, and plant growth are considered exotic. Fusion which combines sea water’s hydrogen with atmospheric carbon dioxide to produce fuel is still at the laboratory stage and only the energy of the future.

Needless to say, under a combination of time, adequate investment in energy alternatives, and close cooperation between major oil exporters and importers, an energy balance could be established. As the world approaches the exhaustion of its depletable hydrocarbon deposits, and the costs of extracting these resources rise, the development of nonconventional or exotic substitutes becomes more attractive. And since returns from such renewable sources as solar energy would in all likelihood be increasing or at least linear for a while, the two cost curves are bound to cross sometime in the future. The question is: When? Other questions are: By what strategy? Through what kind of international cooperation?

The current obstacles to a rapid transition from oil and hydrocarbon fuels to other forms of energy rest with the long lead time needed to bring alternative supplies to market, real or perceived environmental hazards of available alternatives, the infancy of existing technology to deal with more exotic sources, and high production costs.164

Time Frame

The production lead time for coal, tar sands, shale oil, coal liquids, and nuclear power to come on stream is estimated to range from a minimum of 4 years to as long as 12 years. For some of the more exotic sources and processes, the lead time may extend up to 20 years. The future for fusion energy may be 30 to 50 years away. Furthermore, most experts believe that shifting radically from the present system based on oil and gas will not only require a long lead time, but any attempt to hasten the process will be fraught with serious problems—political, social, and economic.165

One of the more promising substitutes for oil and gas is coal. At present the cost of coal production is between 50 per cent and 75 per cent of that of fuel oil. Coal output, which grew at the rate of 1.3 per cent a year between 1960 and 1977, can be raised by over 4 per cent a year in the next couple of decades with adequate investments in infrastructure and transportation facilities, and higher prices. On the whole, coal production is expected to gain a slightly larger share of total energy consumption by the end of this century,166 despite objections from many economists and resource specialists who believe that, as an exhaustible fossil fuel, coal could be better used for making chemicals than for generating power. Nuclear energy, too, once thought of as being able to provide some 40 per cent of total world energy needs by the end of this century, is now projected to satisfy perhaps a maximum of about 6 per cent by 1990 (and an optimistic figure of 10 per cent in the year 2000, compared with the current 2 per cent in the market economies). All other sources of energy are expected to provide another 10 per cent or so (with oil and natural gas still accounting for more than 50 percent).

Environmental Drawbacks

Next to oil, coal is generally considered a convenient and versatile energy source. World coal supplies are many times larger than oil reserves and can satisfy global energy needs for several hundred years.167 Coal can be burned directly as a fuel, can fire electric power plants, can be turned into synthetic oil, gas, or gasoline through the process of liquefaction and gasification, and it can be used as a raw material for making hundreds of products from pharmaceuticals to explosives, plastics, pesticides, fertilizers, and perfume. The most readily available candidate for oil substitution, particularly fuel oil, is coal (especially in the United States, which has the world’s largest proven coal reserves).

But coal is regarded by its miners, distributors, and consumers as dirty, hazardous, and unhealthy. Coal-fired plants are some of the worst air polluters. Coal liquids are thought to contain cancer-causing agents; coal dust causes black-lung disease. Coal mining is one of the most hazardous industrial vocations; hundreds of miners are killed each year in mine accidents. There is a fear that increased use of coal will raise atmospheric carbon dioxide and change the earth’s heat balance. Heating up the earth’s atmosphere may give the globe a “greenhouse effect,” with an unforeseen and devastating impact through melting polar icebergs and flooding coastal regions.

Next to coal, the world’s hope for a replacement for oil has often been nuclear power. In the early 1950s when President Eisenhower established the Atoms for Peace program, the popular expectation was that atomic energy would soon make electric power cheap and abundant. The current conventional wisdom on the energy outlook, however, gives anything but a rosy picture. Contrary to the assumption that the atom would eventually provide an infinite source of electricity, “the nuclear genie has turned out to be a very demanding and expensive servant.”168 Nuclear power development in many parts of the world has been slowed down for many reasons—economic, political, technical, and legal. But environmental risks constitute one of the most crucial obstacles. The hazards of radioactive leaks, contamination of workers, fallouts from accidental plant explosion, nuclear waste disposal, and nuclear proliferation have now dashed hopes of a rapid transition from oil to atomic fission. Nevertheless, nuclear energy is expected to expand beyond its present scale.

Technological Problems

The third major barrier to a rapid development of alternative sources of energy is inadequate technology. Coal gasification and liquefaction are only slowly becoming commercially attractive. The use of nuclear power is also limited at present to the generation of electricity mostly for commercial and industrial consumption (and as such mostly for lighting and cooling). Opportunities for residential heating are not extensive; for transportation (which currently amounts to some 40 per cent of oil consumption in the United States), practical usage is several years away because of the limitations of battery-powered automobiles. Furthermore, nuclear energy cannot replace oil or coal as a raw material base in agriculture and industry.

Limitations of substituting coal and nuclear power for oil plus a strong environmental lobby in the United States, Europe, and Japan have shifted world attention increasingly toward solar energy. Solar power is considered by far the cleanest and safest source of energy and is potentially inexhaustible. Solar energy is believed by many to be the hope of the future.169 The sun’s power includes the limitless rays as a direct energy source as well as a medium of generating energy; it also indirectly covers such other sun-based power as hydro-electricity, firewood, tidal waves, wind, and biomass.170 But solar technology is still in its infancy. By the most optimistic forecasts, solar power’s practical near-term use will be limited to heating and cooling homes and factories. This is, to be sure, a major advantage over nuclear power, because it competes directly with petroleum for heating purposes, whereas uranium must first be converted into electricity and then into heat, at high costs. The main limitation of solar energy is in its low-temperature heat, which makes it inefficient for transportation, electricity generation, or smelting. Given the fact that high temperature applications account for the bulk of current energy consumption (75 per cent in the United States), any large-scale use of photovoltaic and centrally powered energy stations is in the distant future.

Apart from coal and nuclear power, the other energy sources (i.e., hydraulic power, tar sands and shale oil, or windmills, tides, geothermal energy, and organic wastes) are also all limited in their availability and application.

Cost Factors

Apart from untried and tricky technologies involved in oil substitution, the main reasons for a seemingly long transition period to shift from oil-based activities to reliance on more sustainable forms of energy lie in the high and rising costs. The estimates of the cost of some alternatives (i.e., coal and heavy oils) have kept climbing in tandem—but always above—the rising world crude oil prices. For almost a decade, the promoters of the U.S. Project Independence and other interested groups have argued that the United States could become self-sufficient in energy if the price of OPEC oil were to rise a few dollars over the prevailing rate. But U.S. energy independence has proved elusive despite repeated rises in the price of crude. In 1972, the cost of producing a barrel of shale oil was thought to be less than $4.50. By March 1974, it had risen to $8. Five months later, the estimate jumped to $11.50. As late as 1978, a large number of oil companies and oil experts believed that at $20 a barrel (i.e., $6 above the OPEC price at the time) some two trillion barrels of crude oil were economically recoverable. In 1979, the U.S. Department of Energy’s estimate was $25.171

As is often argued, the “rub” in substituting synfuels for petroleum is not so much technology but cost. According to some recent World Bank estimates, the comparative production cost per barrel of oil equivalent of different fuel technologies starts with $30 for coal, tar sands, and shale oil; it ranges between $31 and $55 for liquefied natural gas, coal liquefaction, and wood ethanol and methanol; and it goes to $85 and above for coal gasification, and high-Btu gas out of manure.172 For power technologies, the generation cost per kilowatt-hour of electricity ranges from $0.04 for conventional coal-fired or natural-gas plants to $0.08 and above for solar energy, wind, and ocean thermal energy conversion.173

Some of the more stubborn barriers to a speedy development of nuclear energy have also been the high initial costs of building nuclear reactors (60 per cent more than a coal-fired plant for electricity generation in the United States), soaring initial capital investments in other facilities, high cost overruns, and the enormous need for uranium and plutonium (both rare metals with rising prices). The difficulty with widespread use of solar power has similarly been high costs. Solar energy may be limitless and infinitely renewable, but it is not free to final users. On a large scale, and as a short-term solution, in fact, it is prohibitively expensive.

Three additional problems make oil substitution comparatively disadvantageous. First, there is the cost-benefit problem. Since it takes energy to produce more energy, the benefits of oil substitutes depend on their “net” value added. By this criterion, synthetic sources are far behind petroleum in energy efficiency because one Btu of oil produces 50 Btu of energy, while one Btu of synthetic fuel from coal generates only 17 Btu of energy, and shales offer a coefficient of 1 to 6.5. Second, there are extra costs involved in shale processing because (in addition to toxic fumes, which have to be filtered) it gobbles up scarce water resources and needs special dumps for shale waste. Third, without new breakthroughs in the direct conversion of solar energy into electricity, or in long-range use of electric automobiles, the substitution for petroleum will be at best only partial. The alternative sources of energy as substitutes for the convenient and versatile oil are, thus, not the complete solution.

A recent official study for the U.S. Congress sums up the outlook for oil substitutes.174 Acknowledging the difficulties of predicting, with any precision, future energy needs (because of uncertainties about the relationship between higher energy prices and aggregate consumption, and between energy consumption and the general level of economic activity), it nevertheless joins all recent forecasts that energy import dependency will continue beyond the year 2000. Only a complex mix of continued use of conventional energy, development of alternative domestic supplies, and a reduction in the growth of energy requirements (through more conservation and higher efficiency), can partially alleviate this dependency for the rest of the century. After examining an extensive range of some 31 energy alternatives and technologies, a best guess is that little or no contribution prior to 2000 can be anticipated from such substitutes as breeder reactors, fusion, ocean thermal energy conversion, and satellite power stations. In clear contrast, the most promising returns are in heavy oil, unconventional gas (gas trapped in coal seams, sandstone, and shale rock), and alcohol fuels produced from coal, wood, and farm crops. These three sources together could produce the energy equivalent of 2–3 million barrels of oil a day for the United States.

Superimposed on the high “absolute” costs of oil substitutes as a roadblock to reducing oil supremacy has been the recent world oil glut and concommitant falling crude prices. Many of the economic incentives for developing alternate sources of energy have been lost, leaving the short-term future of many energy projects in the United States and elsewhere uncertain. There are numerous reports of several important projects being halted or abandoned altogether. There are also reports of sharply pared plans for exploration and drilling.

Energy Efficiency

A concurrent method of meeting the energy challenge is through increased efficiency in the use of oil, that is, reducing demand for petroleum without lowering world economic growth or without additional belt tightening. Energy efficiency can be determined by measuring the amount of energy used per unit of output (the so-called energy intensity) or, alternatively, by comparing the rate of increase in energy consumption and the rate of growth of GDP (roughly equivalent to the income elasticity of demand for energy). Although price and income elasticities of demand for energy had long been considered to be small in the short run, the 1974–80 increases in the real price of oil in the industrial countries, combined with nonprice conservation measures, have shown an unexpectedly constructive effect in saving energy.

Even in a short span of only a decade, the reduction in energy intensity has been considerable. By World Bank estimates, pre-1973 energy consumption grew at an annual ratio of 1 to 1 with GDP in the industrial countries, and somewhat faster in the non-oil developing countries. In the industrial countries, both GDP and energy consumption increased at about 5 per cent a year before 1973, and every $1,000 of GDP required the use of the equivalent of about 5 barrels of oil. As a response to oil price increases (and other factors), energy intensity is believed to have fallen to the equivalent of 4.4 barrels of oil per $1,000 of GDP in 1980. In the next ten years, the intensity ratio is expected to fall further, to 3.7 barrels for the oil importing industrial countries. The non-oil developing countries are projected to increase their normal energy use slightly, from 4.3 to 4.4 barrels per $1,000 of GDP because of the expected higher annual growth rate of output.175

As can be seen from these figures, oil has shown greater sensitivity to both price and income changes than its major substitutes, owing partly to its sharp and sudden price jumps and partly to the subsidies and other incentives given by the oil importing countries to energy alternatives.

The World Bank estimates of energy saving imply a medium-term price elasticity of about 0.2 when the stock of capital assets is fixed and a long-term elasticity of 0.4 as appropriate changes in the stock occur in response to higher prices. Elasticities estimated by the International Energy Agency are 0.15 in the short run and 0.45 in the long run.176

Economic Growth and Energy Use: 1980–2000

A critical implication of the world energy crisis relating to global prosperity and financial stability is the relationship between energy consumption and world economic growth for the next two decades.

Prior to 1973, world energy consumption was growing at an annual rate of over 5 per cent—almost at the same pace as GDP growth in the industrial countries and slightly below that of the non-oil developing countries. After 1973, the growth of consumption in both groups of countries had slowed down, although slightly less in the developing countries. Up to the early 1970s, the demand for oil (and gas) outpaced that for energy. From 1955 to 1973, world oil consumption increased at an average annual rate of more than 7 per cent; between 1973 and 1979, the growth rate dropped sharply to an annual average rate of slightly less than 2 per cent. For the industrial and the net oil importing developing countries together, the annual growth rate during the six-year period averaged only about 1 per cent. Altogether, while in 1980 real GDP in the OECD countries was about one-fifth higher than in 1973, energy consumption had expanded by only 4 per cent, and oil use was 3 per cent below its 1973 level.177 In 1982, the demand for OPEC oil was an average of 18.45 million barrels a day (compared with nearly 31 million barrels a day in 1979). OPEC output was for the first time below production by non-OPEC oil producers. The slack in world use of petroleum, however, coincided with a period of relatively slow growth in the industrial countries despite increases in oil efficiency.

The real causes of the weak demand for oil are not as yet clear. In particular, questions persist as to whether the shortfall is the result of structural changes in world economic growth and conservationist tendencies and fuel efficiency or whether it is due to the temporary influences of the business cycle, faster drawdowns on oil stockpiles, government regulations, or consumer overreaction.

Underlying Trends

Prospects for world economic growth and oil use in the 1980s and beyond are subject to a large degree of uncertainty owing to the multiplicity of forces at work. All projections focus on the physical, technical, and economic aspects of energy demand and supply to the (inevitable) neglect of political, social, military, security, and other dimensions of the equation. All projections also start with their own time horizon and their own assumptions regarding population growth, gestation periods for substitutes, alternative energy costs, and, most significantly, oil price as a determinant of both supply and demand. They naturally reach different conclusions.178 Three recent projections are presented here as examples.

(1) On the basis of a 3 per cent average annual rise in gross world product between 1979 and 2000, the growth of world energy demand is projected to be about 2.7 per cent per year. The growth of gross world product is forecast to be slightly over that of the 1973–79 period owing to a recent slowdown in population growth and continued sluggish industrial output among the oil importing industrial countries. The smaller energy/GDP ratio reflects the success of recent conservation measures (home and factory insulation, fuel saving in motorcars, etc.), increased efficiency in the use of oil, and a shift in industrial countries toward services and away from heavily energy-intensive industries. Prompted by the Venice Economic Summit to reduce the oil/GDP ratio from 1 to 1 to 0.6 to 1, the link between economic growth and the consumption of oil is expected to be reduced by about 20–30 per cent between now and the year 2000 without damaging world growth prospects.179

(2) Assuming an annual rate of GDP growth of about 3.5 per cent for the OECD countries, 6 per cent for the OPEC countries, and 4.5 per cent for the non-oil developing countries, an annual growth in energy demand is estimated to be 2.6 per cent in the non-centrally planned economies and is expected to be met by a corresponding growth in the available energy supply (i.e., 2 per cent annual growth in OECD countries, 6 per cent in OPEC countries, and 4.5 per cent in the other developing countries). If there are oil supply interruptions or other energy stringencies, the global growth rate of energy may fall to as low as only 0.8 per cent a year—implying an annual growth of only 1.6 per cent for the OECD countries and 2.3 per cent for non-oil developing countries.180 On the basis of these supply scenarios (Tables 32 and 33), an “energy balance” would limit the growth of demand for energy to an average annual rate of 2.6–2.7 per cent for the rest of the century.

Table 32.World Energy Supply, 1978–2000(Million barrels a day of oil equivalent)
Scenario A 1Scenario B 2
OPEC countries30.530.831.631.027.225.423.0
Other developing countries5.28.611.013.08.510.012.0
OECD countries14.416.015.414.014.711.910.8
Centrally planned economies (net trade)1.30.4–1.0–2.00.4–1.5–3.0
Natural gas17.
OPEC countries1.
Other developing countries1.
OECD countries14.015.414.212.613.411.410.0
Centrally planned economies (net trade)
OECD countries13.217.219.431.415.617.820.4
OECD countries2.45.48.616.
Solar and other 4,56.87.610.
OECD countries5.66.07.818.
Sources: Daniel Yergin and Martin Hillenbrand, Global Insecurity: A Strategy for Energy and Economic Renewal (Boston, 1982); and Fund staff estimates.

Based on the assumption of a 2 per cent annual growth of energy supply in OECD countries through the year 2000 in the absence of political or economic constraints on oil production or its substitutes, resulting in only 2 per cent annual increase in the real price of oil.

Based on the assumption of zero growth of energy supply in OECD countries as a result of slowdown in oil production and other constraints, resulting in a 4.5 per cent increase in yearly oil prices.

Including a small amount of imports from the centrally planned economies.

Excluding the centrally planned economies.

Including hydroelectric, geothermal, and other new sources.

Sources: Daniel Yergin and Martin Hillenbrand, Global Insecurity: A Strategy for Energy and Economic Renewal (Boston, 1982); and Fund staff estimates.

Based on the assumption of a 2 per cent annual growth of energy supply in OECD countries through the year 2000 in the absence of political or economic constraints on oil production or its substitutes, resulting in only 2 per cent annual increase in the real price of oil.

Based on the assumption of zero growth of energy supply in OECD countries as a result of slowdown in oil production and other constraints, resulting in a 4.5 per cent increase in yearly oil prices.

Including a small amount of imports from the centrally planned economies.

Excluding the centrally planned economies.

Including hydroelectric, geothermal, and other new sources.

Table 33.World Energy Demand, 1978–2000(Million barrels a day of oil equivalent)
Scenario AScenario B
OECD countries77.488.897.0119.677.477.477.4
OPEC countries3.65.47.613.25.47.613.2
Other developing countries13.618.623.
Sources: Daniel Yergin and Martin Hillenbrand, Global Insecurity: A Strategy for Energy and Economic Renewal (Boston, 1982); and Fund staff estimates.
Sources: Daniel Yergin and Martin Hillenbrand, Global Insecurity: A Strategy for Energy and Economic Renewal (Boston, 1982); and Fund staff estimates.

(3) The International Energy Agency’s two main scenarios envisage a high and a low demand situation depending on future economic growth, prices, and policies.181 In the high-demand scenario, world economic growth is expected to be 2.6 per cent a year in 1980–85 and 3.2 per cent a year in 1985–2000. The price of oil would remain at $28 a barrel (in 1981 prices) until 1985, and constant in real terms thereafter. In the low-demand scenario, economic growth would be 2.4 per cent and 2.7 per cent, respectively, for the two periods; the oil price would be higher, at $29 a barrel up to 1985 and rising thereafter by 3 per cent a year in real terms. World oil demand and supply under these scenarios is shown in Table 34. As can be seen from the table, the long-term projections by the Agency suggest a rather tight oil market later in the 1980s and a distinct possibility (in the absence of appropriate energy policies) of shortages toward the end of the century.

Table 34.World Oil Demand and Supply, 1980–2000
Scenario AScenario B
Demand 1
OECD countries38.736374338.7353433
OPEC countries2.94692.9458
Other developing countries7.91013227.991117
Supply 114.815131314.8161415
OECD countries
OPEC countries27.526292827.5232724
Other developing countries5.3911135.3889
Centrally planned economies1.3–1–2–21.3100
(net exports; imports –)
Processing gain0.
Excess Demand42109
Source: International Energy Agency, World Energy Outlook, 1982, Organization for Economic Cooperation and Development (Paris, 1982).

For qualifications, see the original source.

Source: International Energy Agency, World Energy Outlook, 1982, Organization for Economic Cooperation and Development (Paris, 1982).

For qualifications, see the original source.

Needless to say, a demand growth exceeding the above figures, or a radical change in OPEC policy in the direction of drastically lower annual production, or a shortfall in non-OPEC contributions to world energy needs, are likely to perpetuate the energy crisis. Conversely, a more diligent and successful conservation policy in the industrial world, or a new breakthrough in the energy/GDP ratio, might reduce the world’s dependence on oil.182

Role of Oil in Future Energy Picture

Altogether, barring a long and protracted period of stagflation in the industrial world, or some dramatic breakthroughs in energy technology, a global oil picture (including the centrally planned economies) in the 1980s may resemble that depicted in Table 34. Other estimates of future oil demand by five major oil companies give an average figure of 52.5 million barrels a day in 1990 for the non-centrally planned economies. World demand for OPEC oil is more uncertain. Once projected to be 40 million barrels a day as early as 1985, the figure is now expected to range between only 26 million and 32 million barrels a day in 1990, with some outside possibility of a drop to as low as 24 million barrels a day, or a rise to as high as 38 million barrels a day—depending on world economic growth and the oil/GDP ratio. Some oil analysts expect the demand for OPEC oil to decline by 3 to 4 per cent a year during the 1980s.

On the supply side, up until 1973 more than 70 per cent of the increments in world energy output was met by petroleum (and 95 per cent by oil and gas combined). The share of oil in total world energy consumption reached 46.3 per cent in 1970. As a result of heavy investment since 1973 in alternative energy supplies (particularly coal and, to a lesser extent, nuclear power), the share of petroleum gradually declined to 44.6 per cent in 1980. This trend may continue for the rest of the century if the price of oil remains high. Yet oil is expected to make up 38 per cent of world energy consumption in 1990, and probably no less than 33 per cent in 2000. (See Table 35.)

Table 35.World Energy Balance, 1970–90(Million barrels a day of oil equivalent)
TotalPer Cent of TotalTotalPer Cent of TotalTotalPer Cent of Total
World Demand
Industrial market economies60.459.371.651.882.146.8
Nonmarket economies27.627.143.531.558.933.5
Oil exporting developing countries3.
Non-oil developing countries7.77.613.810.020.211.5
World Supply
Natural gas18.017.725.618.532.218.3
Solid fuels30.129.538.627.955.131.4
Primary electricity6.66.512.49.021.512.3
Sources: World Bank staff estimates; and Fund staff estimates.
Sources: World Bank staff estimates; and Fund staff estimates.

There is, on the whole, a growing consensus among energy experts that shifting radically from fossil fuels to more sustainable forms of energy may take a long time. A seven-year study of the world’s long-term energy needs by the International Institute for Applied Systems Analysis183 concludes that, given today’s world resources, it is possible to provide enough energy for a world of 8 billion people in the year 2000; but the transition from the current, dwindling supplies of fossil fuels to an inexhaustible energy system will not be spectacular. What may take place in the next fifty years is a transition from clean fossil fuels (e.g., oil and gas) to dirty fossil fuels (e.g., coal and heavier oils). Other major findings of the study are that under any conceivable set of circumstances, world economic growth rates will be limited to no more than 3.5 per cent a year; fossil fuels will continue to be available but at high costs; the contribution of renewable energy sources will be important but limited; OPEC will continue to dominate the oil market; the growth of energy investments will be significant, but they will not be a large portion of industrial countries’ GDP; climatic and environmental impacts of “dirtier” fuels will be serious; and the risks associated with future energy technologies will still be some of the severest constraints in the development of new energy sources.

Under present prospects, OPEC is thus expected to provide a substantial share of the future world petroleum output, but its contribution (which stood at 53.5 per cent in 1973 and nearly 47 per cent in 1979) may be further reduced. For the world, excluding the centrally planned economies, however, OPEC’s share may still range between 47 per cent and 55 per cent of total oil output. OPEC’s income from oil and gas exports in 2000 is estimated to be about $450 billion (in 1980 dollars), or about 40 per cent more than in 1980. The price of oil per barrel at the end of the century is expected to range between $45 and $72 (in 1980 dollars).184

Need for Global Cooperation

The precarious and delicate nature of the energy balance in the next two decades, the uncertainties surrounding the future of oil prices, OPEC supply, and substitutes, and the risks of continued world payments imbalances jointly bring the necessity of global cooperation into sharper focus.

The manifest necessity of such cooperation, and the unnecessarily high cost of the chaos resulting from confrontation, relates to the stark realities of the world energy scene. The transition from an oil-based world economy to a multifuels system is neither easy nor simple, nor inexpensive; there are problems of high cost, a long gestation period, and environmental hazards. The world will be dependent on oil for some years to come, and an orderly management of a transition from oil requires international cooperation for several reasons.

(1) There is near consensus among energy experts that pricing oil below its replacement cost would not only result in a faster exhaustion of petroleum resources than their long-term market value would warrant, but it would also make the transition to new, higher-cost alternatives that much harder; there is thus a clear tendency toward more realistic oil pricing everywhere.

(2) A steady and automatic maintenance of the oil price at its discounted long-term scarcity value may be beyond the power of impersonal market forces.185 The current structure of the oil market and its imperfections as reflected in the erratic behavior of supply and prices since 1973 seem to call for a sort of equilibrium that guarantees not only an ex post balance between oil supply and demand but also a steady flow of oil at a predictable, competitive price.

(3) There is need for a more orderly relationship between oil exporters and major consuming nations for several reasons: a better distribution of existing oil supplies, since no giant new sources of oil are yet in sight; a growing popular clamour in some oil exporting developing countries for conservation (i.e., export restrictions); a fragile and unreliable substitute supply system; and the recent spot market elasticities showing a predictable asymmetry (i.e., a fall in oil demand not having the same downward effect on prices as an equal fall in supply) owing to OPEC’s presumed ability to maintain price by reducing output.186

(4) A centralized management of world oil supply in the pre-1973 era by the major international oil companies is no longer available. Leaving aside the question of equity in the oil country/concessionnaire financial and other relations, and the short-sighted motives of the major oil companies, from a long-term global viewpoint the pre-1973 worldwide oil delivery system was regarded by many observers as fairly efficient. Since the early 1970s, however, there has been a fundamental change in the structure of the petroleum industry and the relationship between the oil trading countries.187 The dominant role of these companies in the various phases of oil exploration, production, refining, and marketing has been gradually eroded by the emergence of state-owned national oil companies, by the continued growth of smaller independents, and, more recently, by the proliferation of oil marketing channels, variegated sales contracts, and multitier pricing. Thus, OPEC’s nearly total dependence on foreign concessionaires for their livelihood up until the October 1973 Kuwait meeting has now changed into one of mutual interests and concerns. After the December 1973 Tehran Conference, and in the course of the 1970s, the major oil exporting countries have gradually taken over the responsibility for deciding production levels, long-term sales contracts, crude price discounts and premiums, and other managerial prerogatives. In the absence of oil company intermediation, there is a need for direct, cooperative, and mutually beneficial arrangements between oil exporters and importers.

(5) OPEC may no longer be presumed always to act as an automatic residual oil supplier (i.e., to provide the difference between world demand for oil and the available non-OPEC supplies): OPEC’s production and price policies are likely to be decided independently of global demand, and subject to various political, financial, and technical considerations.188 As a result, a triangular interdependence has now developed between OPEC, the industrial countries, and the non-oil developing countries. OPEC depends on the industrial nations for the bulk of its oil revenues, for the purchase of technology and sophisticated services, for occasional capital needs, and for investment outlays. The oil importing industrial countries need the OPEC countries for their essential oil requirements, their export outlets, and possible joint ventures in the Third World. The oil importing developing countries provide the other two groups with strategic raw materials, investment opportunities, and expanding export markets; they, in turn, are in need of imported energy, capital goods, technology, and management know-how.

Under these conditions of mutual interdependence, any changes in oil demand, supply, and prices are bound to influence the level and pattern of income and economic activity elsewhere in the world. The crisis-prone balance in the world oil supply and demand may be easily upset by output interruption owing to political upheavals in any country with moderate to large production capacity, by new outbreaks of hostility in any major oil producing area, or by accidental damage to major oil facilities. On the demand side, new pressures may arise from a reversal of conservation practices in the industrial countries, a too rapid economic development in the non-oil developing countries (and particularly in the more advanced developing countries), or from changes in import requirements among the centrally planned economies. Under these circumstances, if future oil prices increase at a moderate, predictable, and steady pace, and adequate OPEC supplies are offered at those prices regularly, economic adjustments in the oil importing countries could be manageable.189

On the other hand, if oil prices should rise unevenly in intervals of big jumps and real-term declines, all countries might be adversely affected. The management of energy resources, sensible economic growth in oil trading countries, recycling of surplus financial assets, and the proper handling of the non-oil developing countries’ debts could be far more difficult and costly. A chaotic, irrational, and nervous oil market would be particularly damaging to world economic and monetary stability for two additional reasons. First, a sharp and sudden rise in the real price of oil may induce those OPEC members whose financial needs can be met by smaller levels of oil revenues to give in to intense domestic political pressure and to cut exports—thus giving their supply curve a backward slope and inducing further short-term upward pressure on prices. Second, a new “oil shock” may jolt the oil importing developing countries into making hasty and economically inefficient investments in costly exotic alternatives—thus locking their consumers into a permanent bind to pay for these high-priced energy supplies in future decades.

Success in dealing with the energy challenge would thus require cooperation among and between all three groups. As an ideal, the ultimate mutual accommodations would have to be such that each and every group would be made to feel that no other arrangement would produce greater benefits, or involve lower costs.190 Such accommodations and arrangements among the oil exporting developing countries, the oil importing industrial countries, and the oil importing developing countries would of necessity have to be crisscrossed and multidimensional. First, there must be cooperation among OPEC members themselves toward a reconciliation of their different interests and aspirations, with a view to a mutually satisfactory compromise. Second, the oil importing industrial countries would have to come to terms with energy conservation, research and development subsidies for new energy sources, increased oil productivity in relation to GDP, and burden sharing during unexpected crises. Third, the oil importing developing countries must cooperate among themselves toward a realistic and obtainable bargaining position to be presented to the other two groups. And finally, there must be a dialogue among OPEC, the industrial countries, and the non-oil developing countries toward mutually beneficial, long-term cooperation.

Such cooperation could be expected to include (i) appropriate collective assurances by the oil exporters against disruptions of supply or unexpected jumps in crude prices; (ii) willingness on the part of importers to purchase oil at its real replacement cost in the years to come—the same price that OPEC producers themselves will have to pay for energy when their resources are exhausted; (iii) commitments by all oil using countries to improve petroleum efficiency and flexibility while a carefully supervised and smooth transition is made toward competitive and renewable energy sources for the future; (iv) readiness by major industrial countries to offer their advanced technologies for the development and diversification of the oil exporting developing countries, and to open their markets to the increasingly diversified products of the developing countries; and (v) acceptance by both oil importing industrial countries and oil exporting developing countries of not only the necessity but the desirability of helping non-oil developing countries to develop and expand their sources of food and fuel.

The utility of such concerted efforts is also likely to be enhanced by an early start. Predicted changes in the present OPEC membership by the end of the century, and possible replacement of the current low-reserve countries (e.g., Algeria, Ecuador Gabon, Indonesia, Nigeria, and Qatar) by new arrivals (e.g., Angola, Cameroon, Egypt, Malaysia, Mexico, and Oman) are likely to alter both the balance of politico-economic power within OPEC and the organization’s relationships with the outside world. Without such high-absorbing countries as Algeria, Indonesia, and Nigeria (and their enormous needs for short-term development finance), the organization’s recent majority preference for higher oil prices may be tilted the other way. At the same time, the economic weight of the Gulf countries in total OPEC exports, and Saudi Arabia’s predominance among the former, might be measurably enhanced. And the new lineup may usher in a host of new problems for the oil-thirsty world. An oil producers’ association dominated by low-absorbing, high-reserve countries faced with limited opportunities for foreign investments and increasing protectionism against their non-oil exports may find its best long-term interest in leaving a large share of oil reserves in the ground. Such a strategy, in turn, might have far-reaching implications not only for the stability of oil supplies but also on the speed of the emergence of oil substitutes.

In sum, the skewed distribution of global energy supplies, and the need for redressing world payments imbalances that may continue for some time to come calls for mutual cooperation. Without this kind of cooperation, and particularly if the major energy-trading countries were to follow unilateral economic policies, both world economic growth and international financial stability would be severely undermined. Political and other consequences of noncooperation might be even more ominous.


For a short-hand analysis of these basic problems, see Society for International Development, Energy and Development (Washington, 1980).


For a partial list of these references, see Edwin A. Deagle, Jr., Bijan Massavar-Rahmani, and Richard Huff, Energy in the 1980s: An Analysis of Recent Studies, Group of Thirty, Occasional Paper No. 4 (New York, 1981).


U.S. Central Intelligence Agency, The International Energy Situation: Outlook to 1985 (Washington, 1977).


Interestingly enough, a North Atlantic Treaty Organization conference on energy in April 1981 concluded that the U.S.S.R. may become a major energy supplier to the West before the end of the century.


Energy: Global Prospects, 1985–2000 (New York, 1977); report of the workshop on alternative energy strategies, a project sponsored by the Massachusetts Institute of Technology.


Organization for Economic Cooperation and Development, World Energy Outlook: A Reassessment of Long-Term Energy Development and Related Policies, a report by the Secretary-General (Paris, 1977).


Between the two OECD studies, the estimate of oil supplies fell by 32 per cent, while the forecast of oil imports rose by 72 per cent.


Energy Policies and Programmes of IEA Countries: Review, 1977, Organization for Economic Cooperation and Development (Paris, 1978).


Futurologist Herman Kahn maintained as late as 1977 that “even if our policies don’t change, the fossil fuels will last into the 22nd century.”—Newsweek, June 27, 1977, p. 71.


Peter R. Odell, “There is More Oil than People Think,” Euromoney (April 1978), pp. 147-50.


See Richard Nehring, Giant Oil Fields and World Oil Resources (Santa Monica, 1978).


Cf. Peter R. Odell and Kenneth E. Rosing, The Future of Oil: A Simulation Study of the Inter-Relationships of Resources, Reserves, and Use, 1980–2080 (London and New York, 1980).


See “20 Million Years of Energy,” Wall Street Journal, September 14, 1977, p. 22. See also The Future Supply of Nature-Made Petroleum and Gas, UNITAR Conference on Energy and the Future (New York, 1977).


For a more recent estimate for the United States, see U.S. Department of Energy, Office of Policy, Planning, and Analysis, Energy Projections to the Year 2000 (Washington, July 1981).


For a brief discussion of these alternatives, see Paul Tempest, ed., International Energy Options: An Agenda for the 1980s (Cambridge, Massachusetts, 1981).


In some countries, notably the United States, stringent regulations on deep-mining safety, strip-mining restoration, clean-air requirements, and so forth, make an early or rapid transition to coal difficult and unlikely.


As shown in Table 35, the share of solid fuels in the total world energy balance is expected to rise from 29.5 per cent in 1970 to 31.4 per cent in 1990. It is to remain at the same percentage up to the year 2000.


The economically recoverable proven reserves of coal are estimated at some 600 billion metric tons, and its potential reserves as high as 2,400 billion metric tons.


A.J. Parisi, “Hard Times for Nuclear Power,” New York Times Magazine, April 12, 1981, p. 36.


Denis Hayes, Rays of Hope: The Transition to a Post-Petroleum World (New York, 1977) considers the sun as the only clear-cut option left for humankind.


By this “comprehensive” definition, some 20 per cent of current world energy consumption comes from the sun.


See The Economist (London), October 6, 1979. Other estimates indicate a range of $35 to $56. The value of oil beyond $100 a barrel in petrochemicals and as fuel in automobiles is given by Scott (cited in footnote 112).


The British thermal unit (Btu) is the amount of heat needed to increase the temperature of a pound of water by one degree Fahrenheit.


See International Bank for Reconstruction and Development, World Development Report, 1981 (Washington, 1981). Other estimates give a range of $18 to $48 for tar sands and shale, $50 to $115 for biomass, and $75 to $150 for a Btu equivalent of a barrel of oil for electricity generated from conventional and nuclear materials. See London Financial Times, April 14, 1982, p. 6. For still other estimates, see U.S. Congress, Senate, Committee on the Budget, Synthetic Fuels: Report by the Subcommittee on Synthetic Fuels, 96th Cong., 1st Sess., September 27, 1979 (Washington, 1979).


U.S. Congress, Joint Economic Committee, Pursuing Energy Supply Options: Cost-Effective R. & D. Strategies, 97th Cong., 1st Sess., April 27, 1981 (Washington, 1981).


International Bank for Reconstruction and Development, World Development Report, 1981 (Washington, 1981), Chap. 4. See also Ahmed Zaki Yamani, “World Energy Options and Policies,” OPEC Bulletin, Vol. 11 (October 1981), pp. 7-15. Energy intensity in manufacturing among industrial countries is reported to have peaked in 1950. The energy required to produce an additional industrial unit is supposed to have declined by 1.5 per cent a year between 1950 and 1973, and faster since. The share of oil in a unit of GNP in the industrial countries is reported to have fallen by 26 per cent between 1973 and 1982. See “The Decline of the OPEC Cartel,” Wall Street Journal, November 26, 1982, p. 12.


For a more recent analysis of this issue, see Abdulhay Kayoumy, “Demand Elasticities for Petroleum Exports of OPEC” (unpublished, International Monetary Fund, September 18, 1981).


This trend has prompted some analysts to predict that total global oil consumption will nosedive to 20 million barrels a day during the 1990s.


See Subroto, “Prospects for Oil in the Eighties,” OPEC Bulletin, Vol. 11 (October 1981), pp. 1-6.


See Don Hedley, World Energy: The Facts and the Future (New York and London, 1981).


See Daniel Yergin and Martin Hillenbrand, eds., Global Insecurity: A Strategy for Energy and Economic Renewal (Boston, 1982).


World Energy Outlook, Organization for Economic Cooperation and Development (Paris, 1982).


For further discussions of future options, see Lewis J. Perelman, ed., Energy Transitions: Long-Term Perspectives (Boulder, Colorado, 1981). See also Dan C. Ion, Availability of World Energy Resources (London, 1976); and Marian Radetzki, Falling Oil Prices in the 1980s (University of Stockholm, 1981).


See Wolf Häfele, Energy in a Finite World (Cambridge, Massachusetts, 1981), particularly Chap. 9.


See Yergin and Hillenbrand, pp. 32, 54 (cited in footnote 180).


In the words of a high Saudi Arabian official: “Energy has become too important a factor in economic well-being to be entirely left to the vagaries of unrestrained laissez-faire.”—Yamani, p. 12 (cited in footnote 175). This belief in the inadequacies of the market mechanism is strongly rejected by free-market supporters.


In the post-1973 market, a relatively small sudden “shortage” of, say, 5 per cent in petroleum output (as in 1979) caused such a panic in the market that crude oil prices increased by several times the actual percentage decline in production. But a much larger decline in world oil demand (as in 1981-82) did not affect oil prices in the same way.


For a recent discussion, see Fadhil J. Al-Chalabi, OPEC and the International Oil Industry: A Changing Structure (Oxford University Press, 1980).


Prior to the recent oil glut, a number of countries (Iran, Mexico, Venezuela, Indonesia, Nigeria, and Norway, among others) declared their intention to gradually reduce production. Others (e.g., Kuwait, Saudi Arabia, and the United Arab Emirates) were reluctant to keep production at near-capacity levels because of their overly sufficient foreign exchange earnings and reserves. For still others, there are technical constraints on reaching capacity levels. See Fereidun Fesharaki, “Global Petroleum Supplies in the 1980s: Prospects and Problems,” OPEC Review, Vol. 4 (Summer 1980), pp. 27-49.


Cf. Amos Jordan, Hayden Bryan, and Michael Moodie, Facing the International Energy Problem, 1980-2000 (New York, 1979).


Among the numerous proposals for triangular cooperation, see Loring Allen, “Oil and Economic Reform,” OPEC Review, Vol. 2 (December 1978), pp. 68-79; and Nordine Ait-Laoussine, “The Stability of Oil Supplies—A Producer’s Viewpoint,” OPEC Review, Vol. 3 (March 1979), pp. 1-7.

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