262. Memorandum From the Director of Economic Research, National
Foreign Assessment Center, Central Intelligence Agency (Ernst) to Gary Sick of the National Security Council Staff1
Washington, February 25, 1980.
SUBJECT
- The Oil Supply Problem in the 1980s
1. Jim Cochrane indicated to me
that you want to read a paper recently done by the Office of Economic
Research for Ed Fried.
2. This is OER’s first hurried attempt
to analyze and project the OECD energy
supply through 1990. We have sketched out the main elements of our
thinking on the subject and made up 2 scenarios, which we consider to be
respectively, highly optimistic or highly pessimistic. We have not
detailed oil and other energy production projections on all individual
countries to avoid unnecessary arguments. We could specify several
combinations of country projections that would be consistent with our
more aggregative projections.
3. The paper reflects current OER views.
It is still in rough-draft form and the subject needs a great deal of
additional work. I would like to present it as a basis for discussion,
not as representing CIA’s eventual best
estimate. So please do not give it wide dissemination.
4. Specifically, the following additional types of analysis are
needed:
• More systematic calculations of potential oil production profiles in
key countries under various assumptions. We are currently doing this for
Saudi Arabia and Iraq.
• More systematic analysis of the probability of finding new oil in
various areas, and of the difficulty in extracting it.
• A fuller assessment of projected revenue requirements of key OPEC countries.
• Assessments of the possibilities for changes in the composition of
final energy demand to accommodate the changing mix of energy products
available.
• [2 lines not declassified]
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5. We hope to put out a more elaborate study, with some of these gaps
partially filled, this summer.2
Attachment3
The Oil Supply Problem in the 1980s
Conclusions
World oil production may have already peaked and is likely to decline
at least slowly throughout the 1980s. Whether the decline is slow or
rapid will depend on the following:
—whether greater oil exploration efforts occurring in response to
growing oil scarcity are successful in offsetting more of the
depletion of oil reserves than was the case in the 1970s;
—whether oil production rates in the Persian Gulf and other
policy-constrained countries will be cut as depletion
progresses;
—whether political change in key producing countries will lead to a
further curtailment of oil supply.
Specifically, we expect:
—Persian Gulf production to decline, or at best to remain near
current levels;
—production in other OPEC countries
to decline, at least slightly;
—OECD production to decline after
the mid 1980s;
—production in LDCs to increase, the extent depending largely on
Mexican discoveries and decisions;
—Communist oil trade to shift from a net export to a net import
position.
Overall, we project declines in Free World oil supply in the 1980s
ranging from less than 5 percent to about 25 percent. Most of the
decline will be in the lighter grades of oil, from which most light
oil products are made. The interaction between OPEC price decisions and the
production decisions of OPEC
countries will tend to give results closer to the lower than to the
higher end of the range. As oil prices are ratcheted upward during
periods of tight markets, oil producers often cut
production—initially to avoid excessive surplus revenues, and later,
as demand drops, to sustain the new real oil price.
It is virtually certain that the OECD countries will get a declining share of Free World
oil supplies, as has been the case in the past decade. This is
because of the tendency of the oil producers to give their own
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needs priority, a likely
continued differential in economic growth rates between the LDCs and
the OECD countries, and the
particular energy needs of developing countries. We consequently
expect OECD oil supplies to fall
at least 15 percent and as much as one-third.
Increased supplies of other forms of energy to the OECD, especially coal and nuclear
power, are likely to just about offset the decline in oil supply. At
best, total OECD energy supplies
would grow about 1 percent a year; at worst, they would decline 1
percent a year.
It would be extremely difficult for the OECD to achieve acceptable rates of economic growth
with energy supplies stagnating. To achieve even 3 percent economic
growth would require annual declines in energy consumption per unit
of GNP of between 2 and 4 percent,
or 2 to 3 times the rate achieved since 1973. Energy, especially
oil, prices are bound to rise rapidly in this situation, leading to
far greater conservation, as well as to slower economic growth.4 Adjustment of energy demand to stagnating
energy supply will be hindered by the likely depressive effect of
slower economic growth on investment and consequently on the rate of
introduction of more efficient energy-using durables. And demand
adjustment will be greatly complicated by a rapid decline in
supplies of light oil products for which there are no good
substitutes while potential coal supplies may not be used.
[Omitted here is the body of the 35-page paper.]
