# Presentation: 675412

## NEMS/AEO Conference - March 2001

Comments on 
International Oil Demand and Supply

Dermot Gately
New York University 

Dermot.Gately@nyu.edu

- Comments on
**International Oil Demand and Supply**
- Dermot Gately
- New York University
- Dermot.Gately@nyu.edu

**Notes:**
I would like to thank Mary Hutzler for inviting me to participate in this conference on energy projections, and, frankly, on the difficulties involved in such projections.  I’ve been looking forward to coming down to Washington, and I would occasionally check the web site of the Washington Post.  The last time I checked the site was three weeks ago, and it said that you were going to get 24” inches of snow, which really alarmed me.  ...  So you can imagine how relieved I was to see all that snow had melted by the time I arrived yesterday.  ...  Hey, doing projections is a tough job! 

## DOE projections: world oil market

- Reference Case: the need for OPEC oil is projected to double over the next two decades, requiring unprecedented investment in capacity expansion, mostly in Persian Gulf.
- Given relatively little response in NEMS to higher prices, OPEC’s key producers would prefer – and could impose – much higher prices than even the High-Price Case, with much slower growth in oil output.

## DOE projections: world oil market

-  If NEMS were to be modified -- assuming greater price-responsiveness for world oil demand and/or Non-OPEC supply -- then the demand for OPEC oil could be satisfied over the next two decades with only modest increases in OPEC oil output, at prices below $30 / barrel.

## The NEMS model and its use       are internally inconsistent

- If NEMS accurately represents the price-responsiveness of world oil demand and Non-OPEC supply, then both the Reference Case & the High-Price Case project future oil prices that  are far too low – because these cases rely on supply behavior by Gulf producers that is not in their own self-interest.
- The NEMS projections of world oil prices could be reasonable, but only if world oil demand and/or Non-OPEC supply are much more price-responsive than are represented in NEMS.

## DOE Reference Case projection to 2020:Oil Price about $21/barrel

**DOE Reference Case projection to 2020:****Oil Price about $21/barrel**

**Demand for OPEC output doubles -- to unprecedented levels.**

## DOE Ref.Case and IEA projections

**DOE Ref.Case ****and**** ****IEA**** ****projections**

**DOE Ref.Case & IEA projections are similar. **
**DOE has higher     Non-OPEC supply.  Both require ****huge**** increases in OPEC output.**

## Key issue: whether OPEC, especially Saudi Arabia and its neighbors, would be willing to expand production as rapidly as is projected.

- IEO 2000, page 34:					 “The combination of potential profitability and the threat of competition from non-OPEC suppliers argues for the pursuit of an aggressive expansion strategy for OPEC.”

## DOE projections: Ref.Case, 		High Price & Low Price Cases

**DOE projections: Ref.Case, ****	****	****High Price & Low Price Cases**

## DOE Reference Case projection to 2020:  oil price about $21, and OPEC output doubling, to unprecedented levels.

**Notes:**
Need better graphic representation of all these variables.  Better representation is shown here, on two graphs.  Top graph shows OPEC output on horizontal and Oil Price on vertical, historical data in black, with DOE Ref.Case projection in red.  In background are iso-revenue curves for OPEC: the higher the curve, the greater is OPEC Revenue.
	Bottom graph also shows OPEC output on horizontal (same as does top graph), but with Non-OPEC output on vertical.  Historical data in black; DOE projection in red.  Total World Demand is shown in 3 lines from NW to SE.  OPEC Market Share is shown by 2 diagonal lines from origin of graph: higher share moving clockwise.

## Alternative Price Cases versus Reference Case: Demand & Supply results are relatively unresponsive to    Oil Price changes (price-inelastic)    	

**Notes:**
If demand for OPEC oil is price-inelastic, then reducing OPEC output (thus increasing price) will have the result that OPEC revenue increases.  

## High Price Case versus Reference Case: results are relatively unresponsive to    Oil Price changes (price-inelastic)    	

|               
Price: 2005-20 | Ref. Price case 
$ 21.50 | High Price case 
$ 27  ( + 26%) |
| --- | --- | --- |
| World Oil
Demand in 2020 | 
 119 mb/d | 
115 mb/d (-3.4%) |
| Non-OPEC Supply in 2020 | 
 60 mb/d | 
62 mb/d (+3.3%) |
| Demand for OPEC oil, 2020 | 
 59 mb/d | 
53 mb/d (- 10%) |

**High Price Case versus Reference Case: results are relatively unresponsive to    Oil Price changes (price-inelastic)    ****	**

- % Price increase > % decrease in OPEC output:          hence OPEC revenue increases when price increases

## High Price Case versus Low Price Case: results are relatively unresponsive to    Oil Price changes (price-inelastic)    	

|               
Price: 2005-20 | Low Price case 
$ 15 | High Price case 
$ 27  ( + 80%) |
| --- | --- | --- |
| World Oil
Demand in 2020 | 
 127 mb/d | 
115 mb/d (- 9%) |
| Non-OPEC Supply in 2020 | 
 57 mb/d | 
62 mb/d (+ 9%) |
| Demand for OPEC oil, 2020 | 
 70 mb/d | 
53 mb/d (- 24%) |

- % Price increase > % decrease in OPEC output:          hence OPEC revenue increases when price increases

**High Price Case versus Low Price Case: results are relatively unresponsive to    Oil Price changes (price-inelastic)    ****	**

**Notes:**
To see the comparison more clearly, compare the High & Low Price Cases.  The High Price is 80% higher than the Low Price, but World Oil Demand is only 9% lower than in the Low-Price Case by 2020, and Non-OPEC Supply would be only 9% higher than in the Low-Price Case by 2020.

## High Price or Reference Price: which would OPEC prefer?

- The High Price Case, because:
- Higher Oil Revenue
- Less investment required
- Less oil reserves used up

## High Price or Reference Price: which would Persian Gulf  prefer?

- Assume that the burden of slowing output growth fell only on Persian Gulf (the supply-restricting “core”), not on Other OPEC.

**Notes:**
We assume that the non-core members of OPEC would be satisfied in their output levels from the Ref.Case, that they would not increase output above that.  Of course, if they did increase their output this would make it more difficult for the core to restrict output.

## High Price or Reference Price: which would Persian Gulf  prefer?

**High Price or Reference Price: ****which would **_**Persian Gulf **_** prefer?**

- Persian Gulf prefers High Price Case:
- Higher Oil Revenue
- Less investment required
- Less oil reserves used up

## High Price or Reference Price: whichwould Saudis, Kuwait & UAE prefer?

- Assume that the burden of slowing output growth fell only on these 3 countries (the supply-restricting “core”), not on the rest of OPEC.

**Notes:**
[to EIA: for Ref.Case production levels within Persian Gulf, I assumed same capacity utilization for all Persian Gulf producers.]    We assume that the non-core members of OPEC would be satisfied in their output levels from the Ref.Case, that they would not increase output above that.  Of course, if they did increase their output this would make it more difficult for the core to restrict output.

## High Price or Reference Price: whichwould Saudis, Kuwait & UAE prefer?

- These 3 still prefer High Price case: virtually the same revenue, less investment needed, more oil left.

## What incentive do these 3 countries have for producing an extra 4.2 mb/d in 2010 -- increasing output to 20.3 instead of to 16.1 mb/d ?          They’d get an extra $5 m$/d: less than $1/barrel; this would not even cover their production costs, much less capacity-expansion costs, or the opportunity cost of not selling that oil in the future.

## High Price or Reference Price: whichwould Saudi Arabia prefer?

**High Price or Reference Price: which****would **_**Saudi Arabia**_** prefer?**

- Assume that the burden of slowing output growth fell only on Saudi Arabia, not on rest-of-OPEC.

- In 2010, for producing an extra 4.2 mb/d, they’d get an extra $40 m$/d: less than $10/barrel.

**Notes:**
If Saudis produce an extra 4.2 mbd in 2010, they get an extra $30 m$d revenue ($7/b).
For an extra 6.6 mbd in 2020, they’ll get an extra $58 m$d revenue (<$9/b).

## Same question, phrased differently:

**Should OPEC’s core increase its output faster, in order to move from High-Price-path to Ref.Case Price-path?  **
**What extra revenue does OPEC’s core get for producing the extra output?**

**Notes:**
If they produce an extra 4.2 mbd in 2010 (18.5-14.3) they’ll get an extra $15 m$d in Revenue (<$4/b extra). For an extra 6.8 mbd in 2020, they get an extra $34 m$d.

## For different membership of OPEC’s core, what extra revenue does core get for producing the extra output?

- Answer: from negative to very little extra per barrel

## Conclusions:

**  ****Even the smallest core in OPEC would prefer High Price Case to Reference Case: there is too little incentive to increase output so rapidly.  The Reference Case could not occur, because OPEC’s core prefers the High-Price-Case instead, and it has the power to impose it.  **

##  Similarly, by extension, neither could the High-Price Case occur – because OPEC’s core prefers an Even-Higher-Price Case, and it has the power to impose it.

** ****Unless demand & Non-OPEC supply are more price-responsive, OPEC will slow output growth, let price increase, and be better off for doing so.**

## What if we allow Demand & Non-OPEC Supply to be more price- responsive than NEMS?

**Use Gately world-oil-model spreadsheet that is calibrated to track NEMS results for Ref. Case price-path, but has more price-responsive Demand & Non-OPEC Supply than NEMS has.**

## Gately world-oil-model spreadsheet

**Higher price-elasticities of Oil Demand: **
**	****- 0.4 for Transportation Oil**
**	****- 0.8 for Non-Transportation Oil**
**These assumptions are still price-inelastic, but they are much more elastic than NEMS.**
**Non-OPEC Oil Supply is also assumed to be more price-responsive than NEMS. **
**Elasticity assumptions are illustrative. **

## Gately world-oil-model spreadsheet

|               
Price: 2005-20 | Ref. Price case 
$ 21.50 | High Price case 
$ 27  ( + 27%) |
| --- | --- | --- |
| World Oil
Demand in 2020 |  119 mb/d
Same as DOE | 104 mb/d (-13%)
[DOE: 115 mbd] |
| Non-OPEC Supply in 2020 |  60 mb/d
Same as DOE | 69 mb/d (+ 15%)
[DOE: 62 mbd] |
| Demand for OPEC oil, 2020 |  59 mb/d
Same as DOE | 35 mb/d (- 41%)
[DOE: 53 mbd] |

- % Price increase **<** % decrease in OPEC output:          hence OPEC revenue decreases when price increases

**Gately world-oil-model spreadsheet**

## Compare DOE High-Price results with High-Price-path results from Gately spreadsheet with its higher price elasticities of Demand & Non-OPEC Supply.

**Gately spreadsheet calibrated to produce DOE Ref.Case results when using Ref.Case Price-path.**

## High-Price Case: comparing DOE & Gately results

**High-Price Case: comparing DOE & Gately results**

**Notes:**
Gately model has same results as DOE for Ref.Case price-path, but more price-responsive results for High-Price path than does DOE.  With High-Price-path, Gately demand rises more slowly than DOE, and Non-OPEC Supply rises more rapidly than DOE.  Effects on demand for OPEC oil cumulate: Gately results are MUCH lower than DOE.  Hence Gately results for OPEC Revenue are now the reverse of those for DOE – instead of High-Price-path yielding higher-than-Ref.Case OPEC Revenue as DOE projects, the Gately model projects that it will yield lower OPEC revenue than under the Ref.Case.

## Same Ref.Case result as DOE, but High-Price-path increases Non-OPEC supply more, reduces Demand more, and greatly reduces the need for OPEC oil.  Also, much lower OPEC revenue & market share from High-Price path.

**Same Ref.Case result as DOE, but High-Price-path increases Non-OPEC supply more, reduces Demand more, and greatly reduces the need for OPEC oil.  Also, much lower OPEC revenue & market share from High-Price path.**

## Slide 30

**Notes:**
In top diagrams, note the Revenue change in going from Ref.Case to High-Price Case.  In 2 bottom diagrams, note the differences in OPEC-market-shares from High-Price case.  For DOE, demand for OPEC oil declines little given High-Price-path – in contrast, Gately spreadsheet’s demand for OPEC oil declines dramatically.

## Gately world-oil-model spreadsheet

**Gately world-oil-model spreadsheet**

## Gately world-oil-model spreadsheet

-  OPEC output rises gradually to 40 mb/d by 2020
-  OPEC output rises gradually to 50 mb/d by 2020
- What would be the resulting price, world oil demand, Non-OPEC supply, OPEC revenue & market share?

**Gately world-oil-model spreadsheet**

## Gately world-oil-model spreadsheet: other cases

**Gately world-oil-model spreadsheet: other cases**

## Most likely case: OPEC output grows slowly, to 40 mbd by 2020.  OPEC market share stays almost constant.  After initial price decline, price & revenue grow steadily to 2020.

**Gately world-oil-model spreadsheet: other cases**

- Most likely case: OPEC output grows slowly, to 40 mbd by 2020.  OPEC market share stays almost constant.  After initial price decline, price & revenue grow steadily to 2020.

**Notes:**
If OPEC output increases to 40 mbd by 2020 (to 35 by 2010), its market share stays roughly constant, and  price and revenue rise would steadily to 2020 – after an initial decline.  If OPEC increases output faster, to 50 mbd by 2020, then price will be lower but revenue would be higher.  However, such revenue increases might not compensate for the costs involved: production costs, capacity  expansion costs, and the opportunity cost of not being able to sell the output later.

## Conclusions

-  DOE Reference Case requires rapid growth in OPEC oil output, to unprecedented levels that would require huge increases in capacity. OPEC’s core producers would prefer – & could impose – higher prices and slower output-growth.
-  Similarly for DOE High-Price Case: rapid increases in OPEC output & capacity.  OPEC’s core producers would prefer – & could impose – an even-higher price-path, with more modest growth in oil output and capacity.

## Conclusions

-   If NEMS were to be modified by assuming greater price-responsiveness of world oil demand and/or Non-OPEC supply, then OPEC output could grow more slowly – say only to 40 mbd by 2020 – without price increasingly significantly.

## ConclusionsThe NEMS model & its use are internally inconsistent

- If NEMS accurately represents the price-responsiveness of world oil demand and Non-OPEC supply, then both the Reference Case & the High-Price Case project future oil prices that  are far too low – because these cases rely on supply behavior by Gulf producers that is not in their own self-interest.
- The NEMS projections of world oil prices could be reasonable, but only if world oil demand and/or Non-OPEC supply are much more price-responsive than are represented in NEMS.

## Appendix

- Additional Slides

## IEA & DOE Reference Case projections are similar. DOE has higher     Non-OPEC supply.  Both require huge increases in OPEC output.

## Alternative DOE Cases: Higher Non-OPEC Supply, with Ref.Case prices

**Alternative DOE Cases: Higher Non-OPEC Supply, with Ref.Case prices**

## “Constrained OPEC” Case for NEMS ?	 how high might price have to rise to keep demand for OPEC oil below 40 mbd in 2020? 	

|               
Price: 2005-20 | High Price case 
$ 27 | “Constrained OPEC” 
$ 43  ( + 60%) |
| --- | --- | --- |
| World Oil
Demand in 2020 | 
 115 mb/d | 
106 mb/d (- 8%) |
| Non-OPEC Supply in 2020 | 
 62 mb/d | 
67 mb/d (+ 8%) |
| Demand for OPEC oil, 2020 | 
 53 mb/d | 
39 mb/d (- 26%) |

**“****Constrained OPEC” Case for NEMS ?****	**** how high might price have to rise to keep demand for OPEC oil below 40 mbd in 2020? ****	**

**Notes:**
These are my calculations.  They assume the same proportional response to higher prices as indicated in the slides comparing High Price results with Ref.Case or with Low Price results.

## What if we use DOE High Non-OPEC Supply assumptions as the basis for comparison between High- Price-path and Reference Price-path?  Will the conclusion still hold, that OPEC’s core would impose the High-Price-path?   ( Yes. )

## With High Non-OPEC Supply --

**With High Non-OPEC Supply --**
**which would **_**OPEC**_** prefer between High Price or Reference Price ?**

- High Price, because: higher Revenue, less investment required, less oil reserves used up

## With High Non-OPEC Supply --

**which would **_**Persian Gulf**_** prefer between High Price or Ref. Price ?**

- High Price, because: higher Revenue, less investment required, less oil reserves used up

## With High Non-OPEC Supply --

**which would **_**Saudis, Kuwait & UAE**_** prefer: High Price or Ref. Price ?**

- High Price, because: almost the same Revenue, less investment required, less oil reserves used up

**Notes:**
If they produce an extra 4.2 mbd in 2010 (18.5-14.3) they’ll get an extra $15 m$d in Revenue (<$4/b extra). For an extra 6.8 mbd in 2020, they get an extra $34 m$d.

## With High Non-OPEC Supply --

**which would **_**Saudi Arabia**_** prefer: High Price or Ref. Price ?**

- Perhaps Ref.Case?  Higher output & revenue & market share may offset higher costs.

**Notes:**
If they produce an extra 4.2 mbd in 2010 (18.5-14.3) they’ll get an extra $15 m$d in Revenue (<$4/b extra). For an extra 6.8 mbd in 2020, they get an extra $34 m$d.

## For different membership of OPEC’s core, what extra revenue does core get for producing the extra output?

- Answer: from negative to very little extra per barrel

## Conclusion: the core producers in OPEC would prefer High Price Case to Reference Case: there is too little incentive for them to increase output so rapidly.