P. 1 

# OAR Box 

# 1865 Prepped by Charmelle Mathews



## Document

Number: 

# 65 ) IV-J- 8 Docket Number: 

# A-83-2 7

Printed 12/3/20089:15:30AM

Sheet 65 of 105P. 2 

# Worl d Throug h 200 0

Septembe rl')H 6P. 3 

## Introductio n Th e dramati c collaps e o f crud e oi l market s i n earl y 198 6 wa s th e resul to f force s se ti n motio n b y th e hig h oi l price s o f previou s years . Reduction s in oi l deman d du e t o conservatio n an dth e substitutio n o

f alternativ e fuels , alon g wit

h stead y increase s in non-OPE

C oi l produc

tion , cut OPEC' s marke

t share . A dispropor

tionat e shar e o f th e burde n o

f reducin g productio n wa s born e by Saud i Arabi aI n 1985 , Saud i productio n fel

l t o a n averag e of 3. 2 millio n barrel s per

da y (MMBD ) from 9 8 MMB D a s recently a s 1981 . Tota l OPE C crude produaio n droppe d t o 16. 1 MMB D i n 1985 , dow n from30. 8 MMB D i n 1979 . Even

tually , th e proble mof

parcelin g ou t

share s o f ashrinkin g marke

t became insurmounta

ble . Price s ha

d t o fal l t o accommodat

e a n increas e i n OPE C production . Th e firstsign s o f

th e impac to f

th e pric e collaps e ar e alread y apparent . Som e industria l an d electri c utilit

y plant s i n th e United States , Wester

n Europe , an d Japa n have switche d fromcoa

l o r ga s t o oil . High-cos toi l producer s hav e shut dow n wells . Exploratio n an d develop men texpenditure s hav e bee n slashed . Ther e als o have bee n significan

t effect s o n th e globa l economy , whic h i s no t

surprisin g sinc e oi l stil l account s fo

r 4 6 percent

ofth e world' s energ y supply . Inflatio n an dinteres t rate s have fallen , an d wealt

h ha s bee n trans ferre d fromoi l producer s t o consumers . ' Thi s patter n represent s th e mino r

imag e o f th e event s followin

g th e 1973-7

4 an d 1979

- 8 0 oi l pric e increases , an d ma y porten d a perio d o f healthy , sustaine d economi c growt h fo r th e United State s an d othe r oi l importers . Nevertheless , eve n thi s optimisti c vie w ha s anegativ e aspect : Jus t a s hig h rea l oi l price s diminishe d oil' s shar e of worl d energ y markets , lowe r oi l price s wil l lea d t o increasin g relianc e o n Importe d oil . Since th e world' s oi l reserve s are still con centrate d in region s wher e ther e i s asignifi

can t potentia l fo r supply disruption , risin g impor tdependenc e mean s (1 ) a highe r ris k o f

a n economicall y damag in g shortfall , (2 ) reduce d flexibility i n formulatin g an d Implementin g foreig n policy , an d (3 ) greate r militar y obliga tion s t o safeguar d vita l suppl y links . A t th e sam e time , th e abilit

y t o respon d wit

h a n increas e i

n domesti c supply will b e greatl y diminishe d Th e challeng e fo

r th e US . governmen

t i n particula r i s t o develo p policie s tha

t permi t consumer s t o benefit

fromlowe

r oi l price s whil e minimizing th e risks o f futur e impor t dependence . Th e difficult

y o f thi s tas k i s amplified by uncertaint

y abou t whe n an d a t wha t leve l oi l price s wil

l stabilize . Planner s dea

l wit h uncertaint

y by develop

in g severa l scenario s tha

t bracke t th e mos t EXHIBIT 1 

## Crud e Oi l Price Scenario s (CurrentDollar s Pe

r Barrel ) 6 0

5 0

4 0

3 0

2 0

1 0

0 197 3 197 9 198 5 1 I Lo w Rang e [^ 9 Mi d Rang e 199 0 200 0 Hig h Rang e likel y outcome . Thus , thi s assessmen t ofth e worl d energ y outloo k

consider s high- , low- , an d mid-rang e case s (se e EXHIBI T 1) , wit h th e mid-rang e cas e explore din detail . Som e policy implication s ar

e sufficientl

y robus t a s t o appl y i n all cases . Thes e are discusse da t th e conclusio n of

th e outlook . 

## Ke y Factor s Thi s oudoo k

i s base do n development s i n severa l ke y factor s tha t pla y importan

t role s i n determinin g energ y supply an d demand . Ther e hav e bee n change s sinc e last year' s outlook . Som

e of thes e are note d below . Oil Prices. Th e supply an ddeman dpro jection s presente d in thi s outloo k are con sisten t wit h th e mid-rang e pric e scenari o mentione d above . (Note tha t price s are in current dollar s an d reflec

t U.S . inflatio

n averagin g nearl y 4 percent

per year. ) I n thi s scenario , crud e oi l price s fluctuate betwee n $1 5 an d $2 0 pe r barre l throug h 1990 . Increase d volatilit y coul d temporaril y sen dprice s abov e $2

0 pe r barre l o r significantl

y belo w $1 5 per

barrel . How

ever , acombinatio n o

f marke t force s an d productio n restrain t b y OPE C (an d perhap s som e non-OPE C producers ) woul d restor e price s t o th e $15-12

0 per barre l range . Dur in g th e 1990s , a s th e supply-deman d balanc e tightens , price s begi n t o mov e u p rapidly , reachin g $40- $ 5 0 pe r barre l i n 2000 . Nevertheless , price s ar e expecte d t o remain belo w th e rang e anticipate d ayea r ago . Not e tha t thi s scenari o doe s not

con side r suc h possibilitie s a s a

n extende d suppl y disruptio n o r

asever e economi c downturn . Economic Growth. Non-Communis t worl d economie s wil l gro w a ta n aver ag e rate o f

jus tove r 3 percen tpe r year , a s expecte dlast

year . The U.S . econom

y wil l gro w a t arat e o f slightl y les s tha n 3 percen t per year . Prospects fo

r growt h i n Japa n an d Wester n Europ e have improvedt o 4 % percent an dmor e tha n 2' A percent pe r year , respectively , becaus e o

f their statu s as oi l importers . Amon

g developin g countries , th e benefit s o f lowe r oi l price s t o net

oi l importer s wil

l outweig h th e negative impac t o n oi l exporters , an d growt h shoul d averag

e clos e t o 4 percent

pe r yea r overall .P. 4



### EXHIBI T 2 

## World Energ

y Deman d (Millio n Barrel s Pe r Da y Oi l Equivalent ) 

### 15 0

10 0

5 0

0 197 3 197 9 ^ Unite d State s | | Wester n Europ e 198 5 199 0 200 0 Japa n | | Developin g Nation s Othe r Develope d Nation s Nuclear Power. Hig h plan tconstructio n cost s an d safet y concern s wil l limi tth e growth o f

nuclea r power . N

o ne w capac it y beyon d wha

t alread y i s unde r construc tio n wil l b e adde di

n th e United States . I

n Wester n Europe , Japan , an dsom e develop

in g countries , nuclea

r program s wil

l g o for

ward , bu t a t aslowe r pac e tha n i n recent years . Nuclea

r powe r economic s ar e ques tionabl e wit

h oil price s belo w $2

0 per bar

rel , bu t th e motive to diversif

y energy sup plie s remain s i

n force . Renewables. Energ

y fromrenewabl e source s such a s biomass , wind , an dsola r powe r wil l mak e alimite dcontributio n t o energ y supplies . I n most cases , th e renewabl e tech

nology wil l not b e competitiv e wit

h combustio n of conventiona

l fossi l fuels . Note : Throughout

th e Outlook , th e "world " i s define das th e non-Communis t world . Only th e ne t

energy trade ofth e Communis t

Bloc i s counte d i

n world energ y supply-demandbalances . The develope d worl d refers t o membe

r countrie s o

f th e Organizatio n fo

r Economic Cooperatio n an d Developmen

t (OECD) . The developin g world , sometime s calle dth e Thir dWorld , refers t o th e remainin g non-Communis t nations . EXHIBIT 3 

## Worl d Energ y Deman d & Economic Activit

y (Barrel s o f Oi l Equivalen t Pe r $1,00 0 o f Good s an d Services ) 

### 5 

# T 

# r 2 

# r 197 3 I Unite d State s 198 5 199 0 tj Other Develope d Nation s 200 0

Developing Nation

s Natural Gas Prices. Natural ga s i s expecte d t o remai n competitiv e wit h oi l product s i n mos tmarket s throug h 2000 . Som

e region s ofth e United State s wher e ga s transmissio n an d distributio n cost s ar e high , however , ma

y find oi l cheaper tha n gas . Coal Prices. Becaus e o

f lowe r oi l an d ga s prices , coa l n o longe r ha s aclear-cu

t eco nomi c advantag e i

n new boilers , eve

n i n relativel y larg e units . I

n fact , wit h oi l price s nea

r th e lowe r en d of th e mi drange , afe

w plant s no w usin g coa

l ma y switc h t o oil . Althoug h substantia

l exces s capacit

y exist s i n th e coa l industr y a t present , fe

w pro ducer s ca n reduc e price s significantl

y and continu e t o operate . A

s aresult , coa l price s wil l fal l onl y slightl y befor e stabiliz ing . I n th e lon g run , price s wil l increas e gradually , limite d b y produc tivity gain s an d expansio n o f low-cos t capacity worldwide . 

## Worl d Energ y Deman d World energy demand

will grow slightly faster than 2 percent

per year during the second half of the 1980s and

1'/. percent per year during the 1990s. Developing countries will

account for nearly half

of the total increase, although they currently represent less than a quarter

of demand. A s EXHIBI T 2 shows , worl d energ y deman d wil l increas e from9 6 million barrel s pe r da y o f oil equivalen

t (MMBDOE

) i n 198 5 t o 10 7 MMBDO E i n 199 0 an d12 5 MMBDO E i n 2000 . Energ

y us e i n th e developin g coun trie s wil l grow a t mor e tha n 3 percent

per year . Energ

y consumptio n i

n th e develope d countrie s wil

l gro w a t les s tha n hal f tha t rate . On average , th e developin g countrie s wil l experienc e faste

r economi c andpopula

tio n growt h an dwil l attract agreate r share o f energy-intensiv e manufacturin g capacit y tha n wil l th e develope dcountries . A s percapit aincome s ris e i

n th e developin g coun tries , per-capit

aenerg y consumptio n wil

l als o increas e fromcurrent

lo w levels . A s EXHIBI T 3 indicates , energy inten

sit y (energ y us e pe r

unit o f economi c activ

ity) wil l remai n fairly stabl e i

n th e develop

in g countries . However, i

n th e develope d countries , shift

s i n th e compositio n o

f eco nomi c output , togethe

r wit h continuin g effi

ciency gain s and saturatio n o f some uses , wil l forc e energy intensit

y lower . Worl

d energy intensit

y i s expecte dt o declin e Vh percen t pe r year .P. 5

Factors responsibl e fo

r th e continue d declin e (eve n i

n alo w oi l pric e environ

ment ) include (1 ) completio n o f conservatio n investment s initiate d whe n price s were higher , (2 ) incorporatio n o f cost-effective , energy-saving technolog y in ne w capacit y an d retrofits , an d (3 ) expectation s tha t lo w price s ar e temporary . Regulation-induce d conservatio n (e.g. , U.S . ne w ca r fue l econ om y standards ) als o wil

l pla y arole . I f effi

ciency gain s are smalle

r tha n expected , tota

l energy requirement s i

n genera l an d oi l con sumptio n i

n particula r will b e higher , an d relianc e o n OPE

C wil l b e greater . 

## Worl d Energ y Suppl y Coal and oil will provide tbe largest

absolute increases in energy supply, while nuclearwill

experience the

fastest growth. OU will continue to supply over40 percent of total world energy requirements in 2000; oil and gas togetherwill

supply over 60 percent. Oil wil l contribute alittl e unde r

3 0 percen t ofth e growt

h i n worl drequirement s from 1985-2000 . A

s aresult , oil' s share of

worl d energ y supply wil

l declin e from4 6 percent t o 4 2 percent (se e EXHIBI

T 4) . Althoug

h oi l i s no w fa r mor e competitiv e wit

h othe r fuel s tha n i n recent years , severa

l factor s wil l caus e it s share t o fall : (1 ) expectation s of a pric e rebound , (2 ) highe

r consumer taxe s o n oi l products , (3 ) completio n of conservation project s alread

y begun , an d (4 ) th e desire o f man y developin g countrie s t o exploit indigenou s ga s an d coa

l resource s fo r interna l development

an dconservatio n o f foreig n exchange . Th e share o

f worl denerg y supplie db

y natura l ga s wil l remai n constant

a t abou t 1 8 percent . However, th e constanc y ofth e glo

ba l share obscure s conflicting regiona l trends . Fo r example , th e share o

f natura l ga s wil l declin e i n th e United States , bu t

i t wil l ris e in virtuall

y all other region s a s (1 ) low

cos t abundant ga s reserve s ar

e exploite dfo

r powe r generation , petrochemica

l feedstock , o r other industria l applications ; (2 ) coun trie s seek t o diversif y their energ y suppl y mixes ; an d (3 ) environmenta l concern s favo r ga s ove r oi l o r coal . Althoug h th e pric e advantag e coa

l ha s maintaine d ove

r oi l an d ga s ha s eroded , coa l will still mak

e asignifican

t contributio n t o incrementa

l energ y requirements . Severa l region s currently posses s underutilize d coal

fired electri c generatin g capacit y tha t wil l b e put into servic e a s electricit

y deman d increases . Furthermore , relativ e t o oi l an d gas , coa l i s see n a s asecur

e long-ter m choic e fo r fueling ne w capacity . Man y developin g countrie s wil

l op t fo r coa l ove r nuclea r energ y becaus e o

f lowe r initia l capi

ta l cost s an d simpler

technology . Finally , development s i

n coa l burnin g technology , EXHIBI T 4 

## Worl d Energ y Suppl y (Millio n Barrels Pe

r Da y Oil Equivalent) 15 0

10 0

5 0

197 3 197 9 198 5 H i O U I 1 Coal I I Natura

l Gas [H I Nuclea r

EXHIBI T 5 199 0 ,, 200 0 I 1 Hydro & Othe r



## Worl d Oi l Produc t Deman d (Millio n Barrel

s Pe r Day ) 

### 6 0 5 0 

### 4 0 3 0 2 0 1 0 198 5 199 0 200 0 i H Moto r Gasoline ' I I Distillat e I I Othe r I I Kerosen e ^^jj | Residua l Fue l Oi lP. 6



### EXHIBI T 6 

## Regiona l Worl d Oi l Deman d (Millio n Barrels Pe

r Day ) 

### 6 0 50 * 40~ 30 ~ 2 0 

## io " 0 

### 198 5 H | Unite

d State s | | .Wester

n Europ e 199 0 200 0 

### 1 \ Japa

n | | Developing Nation s Othe r Developed Nation s suc h a s fluidize d be d combustio n an d low BT U gasification , will hol d dow n th e cos t of complianc e wit

h environmenta

l regulations . Nuclea r power wil l b e th e fastest

growin g energ y source , rising ove r 4 percen t per year , wit h th e mos t

rapi dgrowt

h durin g th e next severa l years . However, its absolute contributio n will b e les s tha n 2 0 percent

of incrementa

l energ y supply , fa

r les s tha n pre viousl y expected . Onc e plant s currently under constructio n are completed , littl e additiona l capacit y wil l b e added . A combi

natio n of high capita

l costs , lo w alternativ e fiie l prices , an d safet

y concern s stemmin g fromth e Sovie

t reactor acciden t i n Apri l 198 6 wil l constrai n growt

h in nuclea

r power . Hydroelectri c an d othe r

renewabl e energ y source s suc h a s win d an d sola r powe r wil l mak e small contribution s t o incrementa

l energ y requirements . Wit

h th e exceptio n of

Canada , develope dcountrie s hav e alread y mad e us e o

f mos t potentia l hydroelectri c sites . Furthe

r development

o f Canadia n hydr o resource s wil

l depen d o n availabilit y of aU.S . marke

t fo r th e addi

tiona l exporte d power . Developin g coun trie s wil l tak e advantag e o

f hydr o resource s t o provid e much-neede d power

fo r electrifi

cation/modernization . Of

course , capita

l constraints coul d slo w development . C-eothermal, wind , solar , an d biomas s wil l continu e t o pla

y limite d role s in worl d energ y suppl y throug h 2000 . 

## Worl d Oi l Deman d World oil demand will grow just over1 percent per yearthrough 2000 with slightly fastergrowth in developing countries than in developed

countries. All

major products will contribute to demand

increases. Worl d consumptio n o

f oi l products , shown i n EXHIBI T 5 , wil l rise from4 5 MMB

D i n 1985 t o 5 3 MMB

D i n 2000 . Continue d improvemen

t i n th e efficienc

y o f oi l use , expansio n o f

alternativ e energ y supplies , an d concer

n ove r futur e pric e increase s wil

l hol d dow n growt

h i n oi l consumption . Lowe r price s will bolster

demand , bu t

i t will tak e man y years t o revers e th e effect s o f previou s hig

h prices , an d some change s ma y b e irreversible . Gasolin e consumptio n ove r th e perio d i s expecte dt o increas e b

y l'/ 2 MMBD , limite d b y (1 ) continue d improvemen t i n averag e vehicl e efficiency , particularl y i n th e United States ; (2 ) increase dconsumer taxe s and highe r refinin g cost s (du e t o th e phase

out o f lea d additives) , bot

h offsettin g par t o f th e impact of lowe r feedstoc k costs ; an d (3 ) marke t penetratio n by diese l passenge r car s outsid e th e UnitedStates . Deman d fo r middl e distillates—kero

sen e an ddiesel—will b e th e fastes t grow ing . Kerosene deman d ove

r th e perio di s expecte d t o ris e b

y ove r 1 MMBD . Distillat e fue l oil , whic h include s highwa

y diese l an d heatin g oils , wil

l increas e b

y 2 MMBD

. I n bot h cases , transportatio n us e wil l gro w faste r tha n heatin g an dcookin g applications , wher e natura l gas , liquefied petroleu m gases , an d electricit

y wil l provide stron g competition . Becaus e o f it s lowe r price , residua

l fue l oi l wil l b e muc h mor e competitiv e wit

h ga s an d coa l i n industria l an d utilit y boilers . Fue l oi l consumptio n i s expecte dt o ris e b y about l'/ i MMB D b y th e yea r 2000 , com

pare d wit h previou s expectation s o

f flat-tb

declinin g us e a

t highe r prices . Other petroleu mproducts , consistin g primaril y o f liquefie dpetroleu mgases , petrochemica

l feedstocks , lubricants , an d pavin g materials , wil

l ris e b y nearl y 2 MMBD . I n most cases , substitute s fo

r thes e product s ar

e limited . EXHIBI T 6 display s aregiona

l break

down o f oil demand . Demand i

n develope d countrie s wil

l rise b y les s tha n 1 percent

per year . Increase s wil

l b e smal l i n Wester n Europe , where ampl e ga s supplie s wil l b e available . Deman

d wil l gro w somewha

t faste r in th e UnitedState s becaus e of limite d domesti c gas availability , and i n Japa n becaus e o f highe r economi c growth . Th e largest gain s wil l occu r i n developin g coun trie s becaus e o

f rapi dgrowt

h i n populatio n an d economi c output , and alac k o f suffi

cien t infrastructur

e t o suppor

t massiv e sub

stitutio n o f ga s o r coal . Worl d crud e oil distillatio n capacit y i s expecte dt o b e adequate t o meet expecte d produc t demand . However, additiona l capacit y t o upgrade th e heav

y fraction of

th e barrel ma y b e require d b

y th e earl y 1990s . 

## Worl d O U Suppl y Non-OPEC

production peaked

in 1985 and will decline steadily as the oil price collapse depresses exploration anddevelopment activity. Market

shares of OPECproducers with abundant

louxost reserves will rise dramatically. Pas t increase s i

n non-OPE C crude oil productio n have bee n a

n importan

t facto r i n OPEC' s los s o

f marke t power . Hig

h oil price s stimulate d exploratio n fo r new reserve s andmade expensiv e developmen t project s possible . I

n the Unite

d States , drillin g activit

y soaredt o new high s and productio n decline s wer

e reversed . OPEC' s shar e o f worl d oil suppl

y decline d from5 9 percent i n 197 9 to 3 8 percen

t i n 1985 .P. 7

Mor e recently , lowe

r price s hav e cause d non-OPE

C supplie s t o decline , an d thi s tren d wil

l continue . Th e United State s wil l b e hardes t

hi t becaus e discoverie s are smalle r o n averag e an

d have higher

uni t costs . Man y ofth e enhance doi l recover y (EOR ) project s tha

t ha d bee n expecte d t o sustain outpu t

wil l no t b e economically feasible . Canad

aan dth e United Kingdo

m wil l als o experienc e relativel

y larg e produc

tio n declines . I

n th e nea r term , onl y Mexico and Norwa y appea r capabl e o f expandin g produaio n significantly . Tota l non-OPE C crud e oi l productio n wil

l declin e steadily from22' A MMB D i n 1985 t o 18

W MMB D i n 2000 . Th e downwar

dtren d wil

l no t b e reverse d by th e anticipate d rapi d pric e rises i n th e 1990s . Moreover, ne t

export s fromth e Communis t

Blo c wil l en d b y th e mid-1990 s a s deman d rise s an d supply slowl y declines . Th e regio n i s likel

y t o b e ane t

importe r by 2000 . I n conjunctio n wit

h stead y deman d growth , th e declin e i

n non-OPE

C supplie s wil l lea d t o rapidl y growin g dependenc e o n OPE C oil , a s show n i

n EXHIBI T 7 . OPEC' s shar e o f supply i s expecte d t o reach 6 0 percen t b y 2000 , comparabl e t o th e level s of dependenc e see n durin g th e 1970s . Fur

thermore , a s EXHIBI

T 8 indicates , OPE

C dominate s worl d oi l reserves , an d mos t o f thes e reserve s are concentrate d amon g th e Middl e Eas t members . A

s OPE C productio n expands , OPE

C producer s outsid e th e Middl e Eas t wil l reach capacity , leavin

g incrementa

l supply requirement s t o th e Middl e Eas t exporters . B

y th e mid-1990s , their produaio n will als o approac h current capacity . A t th e same time , rising expor t revenue s ma

y reduc e their

desire t o boos t produaio n an d capacit

y further, settin g th e stag e fo r asignifican

t pric e hike . Th e likeli

hoo d o f another destabilizin g supply disrup

tio n wil l als o increase . 

## U.S . Energ y Suppl y an d Deman d U.S. energy demand

will grow 1 percent

per year. Oil will supply more than half

of tbe resulting increase in energy requirements, while coal

and nuclear power togetherwill supply tbe remainder. Natural gas use will decline slightly. U.S . energ y intensit

y wil l declin e 2 percent per yea r from1985-2000 . Despit

e lowe r oi l prices , averag e energ y efficienc y wil l ris e a s (1 ) new capita

l equipmen t

an d struaure s requir e les s energ y tha

n th e existin g stock , (2 ) cogeneratio n increases , an d(3 ) th e econom y continue s t o shif

t towar d les s energy-intensiv e service s an d ligh t manufaauring . EXHIBI T 7 

## Source s o f World Oi l Suppl y

198 5 Unite d State s 200 0 Othe r Non-OPE C OPE C

EXHIBI T 8 

## Share s o f Prove d Oi l Reserve s

Middl e East—OPE C g ^ Unite d State s Othe r OPEC I 1 Othe r Non-OPE CP. 8

EXHIBI T 9 

## U.S . Energ y Suppl y (Millio n Barrel s Pe r Da y Oi l Equivalent

) 

### 5 0 4 0 3 0 2 0

1 0

0 197 3 

## H I O U | | Natura

l Gas 197 9 198 5



## r " l Coa l H | Nuclea r 199 0 200 0 1 I Hydr o & Othe r

EXHIBI T 1 0 

### U.S . Natura l Ga s Suppl y & Deman d (Trillio n Cubi c Feet ) 2 5 20 ~ 

# IT " 10 5 ~ 

# ( T 197 3 197 9 198 5 199 0 200 0 

### Existin g Domesti c Suppl y j I Ne

w Domesti c Suppl y H I Imports EXHIBI T 9 depict s th e futur

e patter n o f US . energy supply . Oil wil

l mak e th e larges t contributio n t o incrementa

l US . energy requirements . Utilit

y an dindustria

l oi l deman d wil

l increas e throug h rising utiliza

tio n of capacit y currently idl e an dthroug h switching fromnatura

l gas . Natura l ga s us e will tren d downwar das price s lo w enoug h t o b e competitiv e wit h fue l oi l d o not

permit development

o f adequat e reserve s t o hol d supply steady . Coa l us e wil l increas e slowly , mainl

y i n existin g utilit

y capacity . Nuclea

r energ y wil l increas e rapidl

y throug h th e lat

e 1980 s a s th e last ofth e plant s under

construaio n are completed . Afterward

, nuclea r energ y out

put wil l tren d down a s n o new plant s ar e anticipated . 

## U.S . Natura l Ga s U.S. natural

gas demand

will drop as the initial impact of loweroil prices is felt. However, drastically reduced drilling will cause supplies to shrink and will eliminate tbe present surplus by tbe late 1980s. Fallin g oi l prices , weaknes s in th e manufac

turin g seaor , an d ne w nuclea r generatin g capacit y wil l caus e industria

l and eleari c utilit y gas deman dt o fal

l i n th e nea r term . Ga s deman d i s expeae d t o stabiliz e a t lowe r level s within th e nex

t fe w years , wit

h continue dweaknes s in boiler fue l an d feed

stoc k markets offse

t b y development

o f markets includin g combined-cycl e electri c generatin g capacity , industria l andcommer

cia l cogeneration , an dco-firin

g wit h coa l t o mee t environmenta

l standards . Lo w price s wil

l discourag e gas wel

l drilling , causin g th e ga s surplu s t o shrink . EXHIBI T 1 0 indicate s th e likel

y outlook fo r ga s markets , includin g th e timin g ofth e requirement

fo r ne w domesti c capacity . Ga s prices , currentl

y depresse db

y lowe r oil price s and exces s ga s supplies , wil l eventu all y recover , stimulatin g th e increased drill

in g neede d t o provide thi s capacity . Import s wil l als o increase , maintainin g adequate gas supplie s an dmoderatin g th e rat e o f increas e i n prices . 

## U.S . Coa l Demand forUS. coal, including net exports, will

rise by I

1 /, percent per year to over1.1 billion tons by 2000. The electric utility sectorwill

remain coal's principal market, accounting

for overthreefourths of

coal output. Electricit y deman dgrowt

h o f onl y 1 Vi percent pe r year , th e completio n o

f nuclea r construaio n programs , andgrowt h i n cogeneratio n an

dpowe r import s wil

l limi tP. 9

growt h i n th e us e o

f coa l i n th e ke y utilit y market . A s EXHIBI T 1 1 indicates , coal' s shar e o f electricit y supply will declin e slightly . Relativel

y littl e ne w coal-fired capacit y beyon d wha

t i s alread y unde r con struaio n wil

l b e neede d by 2000 . Utilitie s wil l minimiz e capital-intensiv e generatin g project s by purchasin g power , installin g ga s turbine s o r

combined-cycl e units , o r

manag ing loa d more efficiently . Utilit

y coa l bu m wil l rise b y only Vi percent

pe r yea r throug h 199 0 a s nuclea

r generatio n grow s rapidly . Growt h in coa l us e will accelerat

e t o 2 percent pe r yea r durin g th e 1990s . EXHIBI T 1 2 display s th e outloo k

fo r coa l deman d b

y seaor . Industria

l stea mcoa l consumptio n wil

l ris e alittl e mor

e tha n 2 percent pe r year , lagging behin d growt h i n industria l produaion . Clea

n coa l combus

tio n technologie s wil

l permi t cost-effeaiv e attainmen t o f emissio n standard s an dgive coa l user s greate

r flexibilit y i n choosin g suppl y sources . Thes e technologie s will hel p boos t coa l consumption , particularl

y when oil and ga s price s rise durin g th e 1990s . Metallurgica

l coa l deman d wil

l decline , however , du e t o lowe r ra w stee l outpu t an d more electri c ar

c furnac e stee l produaion . US

- coa l export s wil

l declin e slightl

y from1985-90 . Worl

d coa l deman d wil l b e constraine d by lowe

r oi l prices , increasin g nuclea r capacity , an dslo w growt

h i n stee l produaion . I

n addition , coa

l produaio n capacit y outsid e th e United State s i s expand

ing . During th e 1990s , rising worl d coa l deman d wil

l allo w U.S . export s t o increase . Stea mcoa l export s wil

l gro w b y 5 percent per year , whil e metallurgica

l coa l export s graduall y decline . 

## U.S . Nuclea r Powe r U.S. nuclearelectricity generation will increase 9percent

per year from 1985-90 before declining gradually during tbe 1990s. Completio n of

plant s still under

construc tio n wil l lea d t o rapi dgrowt

h i n nuclea r generatio n durin g th e secon d hal f o f th e 1980s . However, hig

h capita l costs , lon g lea d times , lo w oi l prices , an d environmen

ta l oppositio n wil

l thwar t furthe r expansio n o f U.S . nuclea

r capacity . A

s existin g plant s age , capacit

y faaor s are likel

y t o decline , leadin g t o lowe

r generatio n durin g th e 1990s . 

## U.S . O U Deman d U.S. oil demand will grow by more than 1 percent per year from 1985-2000, rising by over3 MMBD. Consumption of allproducts will increase, with residual

fuel oil experiencing tbe largest

gain. EXHIBI T 1 1 

## Share s of U.S . Electricity Supply

198 5

Natura l Gas Coa l Nuclea r 200 0

I 1 Hydro and Othe r

EXHIBI T 1 2 

## Deman d fo

r U.S . Coa l (Millio n Shor t Tons) 1,25 0 1,00 0 75 0 50 0 25 0 198 5 Electri c Utility Industria l Stea m 199 0

Metallurgical Othe r Domesti c 200 0

| | Ne t

Export sP.1 0

EXHIBI T 1 3 

## U.S . Oi l Produc t Deman d (Millio n Barrel s Pe r Day ) 

### 2? ) 1 5

1 0

198 5 I H Moto r Gasolin e I I Kerosen e Je t

EXHIBI T 1 4 199 0 200 0 Distillat e I I Othe r Residual Fuel O

U



## U.S . Petroleu mIndustry UpstreamCapita l Requirement s (Billio n Dollars ) 6 0 

### 4 0 2 0 0 197 3 197 9

• - T o Maintai n Productio n 198 5 Projecte d Spendin g 199 0

US . oi l deman d wil

l increas e fro

m15 7 MMB D i n 1985 t o 19. 0 MMB

D in 2000 , a s show n in EXHIBI

T 13 . Gasolin e deman d wil l ris e a s lowe

r price s no t onl y spu r increased driving bu t

als o slo w efficienc

y gains . Stron

g gain s in the transportatio n sec tor , offsettin

g continue d weaknes s in heat

in g oil , wil l boos t distillat e fue l oi l deman d Lowe r oi l price s wil

l have th e largest impa ao n residua

l fue l oi l demand , which wil l nearl y double . B

y 2000 , fue l oi l will wi n bac k fromnatura

l ga s much ofth e dual

fuele d industria

l an d utilit y boiler marke t tha t i t los t afte r th e secon doi l pric e run-up . Other products , includin g liquefie d petroleu mgases , petrochemica l feedstocks , andasphalt , wil

l gro w about

1 percent pe r year . 

## U.S . Oi l Supply U.S. crude oil

production will

fall by 2V. percent per year from 1985-2000, resulting in a decline of

3 MMBD. Natural

gas liquids output

will also fall. Net oil imports will

rise from just over4 MMBD in 1985 to nearly 11 MMBD in 2000. The declin e i

n U.S . exploratio n an d devel

opment expenditure s tha

t ha s followe

d th e collaps e of

oi l price s wil

l hav e asever

e impa ao n domesti c oi l output . Reduaion s i n leas e acquisitio n and drillin g cost s wil l not b e sufficien

t t o restor e incentive s t o drill . A s ahigh-cos t

produaio n area , th e UnitedState s wil

l suffe r th e brunt o f an y cutback i n capita l budgets . I

n Alaska , ne w field development

wil l no t b e sufficien

t t o offse t decline s i n th e gian t Prudho e Ba

y Fieldtha t ar e likel y t o begin i

n th e lat e 1980s . Lower-4 8 outpu t

wil l declin e a s drill

ing i s insufficien

t t o replac e reserves . Fur

thermore , man

y thousand s o

f hig h cos t well s hav e alread

y bee n shut

down becaus e ofth e pric e decline . Fe

w new EO Rproject s ar e likel y t o b e economic , and th e syntheti c fuel s progra

mha s groun d to ahalt . Ove r th e lon g term , significan

t contribution s t o domesti c supply wil

l require exploratio n o

f frontie r area s andth e developmen t o f new produaio n technology . However , bot h activ

itie s wil l b e scale d bac

k a s aresul t ofth e pric e collapse . A s oil deman d rises , U.S . requirement s wil l have t o b e met

wit h highe r imports . Crud e oil andprodu aimport s wil l increas e from2 6 percent o f deman d i n 198 5 to 4 1 percent i n 199 0 an d 5 6 percen

t i n 2000 . Furthermore , th e bul

k ofth e increas e i

n import s i s likel

y t o com e fromregion s vulnerabl e t o supply disruptions . Fro mth e standpoin t of energ y security , thi s tren d represent s asignifican

t backwar d step t o th e condition s ofth e earl

y and mid

- 1970s . 

## Capita l Requirement s U.S. investment

in oil and gas exploration, development, and

production will

be well below tbe S200 billion needed to stabilize production through 1990. Th e investmen

t require d t o maintain U.S . oi l an d ga s productio n ha s decline ddu e t o lowe r drillin g and lan

d costs . However, a s a resul t of lowe r prices , th e funds availabl e fo r investmen t hav e falle n eve n faster. Sharpl

y reduce dexpectation s fo

r th e profitabilit

y o f new projects als o are depressin g spending . EXHIBI T 14 indicate s tha

t approximatel

y $20 0 billio n would hav

e t o b e invested i

nP.1 1

U.S . oi l an d ga s exploratio n an d produaio n (th e "upstream " seaor ) throug h 199 0 t o keep outpu t

a t 1985 levels . Th e dotte d lin e o n th e graph show s anticipate dinvestmen t throug h 1988 , accordin g t o arecent survey . Give n lowe r revenues , reduce dpric e ex pectations , an d increase d capita l demand s fromrefining an d transportatio n du e t o highe r oi l consumption , upstrea

mspendin g wil l fal l fa r shor t o f recent levels . Th e larg e and widenin g ga

p betwee n th e tw o line s implie s tha

t U.S . oi l an dga s produaio n will declin e steadily . 

## Alternativ e Scenario s As indicated

earlier, uncertainty about tbe future course of

oil prices complicates government

policy formation as well

as investor decision making. One way to deal with tbe uncertainty is to consideralternative futures that

bracket tbe likely outcome. Low

- an d high-pric e alternative s t o th e mid

rang e pric e pat

h appea r i n EXHIBI T 1 o n pag e 2 . Thes e alternative s are intende d t o provide reasonabl e lowe

r an d uppe r bounds , rathe

r tha n t o cove r ever y possibl e pric e outcome . Comparison s ofth e prospect s fo r worl d relianc e o n OPE

C an d U.S . impor

t depend

enc e under

th e alternativ e pric e scenario s appea r i n EXHIBI T 15 . Thes e indicator s were seleae d becaus e they provid e measure s o f energ y security . However, they als o indicat e th e considerabl e impa apric e change s eventually have o n supply an d deman d I n th e low-pric e scenario , price s fal l t o th e $10-11 2 pe r

barrel range fo

r severa l year s a s exporter s fai

l t o manag e surplu s capacity . Growt h i n oi l deman d an d decline s i n non OPE C supply accelerate , leadin g t o greatl y increase d relianc e o n OPE

C an dupwar

d pric e pressure . I

f OPE C either canno t o r will not expan d capacit

y t o supply th e hug e volume s require db

y 2000 , price s wil

l have to increas e muc

h raste r (a s indicate d b y th e arrow i n EXHIBI T 1) , leadin g t o ye

t anothe r destabilizin g oil-marke

t cycle . I f OPE C doe s expan d capacit

y t o meet deman d a t lowe r prices , i t wil l contro l three-fourth s o

f worl d oi l supply b

y 2000 , an d U.S . oi l import s wil l reac h 1 5 MMBD

. I n th e high-pric e case , mutua l recog nitio n by OPE

C member s ofth e nee dfo

r cooperatio n cause s renewe d produaio n restraint , an d price s quickl

y reboun d abov e $2 0 pe r barrel . Following severa

l year s of increas e wit

h inflation , price s rise steadily i n rea l term s throug h 2000 . Worl d an d U.S . oi l demand s ar e lowe

r a s aresul t ofth e higher pric e level . Non-OPE

C supplie s are higher tha n i n th e mid-rang e case , bu t

still declin e EXHIBI T 1 5



## Compariso n of

Alternativ e Scenario s OPE C Shar e o f Worl dOi l Suppl y a, U.S. O

U Impor t Dependenc

e 

## 8 )

198 5 199 0 | | Lo w Rang e 200 0 198 5 199 0 

### I Mi d Rang e 200 0 Hig h Rang e

fromcurrent

levels . Require d OPE

C produc

tio n expand s t o 2

7 MMBD , strainin g existin g capacity . Eve

n in th e high-pric e case , worl d relianc e o n OPE

C an dU.S . relianc e o n oi l import s bot

h ris e t o ove

r 5 0 percent

o f tota l supply . Clearly , energ y securit

y wil l onc e agai

n becom e afront-burner

issu e durin g th e 1990s . Becaus e ofth e lon g lea dtime s typi

call y require d t o brin g ne w produaio n onstream , step s aime d a

t preventin g th e nex t energy crisi s mus t

b e taken now . 

## Policy Implication s Althoug h lowe r oi l price s ma

y b e beneficia

l t o th e U.S . economy , increase drelianc e o n oi l import s b

y th e United State s wil

l reduc e th e nation' s energ y security . Muc h ofth e aaua l vulnerabilit

y arise s no t

fromimport s pe r s e but becaus e alarg e an dgrowing portio n ofth e world' s oi l supply i s concen trate d i n afe w countrie s where th e risk o f supply disruptio n i s significan t Thi s tren d canno t b e entirely avoided , bu t

certai n governmenta

l aaion s ca

n reduc e U.S . energ y vulnerability . I n th e past , dire agovernment interven

tio n i n energ y market s ha s le dt o economi c distortion s an d inhibite dattainmen t of a secure domesti c energ y supply . Therefore , initiative s suc h a s th e impositio n of impor t fee s o n crud e oi l an d petroleu mproduct s shoul d b e avoide d I

n additio n t o reducin g U.S . economi c aaivir y an d impairing th e abilit y of energy-intensiv e domesti c indus

trie s t o compet e in worl d markets , apolic y limite d to U.S . energ y self-sufficienc y ignore s th e realitie s o

f our economi c an d politica l relation s wit

h allie d countrie s tha

t ar e als o dependen t

o n energy imports . Clearly , th e mos t

dire ametho d o

f improving th e energ y securit y o f th e Unite d State s an d its allie s i s t o develop surg e capacit y tha t ca n replac e disrupte d oil sup plies . Th e U.S . Strategi

c Petroleu mReserv e currently contain s approximatel y 50 0 mil

lion barrel s o

f crud e oil . Th

e targete d leve

l o f 75 0 millio n barrel s shoul d b e achieve d a s quickl y a s i s fiscall

y responsible . I

n addition . w e shoul dencourag e ou

r allie s to develo p simila r petroleu minventor

y policies . I

n th e even t o f apetroleu memergency , thes e supplie s shoul db e allocate d by a n auctio n syste mtha t relie s on free marke

t forces . However, additiona

l U.S . governmen

t policie s ar e neede dt o remov e impediment s to th e efficien

t funaionin g o

f energy markets . Th e nation' s short

- and long-ter

m energ y need s will b e enhance d i f th e fol

lowin g policie s ar

e adopted : Assur e a ta x environmen ttha tdoe s no tdiscourag e developmen to f domes ti c energ y reserves . The federa l incom e ta x syste mi s undergo

in g acomprehensiv e overhaul . Proposed "ta x reform " legislatio n woul d reduc e th e 

### 10P.1 2

incentiv e t o inves t

i n ne w plan t

an d equip

ment , includin g th e equipmen t necessar y t o develo p domesti c energ y reserves . Further

more , uncertaint

y abou t futur e taxatio n will no t en d wit h enactment

o f abill . Ther

e remain s th e possibilit

y tha t th e energ y industr y will b e targete d a s asourc e o f revenu e t o reduc e th e federa l budge t defici t Moreover , man y believ e tha

t petroleu m refiners shoul d bea

r adisproportionate shar e ofth e responsibilit

y for supportin g federa l and stat e superfund programs . Addin g to th e industry' s ta

x burde n woul d b e especiall

y damaging give

n th e current depresse d stat

e of energ y markets . Invest

ment in ne w reserve s woul d b e discouraged , an d technologica

l advance s s o vita

l t o maintenanc e o

f ahealth y domesti c petro leumseao r

woul d b e impaire d Federa l an d stat e ta x policie s shoul d avoid discouragin g investmen t by th e U.S . energy industr

y b y followin g thes e guidelines : • Avoi d th e enactment

of ne w federa

l o r stat e taxe s o n th e energ y industry . Additiona l revenu e need s shoul d b e satisfied throug h broad-base d taxe s o n consumption . • Provid e adequat e cos t

recover y fo r tangi

bl e capita l an d intangibl e drillin g an d development

costs . Th e distortio n of investmen t incentive s ca

n b e minimize d throug h asyste

mdia t allow s th e imme

diate expensin g of

all exploration , devel

opment , an d productio n investmen t outlays . • Reduc e state an d loca

l severanc e an d a d valore mtaxe s o n oi l an d ga s produaion . • Repea l th e Windfal

l Profi t Ta x (WPT) . No w i s aparticularl

y goo d tim e fo

r repeal , sinc e th e WP

T currently collect s n o revenue , bu t

still impose s aheav

y accountin g burde n o n th e oi l industry . Remov e existin g restriction s o n energ y markets . Historically , pric e control s an d other governmen

t restriaion s o n th e operatio n o f energ y market s hav e create d hardship s fo r consumers . Whe

n energ y price s hav e no t bee n allowe d t o attain market-clearing lev

els , overconsumptio n an d reduce d explora

tion aaivit y have resulte d I

n aperio d o

f pric e weakness , continuin g marke t restraint s wil l accelerat e th e ris e i n U.S . dependenc e o n foreig n energy sources . Th e long-ter m interest o f th e industr

y an d th e publi c woul d b e bes t served by removing th e remainin g governmen

t marke t restraints . Th e followin g specific action s woul d result i n mor e balanced energy markets : • Deregulat e natura l ga s wellhea d prices . Th e Federa

l Energ y Regulator

y Commis

sio n ha s adopte darul e tha t raises th e pric e ceiling s o n som e categorie s of "old " gas . Thi s regulatio n ma

y enabl e recover

y of additiona l volume s o f

low-cos t ga s fo r consumer s tha

t woul d otherwis e no t

b e produce d However ; comprehensiv e legis

latio n tha t woul d eliminate pric e controls , provid e ope n acces s t o natura l ga s trans portation , an d remov e natura l ga s deman d restraint s i s neede d • Lif t th e prohibitio n o n th e expor t of Alas

ka n crud e oil . Restriction s o n th e expor t of oi l fro mAlaska' s Nort

h Slop e depres s th e valu e of

Alaska n crud e a t th e well

head , reducin g exploratio n an d develop

ment of Alaska n reserves . Althoug

h exportin g Alaska

n oi l migh t increas e U.S . import s i n th e shor t run , i t coul d reduc e worldwide dependenc e o n uncertai n supplie s fromth e Middle East. Further

more , t o th e extent

tha t ne w Alaska

n reserve s are develope d mor e US . domes

ti c supplie s woul db e availabl e i n th e even t of a n oi l supply shortfall . Enhanc e opportunitie s fo r develop men to f ILS . minera l lands . Policie s tha

t preclud e th e leasin g o

f pros peaiv e oi l an d ga s land s withou t regar dt o their petroleu mpotentia

l are inappropriate , particularl y considerin g th e potentia

l fo r futur e supply shortfalls . Larg

e djscoverie s are mos t likel y t o occu r i n frontie r area s wher e development

i s difficul t an drequire s lon g lea d times . Immediat

e acreag e acces s i s neede d t o ensure tha

t thes e reserve s ar e available in th e futur

e whe n oi l supplie s are no t s o abundan t

Th e federa

l governmen

t alread y impose s leasin g prohibition s o n approximately 28 0 millio n aae s onshor e an d ten s of

million s o f aae s offshore . Som

e ofth e acreag e foreclose d t o leasin g ha s high potential . Acces s t o such qualit y prospect s ca n b e preserve d i

f th e followin

g policie s are adopted : • Exempt land s tha t have outstandin g petro leumpotentia

l fromleasing prohibitions . Reasonable acces s i s neede dt o ensure th e maximu

mcontributio n t o ou r

long

ter menerg y security . • Avoi d unduly inhibitin g th e exploratio n stag e o f petroleu minvestment s throug h ne w environmenta

l plannin g mandates . • Recogniz e th e margina

l economic s o

f vita l (bu t high-cost) OC

S frontie r an d deepwater exploratio n by reducin g th e minimumbi dlevel s for

OC S tract s i n thes e categories . • Adjus t leas e term s t o accommodat e changin g economi c circumstance s b y reducin g royalt

y rates, adoptin g profit

sharin g alternative s t o conventiona l royal

ties , extendin g leas e terms , o r throug h othe r measure s tha

t ca n hel p sustain importan t exploratio n an d development i n th e fac e o f short-ter mcas h constraints . Ensur e tha texcessiv e environmenta l regulation s d o no tneedlessl y inhibi t Industry activity . Oil an d ga s produaio n i

n th e United State s _ i s governe dby ase

t o f stat e an d federa

l regu lation s adopte dt o serv e variou s safet y an d environmenta

l policies . A

t lowe r oil prices , regulator y complianc e cost s ca

n mak e development

o f some reserve s uneconomic , heightenin g th e probabilit

y tha t mor e cheaply produce dforeig

n oil wil l supplan t U.S . sources . Federa l and stat e agencie s nee d to bal

anc e existin g environmenta l and safet y goal s wit h th e nation' s energ y securit y require

ments . A carefull

y considere dprogra

mof regulator y relie f fo r th e U.S . energy industr

y shoul d include , amon g other aaions , th e followin g steps : • Explicitl y confine stat

e authorit y under th e Coasta l Zone Managemen

t A at o OC S aaivitie s direary affeain g stat e land s an d waters . Attempts t o exten dstat e authorit y hav e le d t o extensiv e delay s an dsub

jugated nationa

l interest s t o parochia

l stat e concerns . • Maintai n existin g discharg e limitation s fo r offshor e oi l exploratio n an d productio n wastes , rather

tha n requirin g undergroun d injeaio n o r

other costl y disposa l methods . Curren

t wast e treatmen t pra c tice s adequately prote ath e offshor e environment , an dar

e a t leas t a s stringen

t a s thos e followe

d b y other producin g nations . • Provid e relie f fromregulation s requirin g prompt , permanent

pluggin g o

f well s shut dow n i n respons e to petroleu mpric e fluauations . Onc e marginall y productiv e well s ar e plugged , i

t i s ofte n uneconomi c t o restar t them , meaning tha

t valuabl e reserve s ma

y b e permanently forfeited . Unde r current economi c conditions , oil producer s nee d th e flexibilit y t o b e abl e t o shut i n well s fo r longe r period s whe

n lowe r price s dictate . I t i s especiall

y critica l i n th e curren

t marke t environmen

t tha t short-sighte dgovernmen

t policie s d o no t

ad dt o uncertaint

y o r nullif y incentive s t o invest

i n domesti c oil an

d gas supplies . B

y followin g th e policy prescrip

tio n discusse dabove , th e United State s ca n avoi d inefficien

t developmen

t o f its energ y resource s an dminimiz e th e risk o f exces sive dependenc e o n foreig

n oil .

1 1P.1 3

Prepare d by : Coordinatin g an d Plannin g Departmen t Conoc o Inc . Fo r additiona l copies , writ e to : Publi c Relation s Departmen t Conoc o Inc . 100 7 Marke tStree t Wilmington , DF

. 1989 8