Oil Production: Mideast Still Calls the Shots

By John Haldane

Recent articles about falling oil prices and disarray in OPEC ranks are misleading. Are the days of OPEC numbered? Is the world to be awash in a sea of cheap oil? The answer to both questions is "No."

Even in the unlikely event of the demise of OPEC, the U.S. and Western Europe could not blithely resume consuming oil, a non-renewable resource, at ever increasing rates. Oil will still need to be bought from the oil producing countries in a competitive world market. And a close look at world oil reserves indicates that the future belongs to the Arab oil producers.

OPEC nations control 66 percent of the proven oil reserves and 33 percent of the gas reserves. The USSR possesses over 9 percent of the oil and as much as 40 percent of the gas. Ten out of the top 15 oil countries in terms of oil reserves are members of OPEC. Saudi Arabia alone is credited with 23 percent of the world total.

2001: An Arabian Oil Monopoly?

The main point to remember is that OPEC will supply more than half of the world's oil in the year 2000, up from about two-fifths in 1984. While OPEC currently has 13 members, the solid core of producers is in the Arabian Gulf area. These countries will be producing long after some of the less well-endowed OPEC nations fall by the wayside. For example, Saudi Arabia and Kuwait rank first and second in world reserves. Saudi Arabia has an estimated 162 billion barrels of reserves, while the United Arab Emirates sit on over 30 billion barrels of oil, almost as much as the United States. This must remain a major factor in U.S. defense and industrial planning into the next century.

We can't say we haven't been warned. A 1985 U.S. Geological Survey report states: "Most of the world's oil is found and will continue to be found in just a few localities, with the greatest concentration of oil resources in the Middle East, North America (including Mexico) and the Soviet Union ... Not only does the Middle East have a very large present-day production capacity, but it is drawing its oil proportionally less rapidly than are other areas of the world, thus confirming the idea that the Middle East is becoming ever more dominant in the occurrence of world petroleum."

This realistic appraisal reinforces an April 1985 Conoco report which stated baldly: "Slowly rising demand and peaking non-OPEC supplies imply increasing reliance on OPEC oil in the years ahead. By the early 1990s, most of OPEC's remaining excess capacity will be concentrated in countries such as Saudi Arabia with the least pressing revenue needs. Simultaneously, OPEC's production will become increasingly concentrated in the Middle East. These factors will restore OPEC to a much more powerful position in world oil markets."

The Soviet Union, currently the world's largest oil producer, is having its own troubles. As the Oil and Gas Journal recently reported: "Steadily weakening oil flow in the Soviet Union cut total Communist production by 1 percent during the first half of this year. Soviet oil production during the first six months of 1985 was 11.9 million barrels per day (b/d), down from 12.3 million b/d in the comparable 1984 period. Volga-Ural production continued to decline, but the major factor in the Soviet Union's oil slump has been western Siberia." Some western analysts of the Soviet Union believe that the giant Siberian oil fields have begun to run dry before the Russians expected they would. A number of Western traders are experiencing disruptions in their usually reliable supplies of Soviet oil. Part of the problem is that the Russians are diverting more oil to Eastern Europe to compensate for lost deliveries from Iran's war-damaged Kharg Island. The USSR is well aware that failure to supply its allies with vitally needed oil could lead to unpleasant political problems. With Premier Gorbachev pushing for modernization of domestic industry and agriculture, more Russian oil will be needed at home. This can only drive up world oil prices from non-Communist sources and enhance the status of Mideast producers.

Declining oil production explains to a considerable extent Kremlin moves over the past year and a half to improve its relations with key Middle Eastern countries. The Soviets recently established diplomatic relations with Oman, and may do the same with the United Arab Emirates in the near future. A Soviet ambassador has returned to Egypt and Kuwait has signed a $300 million arms deal with the USSR. Moscow is already the principal supplier of arms to Iraq. While the primary Soviet goal is to regain political influence in the Middle East, the Soviet desire to guarantee future energy resources should not be overlooked.

A Case of Too Little Too Late

Can major new oil discoveries in non-OPEC countries minimize future dependence on Arab oil? Oil experts are pessimistic. The Geological Survey report comments: "Clearly, discoveries are on a downward trend from a high in the 1950s of some 35 billion barrels of oil per year to a present day 10 to 15 billion barrels of new oil discovered per year." It then adds an often forgotten point: "It also is important to recognize where oil is not likely to be found. There is a widely expressed idea that if only minimal exploration has taken place in a particular area, then likely there is a good chance for big oil in that area. Rather, our assessment indicates that many of these sparsely explored areas are sparsely explored for good geologic reason, and it is not likely that they will ever be significantly productive. That reality is surely the most important conclusion of our study, because it asserts that the Middle East increasingly will monopolize world petroleum supplies."

China, for example, is pushing oil exploration, but geologic and technical difficulties seem to indicate that no big breakthrough is in prospect. Moreover, China, to a greater degree even than the USSR, is giving top priority to industrialization and the modernization of agriculture, and will need whatever oil it finds for domestic production. Most of Africa, other than Nigeria, is viewed as having limited crude oil futures. In Asia, aside from China, only Indonesia continues to be a significant producer, and it has located no new oil potential.

While it is always possible that major new oil fields may be found in the future, it is reasonable to believe that no areas of potential discovery will have a major impact on the current distribution of the world's crude oil.

Rather, a drop below $20 a barrel would mean that such high-cost sources as the North Sea, Alaska and some African production will become unprofitable. Moreover, cheaper oil will cause the cancellation of many investments in coal and gas projects since these high-cost efforts will no longer be economically feasible.

The United States has adopted a policy of complacency regarding its energy security as oil prices slowly drop. A more mature approach demands a farsighted handling of our relations with the Middle Eastern oil producing countries to insure that Arab oil continues to be available to the United States and its allies. Should it cease to be, the result for the U.S. would be ever rising production costs, a problem which would quickly dwarf the current high-dollar trade disadvantage.

John Haldane is a specialist in Middle East affairs who has served as a foreign service officer in Baghdad, Beirut and Cairo, and as an international economist in the Departments of Commerce and Treasury.