World Oil Production After Year 2000:
Business As Usual or Crises?

Joseph P. Riva, Jr.

Specialist in Earth Sciences

Science Policy Research Division

August 18, 1995

35-925 SPR

SUMMARY

During the Arab oil embargo of early 1970s, the United States gross national product declined and unemployment doubled. Some 20 years later, in response to a threat to Middle East oil supplies, the Gulf War was fought. Oil fuels world commerce and accounts for 40 percent of total primary energy demand. Oil availability in the future will be a major factor in the world's economic condition. There have been projections by the International Energy Agency (IEA) and the Energy Information Administration (EIA) that world oil production will have to be increased by about one-third in the next 15 years to meet rapidly rising demand. This would require a major expansion of oil production capacity in the Persian Gulf OPEC countries that is far above their present plans. While the Gulf OPEC countries may have sufficient oil reserves to support such an additional production increase, an expansion of such magnitude would require capital that they may not have and the assistance of foreign financial and oil interests that they may not want.

Outside of the United States, where proved reserves are defined primarily on petroleum engineering criteria, there are many vested interests that define oil reserves to meet political or economic objectives. Discounting the reserves that may be exaggerated and utilizing only that portion of the resources that may be produced in actual practice could reduce the ultimately recoverable oil remaining in the world to a level where the midpoint of world oil depletion would occur at the turn of the century, followed by a production decline of nearly three percent per year. Such a resource driven world oil shortfall is a worst case scenario, not being amenable to the usual political, economic, or military solutions.

Deficient productive capacity has not yet caused an oil crisis, but that does not mean it never will. Significant increases in world oil demand will have to be met primarily from Persian Gulf supplies. This is a region with a history of wars, illegal occupations, soups, revolutions, sabotage, terrorism, and oil embargoes. To these possibilities may be added growing Islamist movements with various antipathies to the West. If oil production were constrained, oil prices could rise abruptly along with adverse world economic repercussions. If the IEA and EIA are correct on the demand side, deficient world oil productive capacity could cause an oil crisis within 15 years and political disruptions in Saudi Arabia could cause one sooner. However, if the increases in world oil demand were more moderate, and there is long-term relative peace in the Middle East, with increasing foreign participation in upstream oil activities, a business as usual world oil demand and supply situation would be a likely scenario for much of the next century.

CONTENTS

INTRODUCTION
Business As Usual
-- World Supply
-- World Demand
Middle East Oil
-- History
-- Petroleum Geology
-- Reserves
-- Production Potential
-- Potential Problems
Potential Crises

CONCLUSIONS

WORLD OIL PRODUCTION AFTER YEAR 2000:
BUSINESS AS USUAL OR CRISES?

INTRODUCTION

More than 20 years have passed since the Arab oil embargo of 1973-1974 disrupted the U.S. oil supply, doubling gasoline prices and causing long lines at filling stations. At the time of the embargo, domestic oil production was in the middle of a seven-year decline, having peaked in 1970 at about 9.1 million barrels per day (b/d). However, between 1977 and 1986, domestic oil production leveled off, with output fluctuating around 8.2 million b/d. The decline was halted by a drilling boom that was a domestic response to rising world oil prices. Then, in 1986, the OPEC cartel's world oil prices collapsed as a result of actions taken by Persian Gulf oil producers. By the end of 1985, to prop up cartel maintained world oil prices, Saudi Arabia had been forced to reduce oil output to only 3.3 million b/d, compared to 9.7 million b/d produced in 1980. When it became evident that a further reduction in oil production would be required in 1986 to continue to sustain world oil prices, the Saudis chose a different strategy. Rather than again reducing output in a attempt to drive up the price, the Saudis increased oil production to earn more revenue. As Saudi production increased toward 5 million b/d, other Persian Gulf producers also sharply increased their oil production, resulting in a drop in world oil prices of about 50 percent.

In the United States, the average price of oil declined from $24.09 in 1985 to $12.51 in 1986. This began a process which resulted in the diminution of the domestic petroleum industry. As world oil prices remained relatively low and as oil prospects declined in the mature domestic oil provinces and the most prospective frontier regions offshore and in Alaska were closed to drilling, almost two-thirds of the domestic oil and gas field service jobs and more than one-third of the domestic oil and gas production jobs were lost. The only domestic petroleum industry jobs that have increased during the 1986-95 period are gasoline service stations jobs, as domestic demand for gasoline, and for imported oil, increases.

The collapse of world oil prices, mirrored by the collapse of domestic oil well drilling, resulted in reduced domestic crude oil production (by 1993, down about 23 percent from 1985). Domestic crude oil demand in 1993 averaged about 13.4 million b/d, some 6.8 million b/d of which had to be supplied by imports. The amount of imported oil, over half of which came from OPEC countries, is equivalent to an average of 16 supertankers entering U.S. ports each day. Domestic crude oil production is projected to continue to decline. Future declines will lead to increasing imports, much of which will have to come from the Middle East. In addition to its history of wars, illegal occupations, coups, revolutions, sabotage, terrorism, and oil embargoes, there is a new concern regarding future oil availability. Recent studies have indicated that Middle East oil reserves may be significantly less than officially reported.

Business As Usual

World Supply

If the world's oil reserves are reported with reasonable accuracy and the undiscovered world oil resources, as assessed by the U.S. Geological Survey, prove generally reliable, the original recoverable oil endowment of the earth may have been around 2,330 billion barrels. (l) Nearly one-third of this amount already has been produced and consumed. If unimpeded oil exploitation proceeded everywhere (including the United States) with the utilization of modern exploration and development technology, the remaining two-thirds of the earth's original oil could sustain world production at about its current yearly level of 22 billion barrels for perhaps 100 years. (2) Then a declining resource base would force down world oil output. This scenario treats the world oil endowment as a undifferentiated volume that is exploited in an efficient manner, based on past oil company experience and practice.

However, world oil distribution is not uniform. The world's remaining conventional oil is very unevenly distributed, with 79 percent in the Eastern Hemisphere and 58 percent controlled by OPEC (see tables 1 and 2). Thus, it might be more realistic to project potential world oil production into the future on a country-by-country basis. The length of time that a country may be able to sustain its present rate of oil production can be estimated by using past exploitation experience, combined with reserve and resource information, as a model. The results of such projections are shown in table 3. Note that several countries that appear to be unable to sustain current oil production for the next ten years (Canada, the United Kingdom, and Norway) are developed countries that export significant amounts of oil to the United States. Due to projected future production declines, they can not be expected to be long-term suppliers. The countries with the greatest long-term potential, and the potential to significantly increase shorter-term production, generally are grouped in the Persian Gulf area. It is to this region, that the United States, and the rest of the world, must turn in the next century for major oil supplies.

World Demand

In the early 1970s, oil accounted for about one-half of total world primary energy demand. By 1994, oil's contribution had declined to about 40 percent. The International Energy Agency (IEA) projects that the share of oil in the world's energy mix will remain relatively stable at around the 40 percent level to the year 2010. However, since world energy demand is expected to increase, IEA projects that oil demand will rise from the current 68 million b/d to around 76 million b/d in year 2000 and 94 million b/d in 2010. (3) If an oil production increase of this magnitude should occur and unexpected reserves are not found, the 94 million b/d rate could be sustained for only an additional 20 to 25 years before a depleting world oil resource base would force production down.

The OECD countries are projected by IEA generally to experience declining oil production. The rest of the non-OPEC world, notably China and the republics of the former Soviet Union and Latin America, are expected to increase their oil production. However, even IEA's most optimistic projection of non-OECD, non-OPEC oil production increases accounts for only 20 percent of the estimated rise in total world oil output. Then, 80 percent of the projected increase in world oil production, some 21 million b/d, would have to come from OPEC. Over the next 15 years, the OPEC countries would be expected to increase their oil production from about 27 million b/d to about 48 million b/d or by 78 percent.

Tables 1-3 indicate that the non-OPEC oil producing countries of the former Soviet Union (Russia, Azerbaijan, Kazakhstan, Turkmenistan, and Uzbekistan) and some of the Latin American countries (Colombia, Mexico, Brazil, Trinidad) have sufficient oil reserves and resources to increase oil production, if a variety of governmental, legal, social, and financial problems are solved and very significant upstream oil investments are made. (4) However, China is presently producing oil at a relatively high and efficient rate. Although its remaining oil resources appear substantial, most are located in remote or offshore regions of complex geology that will make recovery expensive and technically difficult. Thus, continuing increases in China's already significant oil production are uncertain. Even more doubtful is the IEA projection that, overall, non-OPEC countries can increase their oil output by some 5 million b/d over the next 15 years, given expected production declines in the United States, Canada, and the North Sea.

TABLE 1. Current World Oil Status
(in billion barrels)

Source: Modified from U.S. Geological Survey and Oil and Gas Journal estimates.
*OPEC Members
R/P = Reserves/Production Ratio
Probable Additions = Inferred Reserves (Potential Field Growth) + Undiscovered Resources
Note: Iraq's production is constrained by U.N. sanctions, thus the very high R/P ratio.

TABLE 2. World Oil Distribution
(in billion barrels)

Source: Modified from U.S. Geological Survey and Oil and Gas Journal estimates.
*OPEC Members

TABLE 3. Sustainability of Current Oil Production

*OPEC Members
WORLD = Aggregate sustainability of total world oil production, assuming continuous efficient exploitation.
WORLD = Aggregate sustainability of total world oil production, assuming continuous efficient exploitation.

Considering reserve/production ratios, reserves, and resources, it is evident that the major sources of any increase in world oil output will have to be Saudi Arabia, Iran, Iraq, Kuwait, and UAE (United Arab Emirates including Abu Dhabi, Dubai, Ras al Khaimah, and Sharjah). Although Venezuela possesses very substantial oil resources, much of the oil is very heavy, making per-well production relatively low. (5) Compared to the Middle East, substantially increasing Venezuelan oil production would require the drilling of many more wells at a much greater investment of money and time. Thus, it is only the Middle East that possesses sufficient reserves to increase oil production to the demand levels envisioned by EIA for the next 15 years.

Middle East Oil

History

The founding of the oil industry in the Middle East dates from 1908 when oil was discovered in southwest Iran. Iranian oil production rapidly expanded during and after World War I, but fell sharply in the early years of World War II. Recovery began in 1943 with the reopening of supply routes to the United Kingdom. The oil was produced by what became the Anglo-Iranian Oil Company, but in the postwar period political difficulties arose with the Iranian government. The conflict centered on Iran's dissatisfaction with the financial terms of the concessions and the monopoly position of the company and its close association with the British government. The subsequent breakdown in relations between the state and the oil company led to the nationalization of the Iranian oil industry in 1951. (6)

Following nationalization, Iranian oil production steeply declined. A compromise was reached in 1954 when a group of oil companies, including British Petroleum (formerly Anglo-Iranian Oil), received exploitation and marketing rights for Iranian oil, but the National Iranian Oil Company retained sole ownership of all fixed assets of the Iranian oil industry. In 1973, Iran took control of its oil industry and, with joint arrangements with foreign oil companies, continued the expansion of oil production that began with the 1954 compromise. Continued expansion of Iranian oil production was made possible by a succession of discoveries that included five super-giant fields. (7) During the Iranian revolution and the long war with Iraq, Iran's oil production declined significantly. Iran is attempting to improve its oil production capabilities with assistance from foreign oil companies (other than those from the United States which are prohibited by the U.S. Government from participating).

Little oil development was possible in the Persian Gulf region during World War II, although large fields had been located in Iran, Iraq, Kuwait, and Saudi Arabia. By the end of the war, it had become evident that the Gulf would become a major oil exporting region when adequate outlets became available. In the postwar years, a rapid rise in world oil demand was coupled with a rapid production expansion in the Gulf. With the nationalization of Iranian oil in the early 1950s, Kuwait became the Gulf's leading oil producer, holding this position until 1965. Saudi Arabia's rise to prominence as an oil-rich state came later. It has since, however, achieved preeminence as the largest holder of oil in the world. (8)

In an atmosphere of competition between the established British companies, in Iran, Iraq, and Kuwait, and the incoming American oil companies, Saudi Arabia had granted a concession to the Arabian American Oil Company (Aramco) in 1933. The first discovery was in 1935, but oil accumulations that were commercial were not located until 1938. Initial production was modest. The discovery that transformed the prospects for the oil industry was that of Ghawar in 1948. It is the largest oil field in the world (82 billion barrels), and was originally thought to be several separate smaller fields. In addition to Ghawar, Saudi Arabia was found to contain ten other super-giant fields, including the world's largest offshore field. A national oil company was established in Saudi Arabia in 1956 to conduct the exploitation of petroleum resources outside of the Aramco concession. Since that time, oil production has become increasingly governed by the state. In 1974, the Saudi government purchased a majority participation in Aramco and the company became fully nationalized as Saudi Aramco in 1988.

Petroleum Geology

The Arabian-Iranian basin is underlain by a deep basement of Precambrian rocks (see table 4 for geologic time scale). Overlying the Precambrian is a wide platform area whose strata formed from slow, intermittent subsidence and deposition along sea margins and into shallow seas during Paleozoic and Mesozoic time. The platform consists of a thick sequence of continental and shallow marine sediments that dip gently east and northeast. Tectonic movements, beginning in Late Cretaceous time, finally eliminated the ancient seaway and culminated, at the end of the Tertiary, with the folding of the Zagros, Taurus, and Oman mountains. (9) A number of large regional, north-south anticlinal trends, that are probably related to basement uplifts, occur in the platform. Many super-giant oil fields (including Ghawar) are contained within structural closures along these trends. To the north and east, the sediments in the deeper parts of the basin were folded along northwest to southeast trends. In northeast Iran, a series of overthrust faults occurs, and the mountain ranges are tightly folded and faulted. Thus, the oil fields of Iran and Iraq are elongated in a northwest-southeast orientation, in contrast to the north-south oriented fields of Kuwait and Saudi Arabia.

The oil fields in the Arabian-Iranian basin vary in their structural and stratigraphic characteristics according to their location. Jurassic reservoirs occur in the broad, gently folded structures of Saudi Arabia. Most of the oil is produced from the Late Jurassic Arab formation which is composed of permeable carbonates alternating with evaporites and sealed with a thick anhydrite. It also contains organically rich carbonates that accumulated under anaerobic conditions as the sea transgressed the region in mid-Jurassic time. These deposits are the likely source for most of the petroleum in the Jurassic reservoirs of Saudi Arabia. (l0) Jurassic sedimentation concluded with four main depositional cycles, each consisting of a shallowing marine carbonate sequence overlain by anhydrite. They are known as Arab A, B. C, and D reservoirs. The largest oil accumulations occur in the oldest cycle, the Arab D reservoir. At Ghawar, the north-south trending oil pool is approximately 140 miles long covers 875 square miles. The oil column reaches a maximum of 1,300 feet.

TABLE 4

Source: Modified from the Geological Society of America Time Scale, 1983

In the northeastern part of Saudi Arabia, the basal Cretaceous unit contains zones that appear to be source rocks, although some of the oil also could have originated in the underlying Jurassic source rocks. To have migrated into the Cretaceous reservoirs, Jurassic oil would have had to moved vertically as much as 5,000 feet. Since the Upper Jurassic evaporite seals are discontinuous in this area, such extensive vertical migration could have occurred. Cyclic sedimentation predominated in the Middle Cretaceous with the deposition of nonmarine sandstones alternating with shallow marine carbonates. The sandstones are the primary reservoirs in the northern Saudi fields, including the super-giant Safaniya, the world's largest offshore oil field. Oil also accumulated in some of the carbonate rocks.

The extremely large oil accumulations in Saudi Arabia can be attributed to the development of thermally mature, organic rich sediments underlying or adjacent to widespread, highly porous and permeable carrier and reservoir beds, and the cyclic deposition of evaporite seals. The tectonic activity in the region was sufficient to create large structural traps, but not intense enough to disrupt oil migration paths or evaporite caps. (ll) The folding is uniquely simple and uniform with almost no smaller scale structural irregularities. Thus, virtually all of the migrating oil was trapped in the large primary structures, creating huge oil fields but practically no small ones. Almost all other world oil provinces exhibit a much more complex structural character with numerous small irregularities that often trap oil. Since almost all of Saudi Arabia's oil is located in only a few large fields, great economies of scale can be realized. Large fields are easier to find than small fields and their wells are much more productive. Thus, significantly fewer wells were needed to find and produce a given amount of oil, greatly reducing upstream costs. However, the apparent absence of small fields will limit future exploration activities.

Burgan, the world's second largest oil field, is located to the north of Saudi Arabia in Kuwait. It is in a north-south trending anticline with an area of about 135 square miles. Oil production is primarily from a number of highly permeable mid-Cretaceous sandstones. In Iraq, the oil fields, including the super-giant Kirkuk, are in younger rocks, Eocene and Oligocene limestone reefs. The petroleum is thought to have originated in underlying Cretaceous source rocks. The principal tectonic feature of Iran is the folded Zagros mountain belt. Paralleling the mountain belt, is a series of long, northwest-southeast trending, asymmetrical folds that contain the major oil fields of Iran. The main reservoir in nearly all of the Iranian oil fields is the Asmari formation, a reefal limestone of Oligocene-early Miocene age. It is overlain by evaporites that provide generally efficient seals, although oil seeps are common throughout the country. (12)

Reserves

The reported oil reserves of Saudi Arabia, Iran, Iraq, UAE, and Kuwait before and after the mid-1980s price collapse are shown in table 5.

TABLE 5. Reported Proved Oil Reserves of Major Middle East
OPEC Oil Producers in the late 1980s (13)
(in billion barrels)

During the four-year period, the reported oil reserves in the four countries increased by 64 percent, or 253 billion barrels. The largest increase was in the UAE (196 percent), followed by Iraq (112 percent), Iran (90 percent), and Saudi Arabia (52 percent). Since OPEC production quotas and levels are partly determined by reserve size, it was more than a coincidence that each country chose this time of market share competition to increase reported reserves. A more important consideration, however, is whether the reserve increases are political or real. Proved oil reserves are those that are economically recoverable and have been measured on the basis of geologic and engineering data. During the late 1980s, not enough exploration wells were drilled in Saudi Arabia, Iraq, Iran, or the UAE to increase proved reserves by the amounts reported through new field discoveries, nor were large new discoveries made. Thus, most of the increases had to have been in inferred reserves.

Inferred reserves are identified economic oil resources that are expected to be added to proved reserves as new development wells are drilled to extend known producing zones and develop new producing zones in known fields. Also included in inferred reserves, is additional oil expected to be recovered from known fields by improved and extended production practices. Most of the large reported reserve increases, if not purely political, appear to be in the latter category. Improved recovery technology would increase the percent of the in-place oil recovered from the known large fields. Since the Middle East is considered to contain huge amounts of oil, the reported reserve increases have been generally accepted, even though they may not meet the normal definition of proved reserves. The increasing oil reserves reported for the Middle East region, despite a history of substantial production, even have caused speculation that the reservoirs are recharging from below, as a consequence of the subduction of organic carbonates in the Arabian plate, and may produce seemingly forever. (l4) However, if Middle East oil would have been generated at the rate at which it is being produced since subduction began in Miocene time, the traps would have long overflowed and the region, if not much of the world, would be inundated with oil. The reserves apparently have increased because of political reporting decisions, not because the fields cannot be depleted. About half of the recoverable oil in Ghawar has been produced and the field must be massively flooded with water from the Persian Gulf to maintain pressure.

In Saudi Arabia there was a reported oil reserve increase of 85 billion barrels in 1989. At the time, it was explained that Saudi reserves may have been underreported, particularly when compared to the already increased reserves of other Gulf states. The Saudi increase was accomplished with little in the way of new discoveries. Aramco expanded the cut-off points for recoverable oil in the huge known fields, assuming that higher percentages of the in-place oil theoretically could be recovered. However, to achieve the higher recovery rates (50 to 60 percent), huge capital investments in water injection wells, field wells, pumps, pipelines, and water separation plants would be required. Eventually, the produced fluid would approach 90 percent salt water, that would have to be separated and disposed of. There have been creditable reports that, in the 1990s, the Saudi government mandated that the oil reserves would not decline. Thus, in spite of the production of some 16 billion barrels of oil, Saudi reserves are 3.6 billion barrels higher now than in 1989. The additional 20 billion barrels again have been theoretically squeezed from the same fields in the same manner, with the addition of projected enhanced oil recovery operations. Enhanced oil recovery technology would add very significant costs to the recovery effort. Under the definition used in the United States, the current proved reserves of Saudi Arabia probably would be about 160 billion barrels, leaving some 101.2 billion barrels as inferred reserves that, at very considerable expense, could be converted to proved reserves and eventually recovered.

Similarly, Kuwait currently has about 86 billion barrels of proved reserves, with field growth potential of perhaps 10.5 billion barrels, at significant additional expense. In the UAE, about 61 billion barrels may be proved, leaving about 37 billion barrels of inferred reserves potentially available at substantially higher cost. In Iran, perhaps 69 billion barrels of the 89 billion barrels reported as reserves qualify as proved reserves, while in Iraq it is possible that as much as 91 billion barrels of the reported 100 billion barrels of reserve may qualify. Kuwait, UAE, Iran, and Iraq have reported generally level reserves since 1987.

Production Potential

Table 3 indicates that, if all necessary investments are made, Saudi Arabia and Iran probably could sustain current production levels into the second half of the next century, while current production levels in Iraq, UAE, and Kuwait may be sustainable into the 22nd century. However, the IEA projects that world oil production will have to rise to accommodate increasing demand. OPEC's share of the increase would be about 21 million b/d by 2010. Based upon the amount of oil thought to remain in the OPEC countries, Saudi Arabia's share of the increase may be about 25 percent (5.2 million b/d), Kuwait, 15 percent (3.2 million b/d); Iraq, 20 percent (4.2 million barrels p/d); Iran, 10 percent (2.1 million b/d); and UAE, 10 percent (2.1 million b/d). This would increase Saudi production to 13.2 million b/d, Kuwait to 5.2 million b/d, Iraq to 4.7 million b/d, Iran to 5.7 million b/d, and UAE to 4.3 million b/d.

Potential Problems

Saudi Arabia is completing an expansion of production capacity from the current 8.5 million b/d to 10 million b/d. Most of the effort involves the restoration of idle onshore and offshore production equipment and the installation of several gas-oil separation plants and gas compression plants in developed fields. The expansion included the enlargement of a seawater treatment plant and injection facilities at Ghawar and the drilling of production wells into lower reservoir zones in Safaniya. Also, a comparatively small (by Middle East standards), light oil field, located in the central part of the Kingdom, will be put into production. The additional output will help offset future declines at Ghawar. No plans exist to expand beyond the 10 million b/d level as the development of several fields have been postponed by generally world low oil prices (l5).

The reconstruction of Kuwait's oil production facilities, that were damaged in the Gulf War, has restored oil production capacity to around 2 million b/d. The rapid production increase after the war may have lowered pressures in some reservoirs, causing formation water influx and possible reservoir damage. The oil lost to the well fires is estimated to be about three percent of the proved reserves. Prior to the Gulf War, Kuwaiti oil production capacity was about 2.5 million b/d. The number of drilling rigs in operation in Kuwait has been increased, and new field wells are being drilled and damaged wells repaired. The higher levels of drilling activity should soon raise the production capacity to pre-war levels, with the goal of reaching a sustainable 3 million b/d before year 2000. (l6)

In the UAE, more than 90 percent of the reported reserves are in Abu Dhabi and nearly all major development activities are located there. Current UAE production capacity is estimated at about 2.45 million b/d. Abu Dhabi is in the process of increasing its production capacity to an estimated 3 million b/d by drilling additional production wells, including some that are horizontal. However, no major new oil fields are being developed. Production operations are concentrated on maximizing oil output in known fields by water and gas injection. There is some indication that additional expansion beyond that now in progress will be inhibited by steeply rising costs. (l7)

Iran's reported current oil production capacity is about 4.2 million b/d, but there have been reports of problems in sustaining production much above 3.6 million b/d. The government plans an expansion of this capacity to 5 million b/d and expects to maintain this level through the end of the century, but further capacity expansion is not expected soon. The additional increase primarily will come from gas injection to maintain reservoir pressure in known offshore fields. Iran is seeking contracts with foreign companies for technical and financial support for this work. Contractors will not receive equity crude, but will receive a negotiable rate of return on investment, plus interest. United States firms have been banned from such projects, as part of a U.S. Government attempt to isolate the Iranian regime which is alleged to sponsor international terrorism and violence against the Middle East peace process and may be developing nuclear weapons. European and Japanese firms are negotiating to obtain the contracts. (18)

Iraq, in spite of United Nations sanctions, has been rebuilding war-damaged oil facilities and export terminals. Its sustainable oil production before the Gulf War was about 3.5 million b/d. The Gulf War caused severe damage to Iraq's oil industry, but the rehabilitation program has been extensive. The oil infrastructure, developed over the past 65 years, is an elaborate network of many production centers with considerable flexibility. Thus, the restoration has proceeded relatively quickly, with some 80 percent of pre-war oil production capacity reportedly restored. Recently, Iraq has detailed 33 oil fields that are open for joint development once sanctions are lifted. The productive capacity of the fields is expected eventually to be about 4.5 million b/d. Although the sanctions against Iraq are supported by the United Nations Permanent Security Council members, oil companies from European and Eastern countries have expressed interest in the ventures. Iraq plans to increase its oil productive capacity to 4 million b/d in 2000 and 6 million b/d in 2010. (19)

Table 6 shows that an oil production expansion of only 4.5 million barrels per day is planned in the critical Middle East countries to the end of the century. There are no plans for further expansion beyond year 2000 in any of the countries, except Iraq once the sanctions are lifted. Iraq plans a 2-million b/d expansion in production by 2010. The planned oil production expansions listed table 6 are less than half that needed to meet the 2010 world oil demand projected by EIA, but will cost in excess of $100 billion, plus an additional $20 billion to upgrade and expand Persian Gulf refineries to meet growing world product demand. (20) Oil production expansion beyond that planned would be even more expensive, on a per-barrel recovered basis, as the remaining oil becomes more difficult to recover and enhanced oil recovery projects are required. Also new pipelines and transportation facilities would be needed to handle the additional oil.

TABLE 6. Planned Middle East Oil Production Expansion
(in million b/d)

Potential Crises

If World oil demand increases significantly from the current 68 million b/d, to near the 94 million b/d in 2010 projected by IEA, OPEC would be expected to increase production from the present 27 million b/d to as much as 48 million b/d. Then, in 2010, OPEC would be providing over half of the world's oil and could largely control world oil prices. OPEC has no current plans to increase oil production beyond that shown in table 6. The costs to further increase capacity, especially to the levels projected, would be so high that the international oil industry would have to be involved. (2l) The OPEC Persian Gulf producers could decide that it would be to their economic advantage if the enormous investments necessary to further increase oil production were not made. Then, as increasing demand forced up world oil prices, they would realize higher income from level production without more rapidly depleting their oil reserves.

The effect on the rest of the world, however, would be much less salubrious. Oil prices significantly affect world commerce. For the industrial countries, the oil price spike of the early 1970s brought profound dislocations and a deep recession. In the United States, gross national product fell by six percent between 1973 and 1975, while unemployment doubled to nine percent. In Japan, gross national product declined in 1974 for the first time since the end of World War II. The economic impact in Europe was correspondingly severe. The oil price increase was an inflationary force that continued when economic growth resumed in 1976. The non-OPEC developing countries suffered most from the oil prices increases. They experienced the same recessionary and inflationary forces, but reacted by borrowing and going into debt. Thus, their ability to grow economically was retarded, and, in some cases, halted altogether. (22) The oil price increases of the mid-1970s were followed by a price collapse in the mid-1980s. In the next century the world may not be so fortunate.

In any scenario of increasing world oil production, Saudi Arabia must play a leading role. The massive program now underway to increase the kingdom's sustainable oil output capacity to 10 million b/d will cost about $36 billion. (23) While no plans exist to expand oil production beyond this amount, an increase in world oil demand, on a scale envisioned by IEA, would require at least an additional 3 million b/d of oil output from Saudi Arabia. Saudi Arabia's ability to fund an additional oil production increase of this magnitude is questionable. The country now runs a yearly deficit and its monetary reserves, once $200 billion, are down to $30 billion. The faltering economy has resulted in a somewhat reduced standard of living, record unemployment, an increasing homeless population, and some civil unrest. Since the Gulf War, the Saudi monarchy has been confronted with a growing Islamist movement that seeks to achieve a comprehensive transformation in the Kingdom's social, economic, and political life. Until the war, most Islamist groups refrained from directly challenging the avowedly Islamic government. The Gulf War transformed the situation by revealing the kingdom's weakness relative to Iraq and dependence on Western protection. The fundamentalists goals include an even more strict adherence to Islamic law and practices with the censorship of all foreign (infidel) influences. In addition, they would establish a strong army for protection, independent of Western assistance, and would control government spending. (24)

Saudi Arabia is a tightly closed Bedouin society brought together 60 years ago by Ibn Saud, the first king of the modern Saudi state. In order to consolidate the country, he married into more than 30 tribes and had 42 sons. His 42 sons married at least 1,400 women, resulting in thousands of Saudi princes. The aging pro-Western king, Fahd, is ill, and his reputed successor, Crown Prince Abdullah, leans strongly toward Moslem fundamentalism and is more skeptical of alliances with the United States than is Fahd. However, the House of Saud has shown an ability to act when endangered and to put family unity above personal rivalry. The Islamist ideological offensive initially created feelings of impending crisis in Saudi society, but the government responded with series of warnings against a backdrop of significantly increased public executions. It appears that the government's long range policy is to divide and co-opt the Islamic opposition, unless faced with an act of violence that would provide justification for their wholesale repression. It is likely that the armed forces will remain loyal to the government. Military pay is high, and many officers are either princes or in-laws or other relatives of the royal family. (25)

Since becoming fully nationalized in 1988, Saudi Aramco has financed all of its operations. However, given the economic problems of the kingdom, foreign investment may be required to increase oil production much above the 10 million b/d already planned. Although the present government has no plans for international oil industry participation, recent changes in the Saudi cabinet, including the appointment of a new oil minister that is highly regarded by western oil companies, may indicate eventual acceptance of joint ventures. (26) A future government led by Abdullah or the fundamentalists may exclude such foreign participation, although fundamentalist Iran is seeking contracts with foreign companies for technical and financial support of its oil industry. A worst case scenario would be a long and destructive civil war between the fundamentalists and the House of Saud, fought above the world's largest oil fields.

However, the ultimate worst case scenario would be a resource driven world oil crisis, as it would not be amenable to the usual political, economic, or military solutions. In the United States, the oil industry is unique because onshore mineral rights are mostly in private ownership, and the Security and Exchange Commission enforces rules that define proved reserves in terms of actual development drilling. Then, as fields are extended by additional drilling, reserves are increased. Thus, onshore U.S. fields usually appear to grow over time. In the offshore United States and in foreign countries, a discovery is appraised on the total volume of oil most likely to be recovered as a basis for development planning. While the first estimate is not always correct, it is as likely to go down as up. There are many vested interests that define foreign oil reserves to meet political or economic objectives. Since OPEC production quotas are based partly on reserves, several countries report the highest reserve numbers possible. In the former Soviet Union, oil reserves often were exaggerated by the inclusion of in-place oil that was neither economically nor technically recoverable. (27)

Discounting the reserves that may be exaggerated and worldwide field growth projected on the U.S. onshore model, and utilizing only that portion of estimated undiscovered oil that may be considered to have a chance of being produced in actual practice, could reduce the total amount of ultimately recoverable world oil from 2,330 billion barrels to only 1,750 billion barrels. (28) An analysis using production curves from depletion models, with a 1,750 billion barrel ultimated world oil recovery, indicates the midpoint of world oil depletion would likely be reached by about the year 2000 at the about the current rate of production and then decline at a rate of about 2.7 percent per year. If successful efforts are made to delay the onset of decline, the subsequent decline rate would be greater. Heavy oil, tar sand, and enhanced oil recovery will become important after year 2000, and would mitigate but not reverse the world oil production decline. By 2050, world oil production will have dropped the levels of the 1960s. (29)

This scenario (which is not universally accepted) may not result in an oil shortage, as rising prices would clear the market and bring on additional and alternative fuels. However, either price controls or rationing would result in a shortage. The end result would be a world of diminishing real income as oil either becomes scarce or too expensive for many consumers to burn, but the need for it remains. There are two possible fixes. New technologies must quickly be developed and widely disseminated that either allow oil to be utilized much more efficiently or that provide an economic substitute for oil as a fuel.

CONCLUSIONS

If there are only very moderate increases in world oil demand and long-term political stability in the Middle East, coupled with very substantial foreign financial and technical participation in upstream Persian Gulf oil activities, a business as usual world oil supply and demand relationship could prevail into much of the 21st century. However, Persian Gulf oil fields will not produce oil forever. The oil in the region is being withdrawn much faster than it is being sourced. If this were not the case, the region would be submerged under the huge volumes of oil that would have been generated (at rates exceeding 27 million b/d) over geologic time for tens of millions of years. Although not impossible, an improbable scenario appears to be one of rapidly increasing world oil production (to keep pace with demand), especially by as much as one-third in the next 15 years, as suggested by IEA and EIA. It is doubtful that the non-OPEC countries can increase their oil output to the higher levels projected because of resource constraints. The OPEC countries currently have no plans to increase their oil production capacities to the extent needed to support this scenario. To do so would require capital that they do not have and a level of foreign assistance that they may not want.

Equally unlikely (but also not impossible) is the scenario that projects a resource driven oil production decline at the turn of the century. Much of the world's reserve data is held confidential by governments and state companies and the lack of confidence in the reported numbers is a serious obstacle to the analysis of future oil production. However, to reach the point at which world oil resources no longer are able to sustain current production levels in only five years would assume an even greater, and purely political, inflation of reserves than previously discussed. Also unlikely but perhaps not impossible, is a technological fix that could, in a relatively short span of time, significantly affect or replace a commodity used in the volume of world oil (68 million b/d).

Deficient productive capacity has not yet caused an oil crisis, but that does not mean it never will. Significant increases in future world oil demand will have to be met primarily from Persian Gulf supplies. This is an area with a history of wars, illegal occupations, coups, revolutions, sabotage, terrorism, and oil embargoes. To these possibilities may be added growing Islamist movements with various grievances against the West (and particularly the United States). In Saudi Arabia, the extended royal family may effectively control the movement, or a civil conflict between the two sides could endanger oil production and oil exports. Economically, the demand for and supply of a commodity are balanced by its price. If oil demand rises to levels that are beyond the current sustainable production capacity, or if oil production is constrained, oil prices will rise, somewhat dampening demand. However, since oil is so essential to drive modern society, there will be severe competition for the oil that is produced. Therefore, the price rise will be abrupt as will the adverse world economic repercussions. If the IEA and EIA are correct on the demand side, deficient world oil production capacity may cause an oil crisis in less than 15 years. Political disruptions in Saudi Arabia that constrain oil exports could cause an oil crisis at any time.

In lieu of a technological fix, the encouragement of domestic oil production would help address the economic and security problems associated with increasing foreign oil imports and may provide some limited insurance against a potential future oil crisis. To this end, Congress may wish to consider such measures as restoring the full depletion allowance for new oil wells, eliminating the tax on intangible drilling costs, maintaining or increasing the strategic petroleum reserve, encouraging alternative fuels technology, funding continued Federal and joint Federal-industry research on improved oil exploration and production technologies, pursuing energy efficiency gains, and/or removing existing moratoria on oil development in the most prospective domestic offshore regions and Alaska. While most or all of these actions would create great controversy between and among economic and wilderness values, oil operations have long lead times so Federal decisions would be required rather quickly if they are to significantly affect end of the century domestic oil output. However, given the mature condition of the Nation's oil provinces, even if all of these actions are taken, their contribution to energy security would be limited, as some imported oil still would be needed.

Endnotes

1. World Wide Look at Reserves and Production. Oil and Gas Journal, December 26, 1994, p. 42-43 and Masters, C. D., E. D. Attanasi, and D. H. Root. World Petroleum Assessment and Analysis. 1994 World Petroleum Conference, Stavanger, Norway.
2. Some of the offshore and Alaskan regions of the United States, that are now under drilling moratoria, are thought to be among the world's most oil prospective regions that remain unexplored.
3. World Energy Outlook. International Energy Agency, 1995 Edition, Paris, p.24-30. The U.S. Department of Energy, Energy Information Administration's International Energy Outlook 1995 projects 2010 world oil demand at 89 million b/d, somewhat less than IEA, but a significant increase over the present level.
4. Riva, Joseph P., Jr. Petroleum Exploration Opportunities in the Former Soviet Union. PennWell Books, Tulsa, Oklahoma, 1994,303 p. and Riva, Joseph P., Jr. Exploration Opportunities in Latin America. PennWell Books, Tulsa, Oklahoma, 1992, 266 p.
5. Riva, Joseph P., Jr. Exploration Opportunities in Latin America. op. cit., p. 85-86.
6. Riva, Joseph P., Jr. World Petroleum Resources and Reserves. Westview Press, Boulder, Colorado, 1983, p. 319-328.
7. Super-giant fields originally contained the equivalent of at least 5 billion barrels of recoverable oil or 30 trillion cubic of recoverable natural gas.
8. Riva, Joseph P., Jr. World Petroleum Resources and Reserves., op. cit.
9. Ibid.
10. Ayres, M.G., M. Bilal, R.W. Jones, L.W. Slentz, M. Tartir, and A.O. Wilson. Hydrocarbon Habitat in Main Producing Areas: Saudi Arabia. American Association of Petroleum Geologists Bulletin, January 1982, p. 1-9.
11. Riva, Joseph P., Jr. World Petroleum Resources and Reserves., op. cit.
12. Ibid.
13. Source: Oil and Gas Journal. December 1986, 1987, 1988, 1989. The oil reserves of the Neutral Zone are divided equally between Saudi Arabia and Kuwait.

l4. Mahfound, Robert F., and James N. Beck. Why Middle East Fields May Produce Oil Forever. Offshore, April 1995, p. 56-106.

l5. Saudi Production Capacity Climbing to 10 Million B/D. Oil and Gas Journal, July 11, 1994, p. 44-47; Ismail, Ibrahim A. H. Untapped Reserves, World Demand Spur Production Expansion. Oil and Gas Journal, May 2, 1994, p. 95-102; and George, Dev. Saudi Aramco's Mammoth Safaniya, NAPR Recompletion Project Concluded. Offshore, July 1995, p. 23-24.

16. Ismail, Ibrahim A. H., op. cit.

17. Ibid.

l8. Iran Outlines Oil Productive Capacity. Oil and Gas Journal, November 9, 1992, p. 37; Huge Natural Gas Reserves Central to Capacity Work, Construction Plans in Iran. Oil and Gas Journal, July 11, 1994, p. 48-51; and Clinton to Block Conoco Project in Iran. Oil and Gas Journal, March 20, 1995, p. 38.

l9. Ismail, Ibrahim A. H., op. cit.; Stauffer, Thomas R. Iraq Challenges Sanctions, Offers 4.5 Million B/D Developable Capacity. Oil and Gas Journal, April 10, 1995, p. 112-113; and Postsanction Plan Scheduled to Boost Iraqi Oil Production. Oil and Gas Journal, July 17, 1995, p. 22-24.

20. Ibid., and OGJ Newsletter, Oil and Gas Journal, July 24, 1995.

21. Lukman, Rilwanu. Political and Economic Issues Affecting Capacity Expansion: the OPEC Point of View. OPEC Bulletin, June 1995, p. 14-16.

22. Yergin, Daniel. The Prize. The Epic Quest For Oil, Money, and Power. Simon & Schuster, New York, 1991, p. 634-636.

23. George, Dev., op. cit.

24. Pipes, Daniel. It's Not the Economy, Stupid. The Washington Post, July 2, 1995; A House That Oil Built For 20,000 Princes. The Washington Times, July 8, 1995; Hodel, Donald. Another World Oil Shock. United States Dependence on Foreign Oil. Hearing before the Committee on Foreign Relations, United States Senate, March 27, 1995, p. 35-42; Dekmejian, R. Hrair. The Rise of Political Islamism in Saudi Arabia. Middle East Journal, Autumn 1994, p. 627-643; and Comment. Offshore, July 1995, p. 5.

25. Ibid.

26. Oil and Gas Journal Newsletter. August 7, 1995.

27. Riva, Joseph P., Jr. Petroleum Exploration Opportunities in the Former Soviet Union. PennWell Books, Tulsa, Oklahoma, 1994, p. 287-288.

28. Laherrere, Jean. World Oil Reserves - Which Number to Believe? OPEC Bulletin, February 1995, p.9-13.

29. Ibid.