Energy Executives See Little Good News for Depressed Industry : Analysts Expect Oil Demand to Remain Flat
Everybody knows what happened when oil prices surged during the 1970s from $2 to $38 a barrel: The world started using less oil.
Today, it is apparently a key assumption of the Organization of Petroleum Exporting Countries that, as it drives oil prices down, the reverse will occur: The world will begin using more oil.
Even before the recent collapse in crude oil prices, a gradual price decline that began in 1982 had appeared to weaken the resolve of industrial nations to keep making gains in energy efficiency. Funds for alternative-energy schemes dried up, for example, and Detroit won relief from auto fuel-economy standards imposed during the energy crisis.
At an energy conference last week in Houston, where a major resurgence of demand would be good news for a depressed industry, former OPEC Secretary General Rene Ortiz declared that “conservation, in my opinion, has reached a plateau. We will witness a slow growth of demand.”
But Ortiz appears to be in the minority. Energy executives and economists say that won’t happen for several years at least. And they gave OPEC little chance of achieving unity on pricing policy for a few days, not to mention several years.
“We’re very much demand skeptics,” said Joseph Stanislaw, the Paris-based director of international economics for Cambridge Energy Research Associates, a prominent energy consulting firm based in Cambridge, Mass. “Oversupply is not going to create new demand in three to five years. Energy demand has already been predetermined.”
To be sure, predicting the energy business is an almost laughable undertaking anymore. By now, according to forecasts made in the late 1970s, oil prices were supposed to be continuing in an upward spiral toward the $75-per-barrel mark. Instead, they plunged 30% to about $20 per barrel in the last two months.
“We were wrong about economic growth, we were wrong about the elasticity of demand, we were wrong about estimates of OPEC production,” said Robert McClements Jr., president of Sun Co., the 10th-biggest oil company. “We’ve never been here before. What we’re living with now doesn’t have a prototype. We can’t forecast the future. If someone asks me what’s going to happen to oil prices, I tell him to go take a cold shower.”
Moreover, the oil industry has been characterized by volatility in supply and demand since the first well was drilled in Pennsylvania in 1859. Indeed, historians trace the phrase, “The bottom fell out of the market,” to the early years of the oil industry when disastrous overproduction sent the price from $20 a barrel in 1860 to 10 cents a barrel a year later.
Analysts also stress that price will remain subject to volatile swings as supplies rise and fall. A sharp falloff in oil exploration, for instance, is already under way as declining prices slash the financial incentive for new discoveries. That will work against the current oversupply and in favor of higher prices in the future.
The sharp drop that has occurred since January could create temporary new demand of up to 3 million barrels per day, Stanislaw says, as electricity generators are switched from other fuels to oil to capitalize on the low prices. But prices of coal and natural gas would be quickly cut to stay competitive.
There is skepticism that the basic underlying demand for oil will change markedly in response to the sharply lower prices, mainly because the energy-related changes in the economy since the 1970s have been so fundamental.
National policies of energy conservation and oil substitution, combined with radically changed attitudes among industrial companies, motorists, homeowners and other energy users, all served to slow the overall growth in energy demand and reduce oil’s share of the energy pie since 1973, compared to the 1960-73 period.
Economists say two of the most important factors have been the switching of electric generation away from oil in industrial nations and increased use of natural gas in Western Europe and liquefied natural gas in Japan. Thus oil consumption, which grew 7.6% a year between 1960 and 1973, has fallen an average growth rate of 1.3% annually since then.
‘De-Energized’ World Economy
“We have de-energized the world economy,” declares Thomas McHale, senior economist at Drexel Burnham Lambert and an energy specialist. “We’re not going to see any dramatic demand response to lower prices.”
The U.S. Department of Energy’s latest forecast for oil consumption, issued in mid-November before the sharp decline in prices, predicted that U.S. refiners’ costs for crude oil would drop $1.25 to $25.08 per barrel in 1986, compared to last year. Despite such a decline and a projected 2.1% increase in the gross national product in 1986, the government saw U.S. oil consumption remaining essentially flat at 15.7 million barrels per day.
“That means that, even with the decline in prices, the amount of energy used to produce $1 of GNP would continue to decline,” a DOE economist said.
“Some people who’ve been freezing in the winter are going to allow the thermostat to go up a few degrees. They can now afford a few more BTUs, and they’ll probably do so. But it will take a long time to reverse even part of what was accomplished (in energy efficiency) in the last decade.”
Those looking to buy a new Detroit “gas guzzler” will be hard pressed to find one, at least in the 1973 sense of the term. Then, the average fuel economy of General Motors’ fleet was about 12 miles per gallon. Today, by law, it is 26 mpg.
Meanwhile, the temptation grows for governments to “tax away much of the decline” in oil prices, the Cambridge Energy Research group notes--a fact underscored by the appearance of Sen. Gary Hart (D-Colo.) at the Houston conference to reiterate his pitch for a tariff on imported oil.
The only potential for any major increase in demand, the energy economists say, is in the developing nations. But even there, oil consumption is expected to grow less than 2% a year during the rest of the 1980s.
And usage in the developing nations remains small--about 8 million barrels of oil per day, or just 17% of world demand. That’s about how much was generated in new non-OPEC production, principally in Mexico, Alaska and the North Sea, since the first energy shock in 1973-74.
