The future oil supply picture for the coming years from OPEC Member Countries in the face of rising global energy demand and geopolitics is a complex one. One of the major supply-side issues with which OPEC has to deal is a rapid rise in non-OPEC oil production and the rehabilitation of Iraq’s oil industry and the expansion of its exports. Another main issue on the supply side is one of resources. All estimates on the question of resources indicate they are more than adequate.

… oil reserves are sufficient to satisfy world oil demand growth during the next two decades…

Proven oil reserves currently exceed 1 trillion barrels. In addition, estimated ultimate recoverable resources have continuously increased in the past. In fact, the US Geological Survey recently revised values upwards, bringing the modal level to approximately 3 trillion barrels. Bearing in mind the considerable uncertainties associated with estimates, one can nonetheless safely conclude that the oil reserves are sufficient to satisfy world oil demand growth during the next two decades, provided that the investments for maintenance and expansion of upstream capacity and the downstream infrastructures are carried out.

Around 80% of proven oil resources are located in OPEC Member Countries, and the relatively rapid depletion of non-OPEC reserves implies that the Organization will increasingly be called upon to supply the incremental barrel, meaning that its market share will eventually rise. However, over the short and medium term, the combination of rapidly rising non-OPEC supply, coupled with uncertain demand prospects, is likely to put downward pressure upon OPEC market share.

…over the short and medium term, the combination of rapidly rising non-OPEC supply, coupled with uncertain demand prospects, is likely to put downward pressure upon OPEC market share.

In its projections, the OPEC Secretariat assumes price developments consistent with the OPEC target price band of $22-28/b for the OPEC basket of crudes, together with global economic growth rates averaging 3.3% per annum over the next two decades, fed by an increased liberalization of world trade, productivity gains and continued economic reforms, to generate a reference case supply and demand outlook to the year 2020. The key results are summarised in the table below. The reference case sees global oil demand rising by an average of 1.7% per annum over the period 2000 to 2020, reaching a level of 107 million b/d by 2020, an increase of 31 million b/d from 2000 levels. More than three-quarters of this increase stems from developing countries whose demand doubles in 20 years, so that, by 2020, the share of these countries in world oil demand has risen to 44%, up from 31% in 2000.

The results in the reference case show that the production of non-OPEC countries will continue to grow during the current decade, although at a lower rate than during the 1990s. From 46 million b/d per day in 2000, it will reach 51 million b/d day in 2005 and stabilize at a level of 53-55 million b/d beyond 2010. Nevertheless, over the short and medium term, the combination of rapidly rising non-OPEC supply, coupled with uncertain demand prospects, is likely to continue to place downward pressure upon OPEC market share.

Given the possibility of downward pressure on oil prices in the short to medium term, it is prudent to examine what might in fact happen if prices were to fall. Although it can be argued that such a fall would cause a greater percentage decline in non-OPEC revenues compared to OPEC, our studies nonetheless show that at both $20/b and $15/b, the volume of non-OPEC production is scarcely affected in the short term (2004), which is unsurprising given the short-term inelasticity of supply.

In the longer term, it is clear that the balance of the global oil reserve base and the relatively rapid depletion of non-OPEC reserves means that OPEC’s future market share will rise.

Consequently, in the short term, there is very little response in terms of either OPEC or non-OPEC volume to accompany these lower prices. In other words, price movement dominates the impacts upon the value of oil produced. Thus, under a low price scenario, any attempts to compensate for falling revenues by increasing output will enjoy just as little success as they did in 1986.

While our reference case figures suggest that OPEC market share will remain approximately constant over the medium-term, a more pessimistic scenario can easily be envisaged in which OPEC market share may in fact be set to continue the decline observed in recent years. In such a scenario, OPEC capacity utilization rates would probably fall sharply, and, most likely continue to fall throughout the medium term. This possible scenario clearly demonstrates that downward pressures upon oil prices could easily mount over the medium term.

In the longer term, it is clear that the balance of the global oil reserve base and the relatively rapid depletion of non-OPEC reserves means that OPEC’s future market share will rise. In the OPEC Secretariat’s reference case, production from OPEC Member Countries increases again gradually after the middle of this decade to reach 36 million b/d barrels per day by 2010 and 52 million b/d in 2020, an increase of 73% from 2000, compared with a more modest increase of non-OPEC production of 21%. These figures underline the need for substantial investments along the hydrocarbon chain, involving upstream maintenance and expansion of output capacity, as well as downstream with regard to oil ports, grid systems, and refinery and distribution networks. By 2020, OPEC’s share has reached 49%, and is set to increase further.

… the coming years will probably represent a key phase in the evolution of oil market behaviour.

These various scenarios demonstrate that it is not just OPEC market share that is likely to come under pressure in the coming to face is how to maintain a steady stream of oil revenues while balancing market share with the downward pressure on prices. In other words, the coming years will probably represent a key phase in the evolution of oil market behaviour. It is becoming increasingly clear that oil market stability cannot be maintained by OPEC alone: OPEC and non-OPEC producers need to co-operate on a more permanent basis to restrain output and ensure that the market remains balanced.

The Author:
Dr. Silva-Calderón started his career as a member of the advisory team of Juan Pablo Pérez Alfonso, which made a significant contribution towards conceptualising and creating the Organization of the Petroleum Exporting Countries (OPEC). He was also president of the regional legislature of his home state of Monagas, one of the most important oil producing regions of Venezuela. Subsequently, he was a member of the National Congress, serving as President of the International Treaties Sub-committee and member of the Energy and Mines Committee. His long involvement in the mining and oil and gas areas includes the drafting of a bill returning the ownership of oil concessions to the State. This bill paved the way for nationalizing the Venezuelan oil industry in 1976. This, in turn, led to the creation of Venezuela´s state oil company, Petróleos de Venezuela, S.A. Later on, he served on PDVSA’s board as an external director. His public service career includes posts in several state and national government organizations. He was director of the Supreme Electoral Council of Venezuela and Chief Legal Advisor to the Ministry of Energy and Mines, where he was also Director General and Vice Minister of Mines. At the ministry, he played a key role in the drafting and approval of the Gaseous Hydrocarbons Law (1999), Mining Law (1999) and Hydrocarbons Organic Law (2001). Dr. Silva-Calderón has been the Secretary General of OPEC since 1 July 2002.