How close is today’s oil market to the crude crisis of the 1970s?
We were asked if today’s oil market is similar to that of the oil price crisis of the 1970s. middle term.
The 1973 Arab oil embargo led to a fivefold increase in the price of crude. Crude prices have averaged near $2 a barrel for about 100 years — plus or minus 50 cents a barrel — but have risen by an average of about $10 a barrel. The rise was partly a function of consumers hoarding for fear of shortages, but for the purposes of this article, the important issue to note is that this price rise triggered several fundamental factors.
Global oil demand continued to grow throughout the decade, but in 1979 we saw the start of a massive four-year decline in crude demand due to fuel switching. Coal, natural gas and nuclear energy have begun to replace petroleum fuels used for heating and electricity. In the 1970s, about 31% of the world’s oil consumption was used for heating and power generation, compared to about 3% today. The decline in demand accounted for nearly 10% of the global total over that four-year period, or around six million barrels per day.
The other fundamental change triggered by the rise in oil prices in the 1970s was the enormous expansion of oil supplies to non-members of the Organization of the Petroleum Exporting Countries. Significant gains came from five key areas: including the British and Norwegian sectors of the North Sea, China’s Daqing Province and its South Sea, Prudhoe Bay in Alaska, the West Siberia region in Russia, and the field Cantarell offshore in Mexico. The ten million barrels per day of additional supply was disproportionate and ended up compounding the effects of the contraction in global demand.
The result of these two factors resulted in an almost 50% cut in OPEC oil production. This created a massive increase in the group’s level of reserve oil production capacity. This overflow has plagued the body for nearly two decades. From an oil market perspective, concerns during this period are usually related to oversupply and downward price spikes.
The current environment and what we expect for the future do not pose the threat of excess production capacity. Today, demand is much more inelastic, since almost all oil use is for transportation and petrochemicals. Without the invention and commercial application of “pot melting,” oil demand will continue to grow at about half the rate of global gross domestic product for decades to come.
In a sense, the fuel switching card was played 40 years ago. Although some believe electric vehicles will permanently replace petroleum in the global energy mix, our work suggests that the global fleet of gasoline-powered vehicles will continue to overwhelm the energy mix.
Additionally, we do not see prospects for a massive expansion of non-OPEC oil supply. All of the areas we cited above that fueled supply growth in the 1970s are in various stages of decline. Importantly, the only significant non-OPEC production expansion over the past decade has come from US shale, which we consider to be in its twilight phase.
We expect non-OPEC oil supply gains to prove disappointing. As we have noted in our work for some time, disproportionately lower gains from non-OPEC supply will essentially lead to an exacerbation of oil geological pressures by anti-carbon lobbying and signaling pressures from virtue of mandates environmental, social and governance.
All of this means that we consider the outlook for the oil market over the medium term to be a contested productive capacity outlook, a view that runs completely counter to consensus forecasts. These structurally upward pressures are already clear in our forecast, which is one of the reasons why we have taken the non-consensus view that the current emergency releases of stocks by Cooperation Organization countries and economic development would prove ineffective in trying to bring down the price of crude oil. prices.
• Michael Rothman is the President and Founder of Cornerstone Analytics, a US-based consulting firm focused on macro-energy research. He has nearly 40 years of experience covering global energy markets and has attended OPEC meetings since 1986. He is also the author of “Cornerstones of Life” which is available on Amazon.
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