Energy, agriculture, and the middle east crisis

Energy, Agriculture, and the Middle East Crisis

The world consumes close to 7 billion metric tons of energy per year, in oil equivalent terms, up from less than 2.7 billion three decades ago. This represents an annual growth rate of 4.8 percent in the 1960's and 1970's, but slowing to 3 percent in the 1980's, after decreasing during the oil crisis years of 1973-74 and 1978-81. The price of oil and other energy sources more than doubled in each crisis. While slower than in the 1960's, the current growth of energy production and consumption is still impressive (table 1 and fig. 1). [Tabular Data Omitted]

Oil remains the principal source of energy, accounting for over 42 percent of total energy production, but down from 51 percent in the 1970's (table 2). Next are coal and natural gas. Hydroelectric and nuclear power represent relatively minor sources, globally at least. The share of nuclear power jumped from a mere 0.3 percent per year in 1970 to 2 percent today. [Tabular Data Omitted]

World oil production grew from less than 20 million metric tons per year (MT/y) at the turn of the century to nearly 3.3 billion today. As the price of oil skyrocketed during the 1974 and 1979-81 crises from $1.50 per barrel in 1970 to $34.50 in 1981, demand declined and production fell to 2.8 billion MT/y.(1) The price fell through 1988 to the average of $13.77 per barrel as supply kept increasing beyond demand, to reach 3.27 billion MT/y in 1990.

The Iraqi invasion of Kuwait last August caused the price to shoot up briefly. However, though the Middle East war shut off both Iraqi and Kuwaiti production, other producers, particularly in the Gulf, compensated by increasing their production. Saudi Arabia alone nearly doubled its production from 5.5 million barrels per day (mbd) to over 8 million.

Oil production is concentrated in well-defined deposits around the globe, chiefly in North America (Canada, Mexico, and the United States); Venezuela in South America; the USSR; the North Sea (Norway and the United Kingdom); the Arabian Gulf (Iran, Iraq, Kuwait, Qatar, Saudi Arabia, and the United Arab Emirates); Africa (Algeria, Egypt, Libya, Nigeria); China; and Indonesia. Over 63 percent of proven oil reserves of over 900 billion barrels are concentrated in the Arabian Gulf, with Saudi Arabia controlling 28 percent, and Iraq and Kuwait together 21 percent. Thus, these three countries control about 50 percent of total world known oil reserves. Another potentially large producer in the region, Iran, controls about 7 percent of world oil reserves (table 3). [Tabular Data Omitted]

Of the world total current crude oil production of over 60 mbd (close to 3.3 billion tons per year), just over 24 mbd is currently exported. The Gulf states, again, control nearly 40 percent of world crude oil exports, in which the share of Iraq and Kuwait is 11 percent, Saudi Arabia's is 12 percent, Iran's is 7 percent, and the United Arab Emirates' is 5 percent. Other principal exporters include Mexico, Venezuela, Nigeria, United Kingdom, USSR, and Indonesia. Oil production and consumption trends indicate that the importance of the Gulf states in the total world oil supply, and in the total world energy picture, is likely to continue to grow.

The largest oil importers are the United States, Japan, and Western Europe (principally Germany, France, and Italy). The United States acocunts for over 35 percent of world imports (principally from Latin America and Canada, and some from the Arabian Gulf states). Western Europe accounts for 34 percent, and Japan for 23 percent of world imports. Most Western European and Japanese imports originate in the Gulf states. Until recently, the Central European countries imported most of their oil needs (about 8 percent of world imports) from the USSR. But, as Soviet production declines and domestic consumption increases, these countries have to rely increasingly on imports from other sources, principally in the Middle East. Iraq in particular has relied on Central European countries for technical services and industrial goods in exchange for oil. The Gulf war, therefore, affected very negatively the region's energy situation.

Apart from being one of the largest importers of oil, North America, and principally the United States, is also the heaviest user of energy or about 7,000 kilograms (kgs) oil equivalent per person. This is down 400 kgs since 1970, implying some improvement in energy use efficiency. The next largest energy user is the USSR, with 4,700 kgs per person, up from 2,877 kgs in 1970. The rest of Europe uses about 2,960 kgs of energy per person, up from 2,690 kgs two decades ago. The smallest, but definitely not most efficient, users are the developing regions of Africa, and South and Southeast Asia, with about 200 kgs per person (fig. 2).

Agricultural production uses about 3 percent of total energy consumption, though this share may vary from 2.6 percent in highly industrialized countries, such as the United States, to 6 percent in the developing countries. However, if transportation, processing, and marketing are taken into account, the agricultural sector uses from 16 to 20 percent of all energy, depending on the level of development. Most energy used in agriculture is for irrigation and fertilizer manufacture, about 36 percent each of the total use for agriculture. Crop drying, tillage and seeding, and transportation take the rest.

Since agricultural production pays a relatively modest share of the total energy consumed in any country, a drastic energy price increase is likely to be felt indirectly through slower economic growth that dampens the demand for agricultural products and exports, rather than a direct increase in the cost of production. The whole food sector, however, is much more vulnerable. The rate of economic expansion in the principal developing countries has been moderate in recent years, and has tended to slow, except in the European Community. Energy consumption, however, after slowing during the early 1980's following the earlier oil crises, grew at an annual rate of 3 percent in the second half of the 1980's as world oil prices steadily declined through June 1990, until they reached, in real terms, their 1974 level. They briefly shot up from about $14 to $36 a barrel last August, after Iraq's invasion of Kuwait, but by January dived again to about $18 a barrel.

Although world oil stocks are high - 3.35 billion barrels at the beginning of January 1991 against 3.24 billion tons in January 1990 - the International Energy Agency authorized the release of 2.5 mbd from government and company stocks to world markets to remove any uncertainty over supply resulting from the Gulf war (1). The United States is contributing the largest portion of these supplies, 1.1 mbd, from its Strategic Petroleum Reserve. Thus, in the short run, given the present state of the world economy and oil availability on world markets, no energy shortages or drastic energy price fluctuations are expected.

In the longer run, beyond the horizon of the next few months, there will be pressure to raise oil prices because of a continuing decline in Soviet oil production and the fact that the ruined Iraqi and Kuwaiti oil fields are likely to remain out of production for at least a year

On the other hand, the expanded production capacity in the Gulf states and elsewhere will be difficult to curtail, and the depletion of the Gulf countries' treasuries by war expenses, as well as the expenses needed to clean up Gulf oil spills caused by Iraq, is likely to force the region to continue pumping oil at the current expanded level.

On balance, therefore, oil supplies are likely to be plentiful with downward pressure on energy prices.

(1) While oil production is usally given in metric tons per year (MT/y) or barrels per day (b/d), oil prices are nearly always quoted per barrel. One metric ton of oil equals 7.33 barrels.

Table : Table 2 - Composition of world energy production, 1986-88 average

Source                        Production            Share
                        1970-77   1986-88     1970-77   1986-88
                             Million mtoe 1/        Percent
Crude oil and ngl 2/    2,503     3,054        50.7     42.2
Coal and lignite        1,407     2,243        28.5     31.0
Dry natural gas           914     1,613        18.5     22.3
Hydroelectric power        98       179         2.0      2.5
Nuclear power              16       145          .3      2.0
  Total                 4,938     7,234       100.0    100.0

1/mtoe = Metric tons of oil equivalent. 2/ngl = Natural gas liquids. Source: (5).

PHOTO : Figure 1 World and Per Capita Energy Consumption Rising (1)

PHOTO : Figure 2 North America Leads Per Capita Energy Use (1)

PHOTO : Figure 3 Crude Oil Prices Well Below Record

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