Non-implementation of Kyoto Treaty - Other than the EU, Japan and Canada, there is little likelihood of ratification and implementation by major oil consumer and importer countries, including the US, China, India and other emerging industrial countries. In the countries of possible or probable implementation, average per capita or "demographic" oil demand is broadly in the range of 12 (Europe, Japan) to 18 barrels/capita/year (Canada). Reductions of more than 10%-15% from these very high demand rates are unlikely within a period of less than 5 or 10 years from the start date of implementing Treaty obligations (2008-12), without strong coercion and intense economic recession, and thus have little or no impact on 2010 forecasts.

Fast growth of oil demand by new industrial powers - both gas and oil demand growth by China, India and other fast emerging industrial economies is in the range of 6%-15%+ per year (5%-9%/year for oil and 12%-18%/year for gas). Fast growing private car fleets and development of the consumer societies in these countries can follow the pattern set through 1975-90 by the Asian Tigers, leading to tripled or quadrupled per capita oil consumption within 10-15 years, almost at any oil price. Current per capita oil demand in China and India is in the range of 1.3 - 1.8 barrels/capita/year.

Impact of higher oil prices - as shown in Table 1, much higher oil prices in the period 1973-80 led to no sharp fall in per capita demand. The range of demographic demand rates used in Table 2 (4.75, 5 and 5.25 bcy) are all below the actual figures for 1975-80. The only potential for actual fall of world oil demand is through intense economic recession triggered by massive rises in interest rates in OECD countries.

As shown in Table 2, the forecasts presented here indicate a minimum increase of about 12.5 mbd for the eight-year period of 2002 through 2010. In fact, the higher cases, with eight-year demand growth above 14 mbd, are probably more likely in the absence of self-induced and intense economic recession or extremely strong "oil-saving" measures in the OECD countries. Rapid cuts of oil demand in OECD countries will only be available through physical rationing and related technical measures, or through indiscriminate use of the interest rate weapon to provoke economic recession: in both cases the political and media rationale will be "oil shock". This analysis is supported by a review of previous actual growths of world oil output, oil prices, and energy policy responses over eight-year periods from 1971 to 2004.

Supply growth shortfall
The only eight-year periods shown in Table 1 in which oil output capacity was increased by more than 12 mbd were all in the distant past - well before 1980. In other words, for the last 25 years, there has been no eight-year period with net increases in capacity more than 12 mbd. From the end of the "high output growth" period, which ended by 1980, and for about 5 years during 1978-83, world exploration-development activity achieved its highest-ever rates of spending and activity, measured by drilling and proving work. These have never been achieved again. Current trends for exploration-development are very far below this, and to date have shown little positive response to rising oil prices.

One cause is the "wait and see" attitudes by most major oil corporations, who have moved "down the barrel" to refined products marketing and non-energy activities. Their aversion to exploration and development is reinforced by now entirely irrational "reference oil prices" for long-term planning - of below $25/bbl (Italy's ENI claims that $16/bbl is a "rational" long-term reference oil price). In a context of very high exploration costs, and constantly falling field size of actual discoveries, there is only limited response to the emerging context set by oil prices well above $45/bbl. World discoveries in 2003 as published by the 10-largest oil corporations were below 3.5 billion barrels (world consumption is currently about 29.8 billion barrels/year). Most major oil corporations claim that exploration efforts will not increase until they obtain "easy access" to prospective areas in the territories held by the OPEC, especially in the Middle East.

World demand growth is running at 2.25-2.5 mbd per year. The relation between oil prices, world economic growth and per capita or "demographic" oil demand is dynamic: with a return to prices comparable to those of the "high price period" (broadly above $55 per barrel in current dollars), per capita demand can easily re-attain 5 bcy. At 5 bcy, world oil demand will quickly exceed 89 mbd, with annual increments of at least 2.25-2.5 mbd (as current). Even if there is a fallback to lower annual growth rates of around 1.6%, these will still generate annual demand increments of at least 1.75 mbd (around 14 mbd in eight years).

Overall, it is difficult on the demand side to forecast world oil demand growth through 2002-2010 as being less than 14 mbd, barring worldwide economic recession through the use of the interest rate weapon, and physical rationing in the OECD countries as a response to runaway oil prices. This demand increment will be very difficult to supply. Taking historical average or likely and reasonable growth trends for export surplus - "offer capacity" - over comparable eight-year periods, we find these range through 8-9.5 mbd since about 1975. In other words, no previous recent eight-year period has achieved growth of net supply offer, after depletion losses, of much better than about 60% of the approximate 14 mbd growth of world demand that is forecast here as the likely minimum growth of world oil demand in the near-term period of 2002-2010.

Taking the likely minimum or low-medium figure (14 mbd in eight years), this is close to 50% of OPEC's total real export capacity in 2004. Current price rises, apart from the "geopolitical uncertainty premium", are in fact and in reality driven by the incapacity of either OPEC or non-OPEC suppliers to significantly raise export capacity. Oil demand growth through the 12 months in the 3rd Quarter 2003 to 3rd Quarter 2004 was well above 2.25 mbd (annual growth rate of about 3%).

World oil import demand is increasing faster than world oil demand (about 4% for imports and 3% for world consumption) for the simple reason that the vast majority of oil producers are experiencing either stagnant or declining production, and world oil consumption is growing. This includes the domestic oil consumption of the producer countries, reducing their net export or supply offer. Overall, the only non-OPEC oil producers with an export surplus of more than 1.75 mbd are Russia, Norway and Mexico. They, and almost all other non-OPEC producers (with or without export surpluses) have either relatively or absolutely small reserve bases and high or very high production/reserve (P/R) ratios. This includes the UK, Syria, Denmark, Gabon, Ecuador, Argentina, Colombia, Egypt, Oman, Romania and other producers with either stagnant or falling production and rising domestic consumption.

Only Russia in the non-OPEC exporter group has a significant potential for increasing its net exports or supply offer through 2010. Inside OPEC, only the three Middle East producers of Saudi Arabia, Kuwait and UAE, and just possibly Venezuela have any major potential for increasing export offer well above their current export capacities. In volume terms, for the OPEC group, only Saudi Arabia has significant short-term potential for increased exports, but is highly unlikely capable of raising exports by more than 3 mbd through to 2010.

The non-Middle East OPEC members - Nigeria, Venezuela, and Indonesia - are likely unable to expand export offer at all through to 2010, especially Indonesia. By 2010-12, Iran may become a net importer of crude. Indonesia will almost certainly cease to be an exporter of either crude or products by 2006 or even 2005. The bottom line to this is fast emerging supply shortfall to a backdrop of fast-increasing dependence on Russia and Saudi Arabia - or in fact the only choice - transition to lower energy, conservation and renewables-oriented economy and society restructuring strategies. Planning for energy transition will be vital and urgent by 2008. Given the laissez faire or new economy doctrine in current political and business leaderships, it is unlikely that serious planning will occur, giving way to crisis by default.

Growth rates of world oil consumption started moving up since the 1994-96 period and have received new impetus through a combination of higher oil and gas prices, changing types of economic growth, economic cyclic changes, and the very fast economic growth of China, India and other large populations. Current trend rates of growth (long-term trend) are above 2.75%-per-year, peaking to over 3% in high-growth periods such as 2004-2006. Current oil demand growth is well above world population growth (about 1.6%/year). That is, per capita average oil demand is increasing. Oil price rises since 1998-1999, it should be stressed, have not reduced this trend, but in fact have bolstered and reinforced it.

Through a mix of factors, oil demand by the US economy - consuming about 26% of world oil production for 4.5% of world population - is showing sustained growth. Only self-imposed recession through high interest rates could change this in the short-term. While initially unrelated to world oil prices, fast-rising US natural gas prices underlain by falling domestic gas production will continue to exert a ratchet effect on oil prices in US markets. In turn, this will affect oil prices outside the US. In Europe, gas supply is exposed to rapid falls in European internal market gas production, also ratcheting up oil prices in Europe.

China, India and certain other fast-industrializing and large-population economies may triple or quadruple per capita oil demand within 10-15 years, in keeping with the trend. South Korea and Taiwan achieved a growth of 1604% and 703% respectively in their national oil consumption through 1965-78. In the case of China and India, today, their oil import demand growth will be considerably higher than their consumption growth due to falling domestic oil production. Annual growth rates of imported oil are typically at double-digit rates (for China about 27% in 2002-03). Consumption growth trends for natural gas in these markets is even stronger - Indian natural gas demand is likely to increase about 20% for 2003-04, with China's demand expected to go up by about 13.5%.

Due to the short-term prospect of "peak oil" (the maximum sustained oil production rate the world can achieve), perhaps limiting total production to around 90 mbd by 2007-2008, and featuring a fast increase in heavy oil, deep offshore oil, and "syncrude" (tarsand and bitumin base) oil output at high capital costs, prices will tend to maintain their upward movement throughout the 2004-2010 period.

Price transition before energy transition
Very large investments are needed if both OPEC and non-OPEC suppliers are to blunt the arrival of structural undersupply in world oil markets, which is likely to be imminent without much higher prices. These (higher prices) will both limit demand growth in the energy-saturated OECD countries, enable continued growth of oil demand by the New Industrial Countries and enable financing of increasingly risky, higher-cost exploration-development. Based on statements by Lee Raymond and by John Thompson (in articles published by ExxonMobil in its journal "The Lamp") spending in the oil and gas sector on a worldwide basis may need to exceed $2.7 trillion in the next 12 years.

Within this spending, oil exploration and development must also make a quantum leap. This overall development of the oil and gas sector is likely impossible without higher, and stable, prices in the range of about $45-55 or 36-42 euro/bbl for oil, and about $8.50 or 7 euro/MMBTU for natural gas. These pricing levels were surpassed through 1975-78, when OECD growth rates and oil demand growth rates averaged about 3.75%-4%. At the time, oil prices expressed in 2004 dollars were about $40-55/barrel.

Moving up to new price bands can be the focus of serious and committed international attention to the risks facing all players at this time. Runaway price rises in a free-for-all bidding process following supply loss of no more than 5% (as occurred during the 1979 fall of the Pahlavi regime in Iran) is the worst possible scenario. With military invasion and destabilization of Iraq by the US and UK, the world has effectively lost over 2 mbd of export supply, equivalent to one full year's oil demand growth.

Under any scenario, the basic need is for higher and less volatile oil and energy prices, accompanying serious and committed energy conservation, transition to renewable energy and restructuring for a low energy economy, habitat and society. This will be forced on energy consumers worldwide through increasing annual depletion losses, and slower additions of net supply - firstly for oil (around 2008) and then for natural gas (latest by 2015-2018). However, at present, energy transition is discarded as utopian and unworkable by current political decision-makers.

Andrew McKillop is founder-member of the Asian Chapter, International Association of Energy Economists. He can be reached at xtran04@yahoo.com

(Copyright Andrew McKillop 2005)