The Shocks of a World of Cheap Oil

Amy Myers Jaffe and Robert A. Manning

From Foreign Affairs, January/February 2000

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Summary:  As oil flirts with prices that call to mind the shocks of the 1970s, the usual Cassandras have been warning of dwindling oil supplies and sky-high prices. But the danger is precisely the opposite. The next two decades will witness a prolonged surplus of oil, which will tamp prices down. This world of cheap oil will have serious political reverberations. Without rising oil revenues, such key states as Saudi Arabia, Russia, Mexico, and Colombia will face worsening crises at home. The same is true in spades for Central Asia, where Washington's current wrongheaded policies could drag it into crises that make the Balkans look like a pregame warm-up. The world should worry less about a scarcity of oil than about a glut.

Amy Myers Jaffe, former Senior Economist for Petroleum Intelligence Weekly, directs the Energy Research Program at the James A. Baker III Institute for Public Policy at Rice University. Robert A. Manning is Senior Fellow and Director of Asian Studies at the Council on Foreign Relations and author of the forthcoming The Asian Energy Factor Revisited.

THE NEW GEOPOLITICS OF ENERGY

Oil prices have been flirting recently with $25-$30 per barrel, levels almost reminiscent of the oil shocks of the 1970s. Rising energy prices have been accompanied by the usual hysteria about dwindling supplies and potentially dangerous transfers of wealth, tempting policymakers to consider ways of dealing with a coming oil crisis. But contrary to much received wisdom, the energy problem looming in the early 21st century is neither skyrocketing prices nor shortages that herald the beginning of the end of the oil age. Instead, the danger is precisely the opposite; long-term trends point to a prolonged oil surplus and low oil prices over the next two decades.

Paradoxically, this scenario of plenty could destabilize oil-producing states, especially those in the ellipse stretching from the Persian Gulf to Russia. And although the economies of the United States and oil-importing developing nations would by and large benefit, the backfire of low oil prices could undermine U.S. policy assumptions and imperil U.S. interests.

Both the popular and the elite media -- from Parade asking "Could It Happen Again?" to Scientific American, no less, proclaiming "The End of Cheap Oil" -- are peppered with forecasts of gloom and doom about energy security. But the "sky-is-falling" school of oil forecasting has been systematically wrong for more than a generation. In its dramatic 1972 "Limits to Growth" report, the group of prominent experts known as the Club of Rome wrote that only 550 billion barrels of oil remained and that they would run out by 1990. In fact, the world consumed 600 billion barrels of oil between 1970 and 1990, and there are today more than a trillion barrels of proven reserves (recoverable at current prices under current conditions). This figure is likely to continue rising even as global consumption exceeds the current 73 million barrels a day. Indeed, the International Energy Agency says that there are 2.3 trillion barrels in ultimate recoverable reserves, and if unconventional sources such as tar sands and shale are included, the number may well be greater than 4 trillion barrels.

The scarcity forecasters -- in some cases, the same people who forecast in the 1970s that oil would cost $100 per barrel by 2000 -- are not only still wrong, they also have it exactly backward. The world's problem is not scarcity but glut. This is true despite the current Saudi-engineered production cutbacks by the Organization of Petroleum Exporting Countries (OPEC), which boosted oil prices off their $8-per-barrel lows. Seasoned oil-market watchers know that this fragile deal among oil producers could dissipate quickly, particularly as financial pressures ease over time, tempting OPEC to release some of the 5 million barrels per day currently being held back from the market.

As OPEC squirms, big and small oil producers around the globe continue to announce new finds and new plans to expand capacity. The latent supply potential in Iraq, Russia, Africa, and elsewhere -- combined with more modest economic expansion in Asia -- belies the Cassandra-like ...

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