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No end in sight for global dependence on Middle Eastern energy

Oil revenues increase incentive to invest in additional short- and mid-term production

Analysis

It is too soon to draw any firm conclusions about the impact of high oil prices on Middle Eastern and North African (MENA) oil exports, on U.S. and other imports, and on increases in conservation and the supply of alternative fuels.

MENA countries are only beginning to reexamine their long-term energy export capacity investment strategies and plans. Importing countries are equally slow to announce changes in national policy, and the private sector is only beginning to seriously react to what may or may not be significant shifts in long-term energy prices and the viability of alternative investments.

Equally important, the key modelers of global energy supply and demand have not yet had time to fully react to the recent rises in oil prices and examine cases that go above $35 a barrel in detail. International Energy Agency (IEA), Energy Information Agency (EIA), and Organization of Petroleum Exporting Countries (OPEC) projections need to be revised or expanded to examine such cases.

It is also not clear that any form of estimate and analysis will have long-term reliability. The trends in oil supply and demand are dependent on unpredictable fluctuations in the global economy, and sudden shifts in the stability and security of exporting states, and are notoriously volatile. The short and long term elasticities in conservation, increased energy efficiency, and increases in alternative energy supplies are at least as uncertain - in spite of a vast amount of advocacy analysis, and special pleading to the contrary.

Nevertheless, analysts must try to deal with uncertainty, and recent work by the U.S. Energy Department, and its Energy Information Agency provide some important potential insights into what may be happening. The EIA also has a unique mix of data collection capabilities, intelligence access, and modeling capabilities. Accordingly, the attached report draws heavily on excerpts from that reporting, paraphrases its conclusions in other cases, and bases its tables on material developed by the EIA.

An executive summary of its conclusions is simple: Major increases have taken place in the oil revenues of MENA oil exporting countries and potentially increase both their capital holdings and incentive to invest in added oil production capacity. A country-by-country survey shows that most major MENA exporters have both the plans and capacity to make significant increase in at least their short to mid-term exports.

If oil prices do return to the level of $25 to $27 a barrel in constant dollars, assumed in the EIA reference case, the EIA estimates that oil will account for some 39 percent of the world's energy consumption through 2015, and that the U.S. and its major trading partners in developing Asia will account for 60 percent of the increase in world demand through this period.

If oil prices stay at $35 and above, however, the EIA assumes that major reductions will take place in the rate of increase in U.S. and other global imports. This will not reduce strategic dependence on imports in the near-term, only slow the rate of increase in dependence. The U.S. and other importers can and must find substitutes for MENA petroleum in the long run, but this will take decades. In the interim, the U.S. and the global economy will actually become steadily more dependent on energy imports, and particularly on energy imports from the Gulf.

Anthony H. Cordesman is Arleigh A. Burke Fellow in Strategy at the Center for Strategic and International Studies in Washington, D.C. This article is reprinted with permission.

Beirut,03 29 2005
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