Debunking the oil myth:
I. Oil in the World Economy
After the oil crises of 1973-74 and 1979-80, consumers were intent not to undergo a third time of troubles. This led to two major developments, both of which implied a significant drop in oil consumption: finding ways to conserve energy and developing a range of alternate energy sources (such as coal, natural gas, and nuclear power).
Until the energy crisis of the 1970s, world oil consumption had risen at a brisk pace. Indeed, demand continued to rise for several years after the initial 1973-74 price rise, as economies took time to adjust. In 1970, the world's crude oil production amounted to 47 million barrels per day1 (b/d); it grew quickly to 60 million b/d in 1980, despite a weak world economy. Over the next two decades oil demand growth slowed sharply, such that in 1998 world demand for oil reached approximately 72 million b/d. (See table 1, page XX.) In other words, oil use rose more during the stagnant economy of the 1970s (13 million b/d) than during the vibrant growth of 1980-1998 (12 million b/d).
Furthermore, whereas most of the demand growth through the 1970s came from the Western industrial countries (North America, Western Europe, and Japan), oil demand in those countries barely rose after 1980; note that oil demand in the former Soviet Union fell 4 million b/d in 1980-98, The vast majority of the demand growth - 9 million b/d - came from Asia outside of Japan. Due to more efficient technologies and the growth of industries that use little oil (like computers), Western industrial economies are no longer sucking up more oil as they grow. The shift to non-oil energy sources has been especially consequential in the slow growth of oil demand. Oil accounted for 49 percent of the West's total consumption of primary energy in 1972 but just around 40 percent in 1990. These trends are expected to continue over the next two decades. According to the U.S. Department of Energy, oil will constitute 38 percent of total energy consumption in 2000 and 37 percent in 2020. The most rapidly growing source of energy is expected to be natural gas, which will increase its share from 23 percent of the primary energy consumed in 1990 to 27 percent by 2020.
The pace of substitution with alternative energy sources may accelerate in coming years, especially if non-oil fuels become more widely used for transportation - a sector which today relies almost exclusively on oil. New technologies for converting natural gas to liquid gasoline, or methane to synthetic crude, are already under development. These technologies might diminish OECD use of oil for transportation from the approximate average of 7 million b/d during the 1970s and 1980s to 5.5-6.5 million b/d by 2010. To be sure, economic development and increased urbanization in other parts of the globe may mitigate this trend, balancing out most of the projected decline in oil-fueled transportation.
However, a note of caution about oil projections is in order. Forecasts of oil demand and of prices tend to be based on a linear extrapolation of current trends. Assessments invariably reflect the situation when they are made more than the date they intended to describe. Zaki al-Yamani, the long-time Saudi petroleum minister (1962-86), once captured this deficiency as follows: "When there's a surplus in the market, you tend to see the future in that light. When there's a shortage, it's difficult to talk about a surplus in the future without facing a barrage of disbelief." Interest groups such as some Western politicians, industrialists and some oil companies that had a stake in developing oil fields in the western hemisphere, skillfully manipulated this impulse in the wake of oil crises in 1973-74 and 1979-80 to spread fears of another oil crisis.
That said, the best guess at the moment is that the decline in oil's share of world energy use and the discovery of new oil fields around the world reduces the ability of oil producers such as Saudi Arabia to affect oil prices. Consumers can shift from oil to other energy sources or they can switch to deliveries from other oil fields. Oil's declining share, combined with energy's declining importance in the world economy, diminishes the economic impact that oil producers have on the economy.
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