Journal Issue
Share
Finance & Development, December 1979
Article

World energy prospects and the developing world: Projections for energy supply and consumption prepared by the World Bank are used to discuss future energy policies

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1979
Share
  • ShareShare
Show Summary Details

Adrián Lambertini

The world energy balance is likely to continue to be tight between now and 1990, as demand for energy outstrips supply after 1985, putting upward pressure on prices. This situation gives rise to concern about the adequacy of future energy supplies and of petroleum supplies in particular, since this is the single largest source of energy, and all forms of energy have been re-evaluated in the light of petroleum’s higher cost. All countries will have their own problems of adjustment. This article will pay particular attention to the position of the developing countries, where the use of oil is far more strongly linked to growth—and, therefore, modernization—than elsewhere. Their growth prospects will be closely correlated to the success of their efforts to adjust to world energy prices and to prospects for further price rises in the future.

The World Bank has conducted studies on the energy situation at the domestic and international levels. In order to assess the world energy situation, and particularly the situation of the developing countries, this article draws upon analytical background work prepared for the World Development Report, 1979. (See “World Development Report, 1979” by Johannes Linn and Lyn Squire in Finance & Development, September 1979.) It also draws upon the Bank’s examination of the prospects for oil production in 70 developing countries (see “Prospects for oil and gas production in the developing world” by Efrain Friedmann and Raymond Goodman in Finance & Development, June 1979).

The World Development Report forecasts show that, by 1990, world energy consumption will have outstripped production (see Table 1). This excess consumption over production will create strong pressures for prices to rise. As the following analysis of the prospects of different groups of countries shows, the determining factor in the situation will be oil. Therefore, most of the references to energy prospects in this article will be to the production and consumption of oil. More oil will be needed than can be supplied—in spite of the present concern to find substitutes and to use present supplies more efficiently, and despite the fact that present prices make it worthwhile to exploit those oil resources that were previously regarded as uneconomic. The industrialized countries alone could absorb the total output of the Organization of Petroleum Exporting Countries (OPEC) by the end of the 1980s. Consumption in the oil importing developing countries, which now import 83 per cent of their oil, is likely to increase as they modernize, and in 1990 could be over twofold the 1976 levels (see Table 2). At the same time, the centrally planned economies are likely to absorb the small surplus they now export to the market economies. Meanwhile, production in the OPEC countries, the principal oil exporters, is likely to level off before the end of the century.

Table 1Commercial primary energy balances, 1976 and 19901(In millions of barrels a day of all equivalent)
19761990
ProductionConsumptionProductionConsumption
(Projections)
Industrialized countries46.569.870.7109.7
Centrally planned economies37.934.466.764.3
OPEC countries33.03.149.07.7
Developing countries26.516.851.338.4
Developing OPEC countries216.92.323.55.4
Non-OPEC oil exporters3.11.99.34.5
Oil importing developing countries6.512.618.528.5
Bunkers and other5.37.0
World total127.0127.1214.2221.7
Sources: World Bank projections; United Nations World Energy Supply, Series J. actual.

Primary energy here refers to coal, lignite, crude petroleum, natural gas, natural gas liquids, hydro and nuclear electricity, expressed in barrels a day of oil equivalent.

Included also in OPEC countries above.

Sources: World Bank projections; United Nations World Energy Supply, Series J. actual.

Primary energy here refers to coal, lignite, crude petroleum, natural gas, natural gas liquids, hydro and nuclear electricity, expressed in barrels a day of oil equivalent.

Included also in OPEC countries above.

The implications of the tightened energy balance vary for different groups of countries. Nevertheless, all of them have an interest in maintaining stable international economic conditions while they adjust to reduced supplies and higher prices.

Estimates of the world’s future supply of, and demand for, energy depend on a number of interrelated variables—including the availability of resources, national growth rates, domestic energy policies, and national and international political environments. In this context, the World Bank’s base forecasts for the global energy balance in 1990 should be seen as notional rather than precise predictions. These estimates assume that the industrialized economies will grow at 4.2 per cent per annum; that the real (as distinguished from the nominal) cost of energy will remain at 1975 levels; that reasonable conservation efforts will be made; that substitution of other fuels for oil will be limited; and, finally, that conventional—as opposed to synthetic—global oil production will reach a plateau in the coming 20 years.

There is, however, a potential gap between projected production and consumption of energy in 1990 (see Table 1), if these assumptions hold. And the attainment of the growth rates assumed for the industrialized countries cannot be expected without a concommitant increase of energy prices in the 1980s in real terms.

Industrialized countries

The industrialized countries dominate the world market for energy: they produce slightly less than 40 per cent of the world’s energy and consume almost 60 per cent. Oil alone accounts for half of their domestic energy requirements, and four fifths of it is imported, largely from the OPEC countries.

The threefold real increase in oil prices since late 1973 has had a very limited effect on energy supply and demand in the industrialized countries. Substitution between energy sources has been, at best, insignificant: oil still accounts for 52 per cent of industrial countries’ total requirement, compared to 53 per cent in 1973. The share of imported oil in their total consumption is the same as it was in 1973; their domestic energy production has virtually stagnated since 1970.

The annual growth rate of demand for energy in the industrialized countries has been reduced significantly, from 5.8 per cent between 1968 and 1973 to 0.7 per cent between 1973 and 1977. Much of this reduction can be attributed to slower industrial growth, but part of it also reflects more efficient use of energy products. Interfuel substitution and further improvements in energy efficiency involve investments in new, more efficient capital goods (that is, a substitution of capital for energy), and, consequently, require a comparatively high initial investment per unit of energy saved. Smaller cars, more efficient engines, and lower speed limits are clearly effective measures in reducing the growth of energy consumption in road transportation. In the industrial sector, integrated design and the correct choice of new processes, good combustion technology, recovery of waste heat, insulation, heat management, and more efficient maintenance are all expected to improve energy efficiency and, in most cases, are likely to be cost effective as well.

Improvements in the efficient use of energy can be considered a substitute for additional energy supplies. A good deal of energy-consuming equipment currently in use is considered to be well below the standard of efficiency that is appropriate for current energy prices; this phenomenon has occurred largely because such equipment was originally installed when energy prices were lower. Primary energy consumption per unit of production in Western Europe could, for example, be reduced by up to 30 per cent if all energy-consuming equipment were of a standard of efficiency compatible with current energy prices. The energy projections of the World Development Report allow for reasonable energy savings in the industrialized countries by 1985; the potential savings in that year, however, are considerably higher at current energy prices.

The prospects for additional supplies of energy in the industrialized countries are uncertain. Only modest increases in conventional energy production are projected to 1990. Nuclear power was once seen as a main prospective source of nonconventional energy and was developed rapidly between 1968 and 1973; by 1977–78, however, new orders for nuclear plants in these industrialized countries had virtually halted, mainly because of concern about their safety. In the United States, which has considerable energy resources and is the world’s largest single producer of energy, domestic pricing and environmental policies have discouraged energy development. Overall, comprehensive and effective energy policies have been implemented only slowly in the industrialized countries, and the outlook for substantial improvements in their energy situation by 1990 is not good. Their reliance on imported oil supplies is expected to remain as heavy as it has been in recent years. If past economic trends—including a growth rate of 4.2 per cent per annum—continue into the 1980s, industrial countries’ need for oil is expected to reach the maximum level of output currently projected for OPEC countries.

Table 2Developing countries: primary energy balance, 1976 and 19901(In millions of barrels a day of oil equivalent)
Oil importing countriesOil exporting countriesAll developing countries
197619901976199019761990
Production6.518.520.032.826.551.3
Petroleum1.28.818.323.819.527.6
Gas0.41.21.47.41.88.6
Coal3.58.00.10.43.68.4
Primary electricity1.45.50.21.21.66.7
(Of which nuclear)0.12.00.10.40.12.4
Consumption12.628.54.29.916.838.4
Petroleum7.214.62.85.910.020.5
Gas0.41.21.02.31.43.5
Coal3.67.20.20.53.87.7
Primary electricity1.45.50.21.21.66.7
Net imports (—exports)6.110.0–15.8–22.9– 9.7–12.9
Petroleum6.010.8–15.5–17.9– 9.5– 7.1
Gas– 0.4– 5.1– 0.4– 5.1
Coal0.1– 0.80.10.10.2– 0.7
Primary electricity
Sources: World Bank projections; United Nations World Energy Supplies, Series J. actual.

Primary energy here refers to coal, lignite, crude petroleum, natural gas, natural gas liquids, hydro and nuclear electricity, expressed in barrels a day of oil equivalent.

Sources: World Bank projections; United Nations World Energy Supplies, Series J. actual.

Primary energy here refers to coal, lignite, crude petroleum, natural gas, natural gas liquids, hydro and nuclear electricity, expressed in barrels a day of oil equivalent.

OPEC

OPEC countries are likely to continue dominating the supply of oil, in spite of important new developments in non-OPEC developing countries, such as Mexico. The OPEC countries command 70 per cent of the world’s reserves of oil, 50 per cent of production, and 80 per cent of the world’s exports. Their land-based supplies are likely to remain the cheapest source of oil during the period covered by our estimates.

OPEC member countries have different endowments of energy resources and factors of production. Oil is not of uniform quality, and different countries command different prices per barrel of oil. Even countries producing oil of similar qualities and with comparable economic conditions sell at different prices and supply differing amounts, according to political factors or to differing assessments of the impact of their decisions on the world economy. (Kuwait’s relatively heavier crudes are typically less valuable than, for example, the lighter crudes produced in Saudi Arabia. The latter, however, are priced below the former.)

Development prospects also differ among OPEC countries. In Kuwait, Qatar, Saudi Arabia, the Socialist People’s Libyan Arab Jamahiriya, and the United Arab Emirates, where investment opportunities are relatively limited, the proceeds from oil exports exceed absorptive capacity. Consequently, these countries have become exporters of surplus capital. Other OPEC countries have larger populations and more capacity to absorb investment, and they rely on the income from their oil exports to finance their development expenditures.

From a supply point of view, most of the expansion in OPEC’s productive capacity occurred in the 1960s. Future expansion is likely to be comparatively less significant; it also is expected to take place in the small group of capital surplus countries. Overall, the OPEC countries are expected to become more dominant as world suppliers of oil in the 1980s; within the organization, there is also likely to be a greater concentration of supplies.

Ten of the OPEC countries—Algeria, Indonesia, Iran, Iraq, Kuwait, Nigeria, Saudi Arabia, the Socialist People’s Libyan Arab Jamahiriya, the United Arab Emirates, and Venezuela—account for over 95 per cent of OPEC’s aggregate production; Saudi Arabia alone has accounted for one third of OPEC supplies since 1974. This concentration, and its location, make world oil supplies highly vulnerable to disruption: a change in the production pattern of any one of these major exporters can affect world supplies, and especially world prices, considerably, as was shown by recent events in Iran.

During the next decade, the difference of interests within OPEC may have more effect on the group’s policies than in the past, particularly on the magnitude and frequency of price changes in a period of increasingly tight supplies. Strong market fluctuations are not unlikely during the forthcoming transition to non-oil energy sources. Since 1973, consumers have found that large, sudden oil price increases have imposed costly adjustments on national economies and on individuals’ living standards. The accompanying inflationary pressures have affected costs in developed countries and also the economic position of the oil producers. As supplies tighten in the 1980s, gradual, periodic price changes might be easier for consumers to absorb and might reduce the inflationary feedbacks from price changes; but a program for such gradual changes would require more cooperation between producers and consumers than has been evident thus far.

Centrally planned economies

The centrally planned economies are collectively self-sufficient in energy. They absorb about one third of the world’s energy consumption and, in recent years, have produced enough fuel to meet domestic demand and to leave a surplus—mainly of oil—for export. The Union of Soviet Socialist Republics (U.S.S.R.), which has become the world’s largest single producer of oil, exported the equivalent of almost 10 per cent of OPEC production in 1976. The People’s Republic of China produces about 2 million barrels of oil a day and exports about 15 per cent of this.

The prospects for the production and export of petroleum are different in the U.S.S.R. and the People’s Republic of China because of the location of their resources relative to the developed parts of their countries, on the one hand, and, on the other, the policies followed in developing them. Both countries are projected to increase their production, although modestly in the U.S.S.R. compared with the People’s Republic of China. Whether the U.S.S.R. and the People’s Republic of China will develop sufficient surpluses of oil to export is uncertain at this time. In the U.S.S.R., oil production will increasingly be needed for domestic consumption, and the Bank projections indicate that this will leave just enough surplus to meet the needs of the Eastern European countries. It seems unlikely that the U.S.S.R. will become a net oil importer in the 1980s. On the other hand, net oil exports to market economies will probably cease by 1990. If coal production targets are met in the People’s Republic of China and if its domestic demand for petroleum does not accelerate too sharply, a small quantity of its surplus oil might be released for export; at best, export volumes will be modest.

Oil importing developing countries

This group includes countries covering a wide spectrum of development levels: from semi-industrialized economies of Southern Europe and Southeast Asia to agrarian nations of Asia and sub-Saharan Africa. A substantial share of the energy needed in the traditional sectors of the developing countries is met by noncommerical energy sources, such as firewood, charcoal, plant and animal residues, human and animal effort, and solar energy. It has been estimated that such noncommerical energy supplies over 90 per cent of total energy consumption in such countries as Mali, Nepal, and Tanzania. In the Far East, excluding Japan, energy use is probably divided about equally between commerical and traditional energy sources.

Since commercial energy (such as oil, gas, coal, or electricity) is used increasingly as countries grow and modernize, commercial energy requirements are expected to increase faster in these countries than elsewhere. At present, the oil importing developing countries account for about 10 per cent of the world’s consumption of commercial energy and for about 7 per cent of world production. Oil meets almost 60 per cent of their commercial energy needs, and 83 per cent of their petroleum requirements were imported in 1976. By 1990, they are expected to account for 17 per cent of global consumption of commercial energy.

What prospects do these countries have for meeting their increased consumption from indigenous sources? Energy resources in these countries are largely underexplored. Since many of the countries have large land areas, and since their search for oil so far has been relatively successful, it is possible that they have considerable potential resources. However, it is projected that the oil importing developing countries are not likely to make any significant addition to world supplies of oil in the next decade. On the basis of their current energy plans, they are expected to produce about 4 million barrels of oil equivalent a day by 1990. This would meet less than 25 per cent of their domestic requirements for oil projected for the same year; the remainder would still have to be imported. This estimate of their domestic production, however, could prove conservative.

Industrialized countries are the members of the Organization for Economic Cooperation and Development, apart from Greece, Portugal, Spain, and Turkey, which are included among the middle-income developing countries.

Capital surplus oil exporters: Kuwait, the Socialist People’s Libyan Arab Jamahiriya, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

Centrally planned economies are Albania, Bulgaria, the People’s Republic of China, Cuba, Czechoslovakia, the German Democratic Republic, Hungary, Mongolia, North Korea, Poland, Romania, and the Union of Soviet Socialist Republics.

Developing countries are divided on the basis of 1977 gross national product per capita into:

  • Low-Income Countries—with per capita income of US$300 in 1977 and below; and Middle-Income Countries—with per capita income above US$300 in 1977. These include developing OPEC countries (Algeria, Ecuador, Gabon, Indonesia, Iran, Iraq, Nigeria, and Venezuela), Greece, Israel, Portugal, South Africa, Spain, and Turkey.

Oil importing developing countries are all developing countries, excluding the OPEC countries and 13 non-OPEC oil exporting countries: Angola, Bahrain, Bolivia, Brunei, Egypt, Malaysia, Mexico, Oman, the People’s Republic of the Congo, the Syrian Arab Republic, Trinidad and Tobago, Tunisia, and Zaϊre.

The interaction between industrialized countries and the OPEC will determine the global cost of oil in the next decade. This is an external factor over which the developing countries have little control, but it is one which is likely to have a significant impact upon their growth prospects. The energy prospects of these countries have to be viewed against the background of their overall development needs; in particular, although current oil prices provide the economic incentive to develop previously underexploited energy resources, higher energy costs may well exacerbate capital and management scarcities that already hamper development efforts.

Energy use in LDCs

In the coming ten years, the low-income economies of sub-Saharan Africa, Asia, and the Pacific are expected to increase their demand for commercial energy as incomes, particularly in the rural areas, rise. In the middle-income, industrializing countries, more efficient use and better conservation of energy will be needed to sustain the development of energy-intensive industries at competitive levels.

In many developing countries, a significant share of households satisfy their energy needs from noncommercial energy sources, and in these countries the use of commercial energy is far more strongly linked to production than in industrialized countries. In the latter, industry and transportation absorb about 60 per cent of commercial energy, compared with more than 80 per cent in developing countries.

Energy use patterns result from past investments, but at any point in time the amount of energy required per unit of production (energy intensity) is determined not only by the energy requirements embodied in the existing capital stock—for example, the designed fuel consumption per passenger kilometer of a car or the designed coke requirement per ton of steel produced—but also by the actual use of existing equipment. Despite the design similarity of capital equipment in industrial and developing countries, there are indications that the latter use relatively more energy per unit of production in power generation and transportation.

Thermal power plants operate at lower capacity utilization rates in developing countries, resulting in lower fuel efficiency (higher fuel inputs per kilowatt hour generated). In many countries, for example, capacity utilization is constrained by the size of the electrical system, its transmission capacity, and fuel supplies. The coexistence of two frequencies of electric current and even of two voltages in local systems is not rare. In many developing countries, the transport sector is less energy efficient (and fuel requirements per ton kilometer of freight transported are higher) than it is in industrial countries. Not only is the largest share of freight carried by road (which requires between 100 and 200 per cent more fuel per ton kilometer than rail or water), but the proportion of gasoline trucks (which are less energy efficient than diesel trucks) is also higher and the quality of the highway network is lower. In addition, poor utilization of existing equipment lessens the energy efficiency of the transport system.

Ultimately, the impact of higher energy costs on the growth prospects of the developing countries depends on the domestic policies they implement to manage the increasing energy inputs of their economies.

The energy efficiency of motorized urban transportation systems in developing countries is low, due to inefficient use of buses (which typically account for two-thirds of motorized trips). This, in turn, results from poor management and inadequate maintenance. The low quality of public transport systems in those countries has only tended to increase the attractiveness of private cars at the expense of fuel efficiency. The resulting congestion further reduces the quality and attractiveness of public services. In cities like Beirut, Istanbul, Kuala Lumpur, Lusaka, Nairobi, and Tehran, for instance, passenger cars account for a larger share of mechanized urban transport than in cities of comparable size in developed countries where incomes are several times higher.

Improvements in energy efficiency are as important in developing countries as they are elsewhere (particularly where supply options are more limited than those of industrial countries), even though their energy savings may have little impact on the global energy balance. Such improvements, however, require capital investments and more efficient management of existing and future equipment, particularly equipment used in the production of energy-intensive goods and services. The relative scarcity of capital and managerial resources which characterizes the developing economies should be expected to delay their adjustments to current and future energy prices.

Aggregate energy supplies

The future energy situation in the oil importing developing countries will depend, to a large extent, on how far they increase local production. Although the ultimately recoverable reserves of petroleum in the developing countries are not known with any certainty, a recent assessment by the Bank suggests that the oil importing developing countries, whose proven reserves are now about 2 per cent of the world total, may account for as much as 15 per cent of the world’s ultimately recoverable oil reserves.

Between 1976 and 1985 the unit capital costs of oil production in developing countries are projected to increase faster than the unit capital costs of producing energy from other conventional sources of energy. However, the price of oil in the international market has now increased enough to cover the cost of exploiting known reserves of oil and gas that were previously noncommercial. Economic returns on these projects are likely to be very high at current oil prices, averaging about 30 per cent. The actual return, however, depends on domestic policies.

In general, oil product prices in the oil importing developing countries reflect adequately oil prices in the international market. However, direct government action is probably more important in the developing countries than elsewhere in determining the levels of future energy production, as the energy sector is generally a direct concern of the state. The allocation and timing of investments in developing countries is not only a matter of price incentives but also one of broader economic goals, and there is no evidence that these countries have altered their investment plans on account of higher energy prices, nor any evidence that the industrialization patterns of the recent past are being revised to allow for additional energy production beyond the levels dictated by domestic economics and indigenous supply requirements.

As elsewhere, supply and demand adjustments in developing countries will involve reallocations of capital and managerial resources, but these countries’ overall development circumstances are likely to allow for only a partial adjustment in the next decade. Ultimately, the impact of higher energy costs on the growth prospects of the developing countries depends on the domestic policies they implement to manage the increasing energy inputs of their economies.

Other Resources Citing This Publication