expectations for energy demand vary considerably. In the IEO99 reference case and in the IEA 'business as usual' case, energy demand in developing Asia is expected to increase by 3.7 percent per year between 1995 and 2020. DRI projects a lower growth rate of 3.2 percent per year. PIRA projects a growth in energy use of 3.9 percent per year between 1995 and 2010 (the IEO99 reference case projects the same growth rate over the same time period), and PEL projects a growth rate of 4.1 percent per year between 1995 and 2015 (IEO99 is somewhat lower at 3.8 percent per year over the same period). Other Asia includes countries hardest hit by the economic troubles that began in 1997 and continued throughout 1998, such as Thailand, Indonesia, Malaysia, and South Korea. It is clear that there is still much debate among analysts about the time frame needed for these countries to regain momentum for economic expansion and increased demand for energy.

Within Asia, there is more variation in expectations for "other Asia" than for China. IEO99 and DRI tend to be more conservative than the other forecasts. Between 1995 and 2020, IEO99 and DRI project energy demand growth in other Asia of 3.3 percent and 3.0 percent per year, respectively. IEA projects 4.0-percent annual

growth in other Asian energy use. Between 1995 and 2015, PEL expects energy use in other Asia to increase by 4.1 percent per year, compared with 3.4 percent per year for the same period in the IEO99 reference case. Between 1995 and 2010. PIRA projects robust average annual growth of 4.4 percent, compared with 3.6 percent in the IEO99 reference case.

Of the remaining developing regions, the greatest variation in expected growth is seen for Central and South America. IEO99 is more optimistic about growth in energy use in the region than are any of the other fore cast series, projecting growth of 4.3 percent per year over the 1995-2020 period, compared with 3.1 percent per year (DRI) and 2.9 percent per year (IEA). Over the 1995-2010 period, IEO99 is substantially higher than PIRA in terms of energy demand growth (4.5 and 3.6 percent per year, respectively); and over the 1995-2015 period, IEO99 projects a substantially higher growth rate (4.4 percent per year) than does PEL (3.6 percent per year).

A key reason for the differences among the various forecasts is that they are based on different expectations about future economic growth rates (Table 4). Expecta tions for economic growth are substantially alike among

alternative forecasters for the remaining fossil fuels. In IEO99, oil use grows by 1.8 percent per year worldwide between 1995 and 2020, whereas the range of average annual growth rates among the other forecasters runs from 1.9 percent (IEA) to 2.0 percent (DRI). Coal use in IEO99 grows by 1.7 percent per year, but the DRI and IEA forecasts project increases of 2.1 percent per year. For both oil and coal, the alternative forecasts fall within the range of projections defined by the IEO99 low and high economic growth cases.

At first glance, it appears that the IEO99 projections of growth in the use of non-fossil fuels (i.e., nuclear power and hydroelectricity and other renewables) also are lower than those in the other forecasts. However, DRI produces a forecast only for combined nuclear and hydroelectricity-as "primary electricity." When the IEO99 projections for the two non-fossil energy sources are combined, they fall in the middle of the range of growth rates expected between 1995 and 2020 by the other forecasters, from 0.7 percent per year (DRI) to 1.2 percent per year (IEO99).

References

1. S. WuDunn, "Japan's Parliament Passes $517 Billion Bank Rescue Package," New York Times (October 17, 1998).

2. C. Dawson, Japan Nationalizes Second Bank." (press release, Associated Press, December 13, 1998).

3. International Energy Agency, World Energy Outlook 1998 edition (Paris, France, November 1998).

4. WEFA Energy, Asia Special Report (Eddystone, PA. November 25, 1998).

5. PlanEcon. Review and Outlook for the Former Soviet Republics (Washington, DC, March 1998), p. vi.

6. PlanEcon, Review and Outlook for the Former Soviet Republics (Washington, DC, October 1998), p. vii.

7. United Nations Framework Convention on Climate Change, "List of Signatories to the Kyoto Protocol," web site www.unfcc.de (December 3, 1998).

8. NewsEdge Corporation, "Alternative Energy Expands 30 Percent," NewsPage web site www. newspage.com (December 8, 1998).

World Oil Markets

The crude oil market was wracked with turbulence during 1998, as prices fell by one-third on average from 1997 levels. Even without adjusting for inflation, the world oil price in 1998 was the lowest since 1973. The declining oil prices were influenced by an unexpected slowdown in the growth of energy demand worldwide-less than any year since 1990-and by increases in oil supply, particularly in 1997. Although the increase in world oil production in 1998 was smaller than in any year since 1993, efforts to bolster prices by imposing further limits on production were unsuccessful.

Oil consumption in 1998 was lower than anticipated largely because the recession in Southeast Asia proved to be more severe than expected early in the year. Significant reductions in gross domestic product (GDP) were experienced in Korea, Thailand, and Malaysia. Depression and political turmoil struck Indonesia. Japan, the region's largest economy, moved from slow or no economic growth to decline. Although the Chinese economy continued to grow, it was hampered by a reduction in trade with neighboring countries. As a consequence, a decade-long string of annual increases in oil demand was broken, and Asian oil requirements fell by about 100,000 barrels per day in absolute terms [1] and by more than 1 million barrels per day relative to expectations [2]. Production geared to the earlier expectations created a supply glut, which was exacerbated by a mild winter and lower weather-related demand as well as Iraq's return as a crude oil exporter.

By mid-1998, declining prices set in motion renewed efforts to manage oil supplies under sponsorship of the Organization of Petroleum Exporting Countries (OPEC). Agreements were sought to restrict production within OPEC, and initiatives were launched to gain cooperation from non-OPEC producers. In both March and June, OPEC (excluding Iraq) and key non-OPEC producers Mexico and Norway announced plans to cut oil production. In the remaining months of 1998, however, announced and realized production cuts were not clearly synchronized, and production management efforts had at best only modest success.

By the end of 1998, other constraints on oil supply became increasingly evident. Stripper production in the United States was in decline. Exploration and development spending was being slashed. Rig utilization rates,

especially for onshore equipment, had fallen by 30 percent. Announced spending plans worldwide were reduced. Oil-producing countries faced severe fiscal deficits, causing national oil companies to cut capital spending. Private-sector restructuring entered a new stage as mergers involving leading multinational oil companies were announced or consummated. A prime objective of the mergers was to rationalize corporate operations, reducing employment needs and eliminating investment activities with low profit prospects.

How should these developments be factored into the construction of an intermediate- and long-term oil market outlook? One perspective might feature an expectation of continued low oil prices in 1999 and beyond. sustained in part by expectations that economic recovery in Asia will be slow in coming, increasing adverse economic pressures in the rest of the world and causing oil demand to remain flat or decline. This perspective could be further sustained by a view that oil supply development continues even in the context of low oil prices because of technology being applied to highly prospective frontier areas, or because resource-rich OPEC producers-including especially Saudi Arabiaare opening up their countries to high levels of exploration and development activity.

While the risk that such a scenario might transpire is perhaps greater now than a year ago, it is not this report's reference case. Oil prices in the International Energy Outlook 1999 (IEO99) reference case are expected to recover over the next several years as oil demand growth resumes in Asia and is sustained over the next two decades at high levels in developing countries throughout the world. By 2005, oil prices are projected to be in the range of the reference case track presented last year in the International Energy Outlook 1998 (IEO98). Oil demand is expected to reach 110 million barrels per day by 2020, requiring an increment to world production capability of 30 to 40 million barrels per day relative to current capacity. OPEC producers are expected to be the major beneficiaries of increased production requirements, but non-OPEC supply is expected to remain highly competitive—with major increments to supply coming from deepwater resources, especially in West Africa.

Some argue that recent and projected trends in growth for oil production are not sustainable and that within a decade or so we could face severe oil price escalation (see box on page 22). Over the past 25 years, oil prices have been highly volatile. In the future one can expect volatile behavior to recur principally because of unforeseen political and economic circumstances. It is well recognized that tensions in the Middle East, for example, could give rise to serious disruptions in normal oil production and trading patterns. On the other hand, significant excursions from the reference price trajectory are not likely to be long sustained. High real prices deter consumption and encourage the emergence of significant competition from marginal but large sources of oil and non-oil energy supplies. Persistently low prices have the opposite effects. Limits to long-term oil price escalation include substitution of other fuels (such as natural gas) for oil, marginal sources of conventional oil that become reserves when prices rise, and nonconventional sources of oil that become reserves at still higher prices. Advances in exploration and production technologies are likely to bring down prices when such additional oil resources become part of the reserve base. Highlights of the IEO99 projection for the world oil market are as follows:

•The reference case price projection traces slow recovery over the next 3 to 4 years as growth in oil supply slows and demand growth resumes. The reference case rests on an assumption of economic recovery in various Asian countries in 2000 and beyond. •Despite relative low prices in the near term, deepwater exploration and development initiatives are generally expected to be sustained worldwide, with offshore West Africa emerging as a major future source of oil production. Technology and resource availability can sustain large increments in oil production capability at prices ranging between $18 and $22 per barrel. The current price environment will, however, slow the pace of development in some highly prospective areas, including especially the Caspian Basin region.

⚫Economic development in Asia is crucial to long-term growth in oil markets. The projected evolution of oil demand will strengthen economic ties between the Middle East and Asian markets.

•Though OPEC's share of world oil supply is projected to increase significantly over the next two decades, competitive forces are expected to remain strong enough to forestall efforts to escalate real oil prices significantly. The competitive forces operate within OPEC, between OPEC and non-OPEC sources of supply, and between oil and other sources of energy (particularly natural gas).

•The uncertainties associated with the reference case projections presented here are significant. For example, although some signs of economic recovery in Asia are evident at the beginning of 1999, Japan's turnaround is still awaited. China's internal economic reforms may be at risk. Adverse ripple effects in South America seem to have gained some strength. Recovery prospects for the former Soviet Union have grown more dim. These and other economic strains increase the risk of near-term political and policy discontinuities that could lead to oil market behavior quite different from that portrayed in the IEO99 projections.

Growth in Oil Demand

Oil currently accounts for about 40 percent of world commercial energy supplies. The reference case projec tion anticipates rising demand, by about 1.8 percent per year, causing oil requirements to reach 110 million barrels per day by 2020.

In 2020, oil is expected to represent 37 percent of total energy supply. The decline in the energy share reflects primarily a trend toward switching to natural gas and other types of fuel particularly for power generation in many industrialized and developing countries. Oil demand in industrialized countries is projected to increase at only about 1 percent per year over the next two decades. Thus, the region that accounted for about 60 percent of oil demand in 1996 will account for only about one-third of anticipated demand growth between 1996 and 2020. The other two-thirds of demand growth (about 26 million barrels per day) is projected for developing countries. In Eastern Europe and the former Soviet Union (EE/FSU), domestic production and oil consumption have been in continuous decline since the late 1980s. A gradual turnaround is expected beyond 2000, but overall recovery expectations have been scaled back to less than 5 percent of the projected increase in

world demand.

In all regions of the world, the largest increases in ail consumption are expected to result from oil's use as transportation fuel. After 2011, the use of oil used for transportation is projected to top all other uses combined (Figure 20). By 2020, transportation is expected to account for 52 percent of world oil consumption, up from a 44-percent share in 1996. The sources of growth in end-use consumption differ greatly between industrialized and nonindustrialized economies (Figure 21). In industrialized countries, ofl demand growth stems almost exclusively from developments in transportation. In other areas, growing demand for petroleum fuels in electricity generation, heating, manufacturing and other uses accounts for about one-third of the incre ment in oil consumption.