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Energy problems of the non-OPEC developing countries, 1974–80: Will the rising costs of energy prejudice the development of their growing economies?

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
September 1976
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Adrian Lambertini

Between 1974 and 1980 the non-OPEC (Organization of Petroleum Exporting Countries) developing countries’ demand for energy will continue to grow as incomes grow, though at slower rates than in the previous 15 years. The 13 oil exporters among them will double their oil export volumes over this period. Because of its higher price, countries that rely on imported oil need to adjust their use of energy per unit of product and to intensify the exploitation of domestic energy reserves, where possible. Many will nonetheless remain heavily dependent on oil imports for the foreseeable future. The oil importers of the middle-income group (with per capita annual incomes between $200 and $375), are expected to fare particularly badly, because their oil reserves are minimal.

Though the distribution of their energy reserves is uneven, all the non-OPEC developing countries together have enough economically recoverable reserves to reduce their dependence on energy imports from other groups of countries from about 30 per cent of total consumption in 1974, to between 12 per cent and 6 per cent in 1980. To achieve this would entail annual investments that are twice as high in real terms as those made in 1968–73. The poorest countries among them (with per capita annual incomes below $200) have about half the energy reserves of the group (India’s coal and Niger’s uranium reserves account for a very high proportion), and present economic conditions would make it profitable for them to meet 90 per cent of their energy needs from indigenous sources by 1980. However, to do this they would need to invest the annual equivalent of 1.3 per cent of gross domestic product (GDP) in energy production over the next five years.

The non-OPEC developing countries have almost half the world’s population (of which the net oil exporters have 10 per cent), but they presently account for less than 10 per cent of its energy consumption, equivalent to only 13 per cent of the energy consumed by the developed countries. Energy consumption, industrialization, and economic growth are closely linked. The previous 15 years saw the achievement of relatively rapid economic growth in the developing countries, associated with a 22 per cent rise in the intensity of energy production and a doubling of energy consumption (see Table 1). The most important single source of energy in these countries is oil.

Table 1Non-OPEC developing countries: energy consumption and production by income group(In thousands of b/d of oil equivalent)
1960197119721973197419801

(I)
19801

(II)
Inland energy consumption
Higher-income1,862.83,973.04,293.64,713.94,876.56,4856,550
Oil1,467.03,096.03,366.03,763.03,865.04,4054,715
Coal192.0270.2267.5253.0263.0480375
Primary electricity59.9146.2155.2173.5198.0430430
Natural gas143.9460.6505.0524.4550.51,1701,030
Middle-income461.41,222.41,261.91,311.31,381.11,6451,845
Oil319.0942.0990.01,028.01,073.09001,150
Coal131.0239.4226.8242.0263.0540515
Primary electricity11.036.439.635.939.19090
Natural gas0.34.65.55.46.011590
Lower-income1,113.51,987.92,045.02,150.12,209.63,0453,070
Oil359.5814.4867.4900.0880.0860960
Coal724.01,037.01,024.01,075.01,142.01,7501,750
Primary electricity18.865.065.969.774.6140140
Natural gas11.271.587.7105.4113.0295220
All countries3,436.77,183.37,600.68,175.38,467.211,17511,465
Oil2,145.54,852.45,223.45,691.05,818.06,1656,825
Coal1,047.01,546.61,518.31,570.01,668.02,7702,640
Primary electricity88.8247.6260.7279.2311.7660660
Natural gas155.4536.7598.2635.2669.51,5801,340
Indigenous energy production
Higher-income1,416.33,138.43,246.83,359.43,609.75,8105,580
Oil1,048.02,310.02,384.02,462.02,533.03,7603,760
Coal151.0222.6222.6209.0215.0380300
Primary electricity59.2140.8152.4170.2194.0420420
Natural gas158.1465.0487.8518.2667.71,2501,100
Middle-income221.5834.5811.3837.7895.51,9151,860
Oil80.0552.0520.0530.0544.01,2151,215
Coal131.0236.6226.8236.0263.0430400
Primary electricity10.241.341.739.243.19595
Natural gas0.34.622.832.545.4175150
Lower-income774.91,390.21,460.11,510.91,554.92,7502,680
Oil28.0170.2176.0172.0176.0490490
Cŏal716.01,040.21,082.21,065.01,142.01,7501,750
Primary electricity19.765.365.469.774.6150150
Natural gas11.2114.5136.5152.2162.3360290
All countries2,412.75,363.15,518.25,708.06,060.110,47510,120
Oil1,156.03,032.23,080.03,164.03,253.05,4655,465
Coal998.01,499.41,531.61,510.01,620.02,5602,450
Primary electricity89.1247.4259.5279.1311.7665665
Natural gas169.6584.1647.1702.9875.41,7851,540
Sources: UN Series J, and World Bank staff estimates.

Two alternative assumptions on the per barrel export price of Saudi Arabian light oil have been adopted here. The first one (I) assumes a price per barrel that remains constant in real terms at its 1974 level, over the rest of the decade. The second (II) assumes a price of $7.00 per barrel in 1980, at 1974 prices.

Sources: UN Series J, and World Bank staff estimates.

Two alternative assumptions on the per barrel export price of Saudi Arabian light oil have been adopted here. The first one (I) assumes a price per barrel that remains constant in real terms at its 1974 level, over the rest of the decade. The second (II) assumes a price of $7.00 per barrel in 1980, at 1974 prices.

The consumption of commercial energy in the non-OPEC developing countries more than doubled between 1960 and 1974, growing from the equivalent of 3.5 million barrels of oil per day (b/d) to 8.6 million b/d. By 1980 these countries may be expected to be consuming more than the equivalent of 11 million b/d while producing, on aggregate, 10.5 million b/d. (These figures do not, however, give any indication of the consumption-production gap of individual countries.) The extent of their problems with energy production and consumption can be measured by the increase in the price of oil since 1973.

During the period 1960–74 the energy consumption per capita also rose from an annual 156 kilograms of oil equivalent to 270 kilograms, due to the high rate of economic development. Although these figures are low in comparison with the per capita consumption of 2,750 kilograms of oil equivalent in Japan or 8,200 kilograms in North America, they serve to highlight the dilemma facing the developing countries: whether to cut back on development or their energy bill.

The full adjustment to the higher costs of energy, triggered by the increase in oil prices of 1974, will demand significant changes in the economic structure, energy industries, and capital allocation in the non-OPEC developing countries. This process is not expected to materialize in the next five years, and some energy shortages should be expected. In fact, the lead times determined by technical and physical factors affecting development of the energy industries could be longer if the amounts of capital required for such development are not timely and/or sufficient. It is the purpose of this article to examine the rise in energy consumption in these countries, their energy resources, and their future requirements, and to determine the extent of assistance and investment they will require to face what appears to be a major obstacle to their future economic growth.

For the purpose of this analysis, the non-OPEC developing countries are divided into three groups according to per capita income in 1972. Higher-income countries are those above $375; lower-income countries below $200; and middle-income countries are between the two. Differences in economic structure and in relative endowment of energy resources have resulted in patterns of energy use that differ according to income group and that will result in differing energy prospects up to 1980.

Consumption and investment

The growth in energy consumption during 1960–73 was based to a significant extent on the availability of crude oil at declining prices over most of the period. In 1974, oil accounted for about 70 per cent of the consumption of energy of the non-OPEC developing countries, where energy imports consist almost entirely of oil.

Energy conversion factors
Barrels of oil

equivalent
Energy form and unit
Crude oil; 1 metric ton7.3
Refined products;
1 metric ton7.7
Natural gas; 1,000
cubic meters6.3
Solid fuels; 1 metric ton4.9
Primary electricity
(nuclear, hydrothermal,
geothermal); 1,000
kilowatt hours0.6

The use of energy per unit of GDP rose from 860 kilograms of oil equivalent in 1960 to 1,050 kilograms in 1973. Given the large share of oil in total energy consumption, the increase in oil prices of 1974 reduced the overall energy consumption relative to GDP, and the use of energy per unit of product is now estimated to have fallen to 1,040 kilograms of oil equivalent.

Over the next five years the growth of demand for energy in the non-OPEC countries is expected to be somewhat slower than between 1960 and 1973, reflecting the slower growth of incomes. Many of these countries have substantial energy reserves that for a variety of reasons are not being fully exploited, and a large number which at present depend heavily on imported oil will find it profitable to expand domestic energy production sharply over the next five years. Through a combination of slower growth of demand and an expanding supply from indigenous sources, some of them will be able to satisfy an increasing share of demand from domestic sources. Countries that are unable—for want of appropriate energy reserves or want of capital—to reduce their dependence on imported energy will need to reduce the energy intensity of their economies, limiting investments in new production capacity that is energy intensive, if their economic growth is not to suffer further serious setbacks.

The growth of energy consumption and production in the past 15 years entailed high levels of investment in the domestic energy industries—from 1968 to 1973 more than $4.2 billion (in constant 1973 dollars) was spent each year in the energy sectors of these countries. Meeting the energy requirements of 1980 will demand an investment effort of at least twice that amount, despite the fact that a slowdown in the rate of oil consumption is expected to release a significant amount of capital that would have been otherwise committed to the expansion of the domestic oil refining capacity.

Energy and income level

From 1960 to 1974, the higher-income and middle-income economies experienced relatively high rates of economic growth based on the rapid growth of their industrial sectors. From 1974 to 1980, these economies are expected to grow at 5.5 per cent annually, compared with 6.5 per cent and 5.6 per cent annually over the past 15 years in the higher-income and middle-income countries, respectively. Altogether, higher-income and middle-income countries account for 70 per cent of the GDP of the three income groups that comprise the non-OPEC developing countries. Lower-income countries consisting of basically primary economies experienced an average rate of growth of 3.3 per cent over the past 15 years and are expected to grow at 4.5 per cent annually over the rest of this decade.

Almost 60 per cent of the energy consumed in the non-OPEC developing countries is used by higher-income countries; 16 per cent is consumed in middle-income countries. The lower-income countries consume the remaining 24 per cent and are relatively better endowed with energy resources than countries in the other groups. Almost half the energy resources of the non-OPEC developing countries that could be developed over the next five years are located in lower-income countries. However, these resources remain largely undeveloped: in 1974 less than 1 per cent of that fraction had been developed. The energy resources that could be developed over the medium term in higher-income countries could sustain a production of energy for over 25 years at the output level of 1974. In the middle-income countries there are energy resources that could last for over 100 years at the 1974 level of output (see Table 1).

The energy industries

Once the country distribution of energy resources is taken into consideration, it is found that there is little correspondence between energy resource endowment and a country’s requirements. On the basis of their relatively high energy reserves, the higher-income countries appear capable of continuing the diversification of energy sources developed over the past 15 years. In 1974, higher-income countries produced 2.5 million b/d of oil, equivalent to almost two thirds of the oil production in all non-OPEC developing countries. Coal is the. second most important energy resource, followed by natural gas. Argentina, Brazil, and Colombia are endowed with the bulk of lower-cost, reasonably assured resources of uranium in higher-income countries.

Energy reserves are defined as the measured or reasonably assured fraction of the energy resources that could be exploited in the next five years given current technology, costs, and prices. On this basis, these countries could begin to produce over 22 billion metric tons of oil equivalent in the next five years. If these reserves were all used over a 25-year period, the non-OPEC developing countries could consume—in aggregate—410 kilograms per capita of oil equivalent each year without importing energy. However, the distribution of reserves is far from even.

The coal mining industry in the majority of developing countries is generally very small: one v mine or one field activity. India, Korea, and Rhodesia are exceptions. In 1974, coal accounted for 6 per cent of the energy consumption in the higher-income countries, 20 per cent in the middle-income countries, and 53 per cent in the lower-income countries. The share of coal in the consumption of energy in the latter two groups is heavily weighted by the share of coal in the energy consumption of Korea and India, respectively. In Korea, a middle-income country, coal accounts for 47 per cent of total energy consumption. In India, coal is still the single largest source of energy and accounts for 71 per cent of total energy consumption. Both these countries meet their coal requirements entirely from domestic sources. The use of coal in the other non-OPEC developing countries is much less extensive, and domestic supplies are supplemented with imports of coking coal from the United States and, to a lesser extent, from the CMEA area (the Council for Mutual Economic Assistance, an international economic organization linking some socialist countries).

Depending upon its location above or below the ground level, the development of a coal mine, after appraisal, may take from three to seven years, which may slow future exploitation efforts.

Hydropower is the main source of primary electricity in non-OPEC developing countries. About 38 per cent of the installed power capacity in these countries consists of hydroelectric plants. Over the coming five years their total power generation is expected to increase by 50 per cent while hydroelectricity generation will increase even faster, possibly accounting for 68 per cent of total generation in 1980. Together, these countries have 44 per cent of the world’s hydraulic resources, but as of 1974 only 4 per cent of these resources had been developed. By 1980 no more than 8 per cent will have been developed. The time it takes to complete the construction of a hydropower plant depends mainly on its size and location. Projects started in 1975 and thereafter are not expected to have a significant impact on the power balance of these countries until after 1980.

Besides hydropower, other sources of primary electricity are currently in the initial stages of development. In 1974, nuclear power plants were operating in India and Argentina. By 1980, almost 10 per cent of the primary electricity generated in lower-income countries and 12 per cent in higher-income countries may come from nuclear plants. In the middle-income countries nuclear power is expected to account for 14 per cent of total primary electricity in 1980. The same qualification on lead times for hydropower applies also for nuclear plants. The construction alone of a nuclear power plant may take about five years. After construction is completed, the start-up of commercial operations may still take another year.

Geothermal electricity is still in its initial stages and is expected to account for under 1 per cent of the primary electricity generated in the higher-income countries and for 1.4 per cent of that generated in middle-income countries in 1980.

The natural gas resources of the non-OPEC developing countries have remained largely undeveloped due to the lack of established markets for natural gas, which discouraged the construction of gathering and distribution facilities. For the aggregate of the non-OPEC developing countries, 65 per cent of all the production of natural gas was marketed in 1973 and the remainder was flared, vented, or reinjected. In middle-income countries the proportion of marketed to gross natural gas production was 29 per cent in the same year; in higher-income countries, 65 per cent; and in lower-income countries, 90 per cent. These values can be compared with the share of marketed to gross natural gas production in oil producing areas of developed countries, where over 90 per cent of the gross production is marketed. Such is the case in Canada, the United States, and Australia. The prospects for the development of natural gas in non-OPEC developing countries are good. Significant increases in production are expected at every income level over the next five years. The development of natural gas resources depends on the development of transport capacity, particularly pipelines.

The oil industry

Onshore crude oil has been the most developed source of energy in the non-OPEC developing countries. Recent in-creases in the international price of oil provide a strong incentive to expand the development of crude oil production.

During the 1960s, declining international crude oil prices had a great effect on the expansion of the oil sector in countries where operations were state owned, and where production was geared to the domestic market. Prices of crude oil and oil products produced locally were often held at unprofitable levels, discouraging investments in exploration in newer, more risky areas. Moreover, falling profitability discouraged the development of smaller prospects in known areas. As a consequence, the number of successful exploratory wells drilled, relative to total drilling (the success ratio) declined, leading—together with stagnation of the exploratory effort—to the stagnation or decline in reserves and decline in yield. The development of existing fields was intensified.

The decline in the profitability of crude oil operations in these countries reduced the investment funds that the industry could generate to finance its expansion. Increasingly during this period the industry responded to the growing demand for oil by expanding refining capacity to process imported oil. Investments in refining further restricted the availability of capital for crude oil production operations. Crude oil production remained concentrated in relatively well-known areas, which resulted in a progressive aging of existing fields.

In non-OPEC oil exporting countries the effect of the 1974 increase in the price of oil has been dynamic, and newer areas have been opened for exploration and development. Offshore operations have been gaining in importance, and increases in crude oil production capacity resulting from discoveries made in the past are expected to bring about significant increases in production without any major impact on production costs. The oil exporting non-OPEC developing countries are expected to account for 80 per cent of the production increase of 2.0 million b/d by 1980, which is projected for the aggregate of non-OPEC developing countries.

Renewed exploratory effort in relatively newer areas is not expected to have a significant impact on the oil balance of the countries that experienced the erosion of their reserves over past years. The medium-term response to changes in oil prices depends on changes in output from existing wells, improving the recovery of the oil in place through artificial lift, and bringing into production fields that would be marginal at lower prices. That is, it depends mainly on the development of fields already under production and of fields with known potential (see Table 2). Crude oil output to 1980 has been projected at its technical potential of 5.5 million b/d, an increase of over 60 per cent from the 1974 level.

Table 2Non-OPEC developing countries: crude oil production(In thousands of b/d)
19751977119801
Onshore2Offshore2TotalOnshoreOffshoreTotalOnshoreOffshoreTotal
Higher-income
Argentina395.0395.0400.0400.0395.0395.0
Bahrain461.061.060.060.055.055.0
Brazil170.021.0191.0130.0100.0230.0110.0230.0360.0
Brunei435.0140.0175.030.0220.0250.025.0215.0260.0
Chile337.037.035.015.050.032.018.050.0
China, Rep. of5.05.04.04.04.04.0
Colombia164.0164.0150.0150.0135.0135.0
Israel**75.0**3.0**3.0
Malaysia490.090.0200.0200.0320.0320.0
Mexico 3,4785.065.0806.0930.070.01,000.01,125.075.01,200.0
Oman4342.0342.0360.0360.0305.0305.0
Peru35.040.075.0125.045.0170.0165.035.0200.0
Trinidad & Tobago48.0157.0205.041.0154.0195.033.0167.0200.0
Tunisia75.020.095.070.030.0100.060.060.0120.0
Subtotal2,152.0328.02,720.02,335.0834.03,172.02,444.01,160.03,607.0
Middle-income
Angola423.0142.0166.025.0150.0175.025.0200.0225.0
Bolivia442.042.050.050.060.060.0
Congo438.038.035.035.045.045.0
Egypt455.0175.0230.0135.0315.0450.0115.0415.0530.0
Syria4170.0175.0250.0250.0300.0300.0
Subtotal290.0355.0651.0460.0500.0960.0500.0660.01,160.0
Lower-income
Burma20.020.030.030.035.035.0
India165.0165.0205.020.0225.0195.0200.0395.0
Pakistan6.06.07.07.07.07.0
Zaïre42.02.050.050.050.050.0
Subtotal191.02.0193.0242.070.0312.0237.0250.0487.0
Total2,533.0685.03,560.03,037.01,404.04,444.03,181.02,070.05,254.0

Projected.

Estimated breakdown.

Includes condensate.

Net oil exporting country.

No breakdown available.

Denotes none.

Projected.

Estimated breakdown.

Includes condensate.

Net oil exporting country.

No breakdown available.

Denotes none.

Capital requirements

Meeting the energy requirements that accompanied relatively rapid economic growth in the past meant a considerable investment effort in domestic energy production in the non-OPEC developing countries. For 1974–80, although GDP growth is expected to be lower for the majority of countries than for 1968–73, the annual requirements of their energy industries are likely to increase by more than two thirds (see Table 3).

Table 3Non-OPEC developing countries: annual GDP and investments in the energy industries(Constant 1973 U.S. dollars, in millions)
1968–731974–80
Total GDPInvestmentTotal GDPInvestment
III
Higher-income1191,1652,440284,8503,7103,660
Oil1,3801,8201,880
Coal44020
Power9051,5001,500
Natural gas151350260
Middle-income63,477’1,15391,8031,7301,780
Oil337364420
Coal244033
Power7801,3001,300
Natural gas123026
Lower-income104,837613130,3991,2601,270
Oil143478500
Coal48150150
Power409600600
Natural gas133021
All countries359,4794,206507,0527,1007,100
Oil1,8602,6622,800
Coal76230203
Power2,0943,8003,800
Natural gas176410307

Included in the estimates of capital requirements of the higher-income countries are investments in refining capacity in four refining centers that accounted for over 35 per cent of the investments in refining in 1968–73. This distorts the industry share section to the extent that netting out the investments in four refining centers would show that the investments in the power sector were almost 30 per cent higher than the investments in the oil sector over the same period.

Included in the estimates of capital requirements of the higher-income countries are investments in refining capacity in four refining centers that accounted for over 35 per cent of the investments in refining in 1968–73. This distorts the industry share section to the extent that netting out the investments in four refining centers would show that the investments in the power sector were almost 30 per cent higher than the investments in the oil sector over the same period.

Overall, the projected increases in the total energy requirements of the non-OPEC developing countries together with a substantial drop in their dependence on imported oil and increases in energy exports, are likely to necessitate an average annual investment of a little under $7.0 billion (in 1973 dollars), excluding investments in exploration, geological and geophysical expenses, leases, rentals, port facilities, tankers, and marketing.

Investments in the power sector are expected to remain high, relative to other energy investments, as in the past. In the middle-income countries this sector is expected to account for nearly 70 per cent of total investments in energy, compared with 68 per cent from 1968–73. In the higher-income countries the share of power in total energy investments is likely to increase from 37 per cent to 40 per cent. By contrast, in lower-income countries, the share of the power sector is projected to decline from 67 per cent to 48 per cent. This is because these countries’ oil and coal industries are likely to demand annual capital investments of at least three times those from 1968–73.

Lower-income countries are likely to find it much harder than others to make the necessary energy investments. Their required investments in domestic energy production and transformation facilities between 1974 and 1980 would account for 1.3 per cent of their GDP, whereas their actual energy investments between 1968 and 1973 represented only 0.6 per cent of GDP. For the higher-income and middle-income countries, with relatively lower energy potential, no such rise is involved.

These amounts represent the minimum capital requirements to develop the technical energy potential of the non-OPEC developing countries in the next five years. These countries will need to continue operations geared to the supply of energy in the longer term, putting emphasis on exploring relatively newer areas, substituting equipment at the consumer end, and strengthening the development of available resources. Moreover, they will have to face the higher costs of imported oil whose supply could not be reduced in the medium term below current projections unless a further slowdown in economic growth were accepted.

However, should the minimum required amounts of capital not be met sufficiently or in time, the non-OPEC developing countries will have to face steeper reductions in economic growth or further reductions in use of energy per unit of product, which entail endangering their longer-term prospects for faster growth and industrialization.

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