GEOCASES: Access to Geographical Cases Studies for A Level logo

The Global Oil Situation

- Page 1 -

Oil is vital to the functioning of the global economy. The ‘energy crises’ of the 1970s and early 1980s were a result of very significant increases in the price of oil. The current price is at more than a 20-year high and it could have much further to go. If the price continues to rise, it could have a considerable impact on the global economy. A number of organisations have made predictions as to when peak global oil production will be reached. However, these forecasts vary widely.

Access to Geography logo

Access to Geography Related Title

Access to Geography
related titles

small globe iconRecent price rises

The price of oil has risen from $10 (£5.75) a barrel in 1998 to more than $65 (£37.30) a barrel in late 2005. In October 2005, prices in some petrol stations in the UK reached £1 a litre. In just one day in October 2005, a week’s worth of fuel was sold when people feared a disruption to the supply because of possible fuel protests, such as blocking oil refineries and motorways. Memories of the fuel protests of September 2000 flooded back, when large-scale protests had a major impact on the country. Fortunately for consumers, the recent fuel protests were extremely muted compared to five years earlier and supplies of petrol were not interrupted.

The UK Treasury commented that all leading economies were being affected by high oil prices, predicting that:

  • If oil prices stayed at $65 (£37.30) a barrel, the UK economy would grow by 2 per cent a year.
  • However, an increase to $100 (£57.50) a barrel would see growth fall to 1.5 per cent.

The price of oil affects the cost of almost all other products and activities. The previous three global economic recessions were all strongly linked to a substantial increase in oil prices. Up to late 2005, the global economy had managed to ride out the price rises but some economists doubted that this could continue. Previous sharp and significant increases in the price of oil have been mainly the result of supply shocks (the OPEC oil embargo in 1973–74, the Iranian revolution in 1979 or Iraq’s invasion of Kuwait in 1990). The current high price situation is due mainly to rising demand. This means that prices are more likely to remain high although the level may fall back to a certain extent. Experts at Goldman Sachs predict oil prices to average out at $68 (£39) a barrel in 2006 and $60 (£34.50) for the next five years.

The main reasons for the recent rapid rise in the price of oil are:

  • The significant increase in the demand for oil – the rises in both world GDP and world oil consumption in 2004 were the largest for almost 30 years. Very high growth in demand in China, India, the USA and some other economies was impacting heavily on the rest of the world. Many emerging economies such as India and China subsidise oil, which encourages consumption.
  • Insufficient investment in exploration and development over the last two decades. The low oil prices for most of this period did not provide enough incentive for investment for the major global energy companies.
  • Problems in the Middle East centred on Iraq. Exports of oil from Iraq are well below potential because of terrorist attacks and the slow pace of reconstruction after the war.
  • Major buyers, particularly governments, stocking up on oil to guard against disruptions to supply.
  • The impact of Hurricane Katrina and other hurricanes on US oil production. In the Gulf of Mexico, 711 out of 819 oil platforms and gas towers were temporarily shut down as personnel were evacuated in the wake of Katrina. During this hurricane period, oil extraction in the Gulf dropped by 91.7 per cent. The Gulf supplies about 35 per cent of US domestic output. In September 2004, Hurricane Ivan reduced US oil output by 45 million barrels over six months.
  • Limited US refining capacity due to inadequate investment in recent decades. US refineries are ageing and thus require more maintenance. This, in turn, reduces capacity.
  • A lack of spare oil production capacity. In the past, Saudi Arabia has maintained a significant amount of spare capacity (wells it was not pumping oil from) to prevent global supply problems when supplies were interrupted in other producing countries. This spare capacity has declined to a 20-year low because of investment failing to keep pace with rising demand.

The Oil Depletion Analysis Centre based in London recently predicted that supplies of oil would be tight for the rest of this decade, even if all the major new exploration and drilling projects underway meet their targets. It takes several years to get new projects on stream. The International Energy Agency estimates the world will need to spend $3 trillion (£1.7 trillion) over the next 25 years to meet the predicted demand.

small globe iconGlobal patterns and trends

Figure 2 shows the change in daily oil consumption by world region from 1979 to 2004. The data shown here, and in the following four illustrations, is from the BP Statistical Review of World Energy from June 2005. After a fall in demand in the early 1980s to under 60 million barrels a day, global demand rose steeply to over 80 million barrels a day in 2004. The graph shows that the largest increase has been in the Asia Pacific region, which now accounts for 28.9 per cent of consumption. Only North America has a higher global share at 29.8 per cent. Of the latter, the USA accounts for 24.9 per cent. In contrast, Africa consumed only 3.3 per cent of global oil, behind South and Central America with 5.9 per cent.

The pattern of regional production is markedly different from that of consumption (see Figure 3).

In 2004, the Middle East accounted for 30.7 per cent of production, followed by Europe and Eurasia (22 per cent), North America (17.3 per cent) and Africa (11.4 per cent). Within the Middle East, Saudi Arabia dominates production, alone accounting for 13.1 per cent of the world’s total. Saudi Arabia is followed in order of importance by Iran, UAE, Kuwait and Iraq. The Russian Federation accounts for over half the total production of Europe and Eurasia.

Figure 4 illustrates the spatial distribution of proved oil reserves and the dominating position of the Middle East. In the period 1984–2004, proved reserves rose considerably but much more so in the earlier part of the period than in the latter part. The problem is that demand is increasing at a faster rate than proved reserves. In 2004, the Middle East accounted for almost 62 per cent of global proved reserves. The main countries contributing to the latter figure are: Saudi Arabia (22.1 per cent); Iran (11.1 per cent); Iraq (9.7 per cent); Kuwait (8.3 per cent); and United Arab Emirates (8.2 per cent). Europe and Eurasia held the second largest proved reserves with 11.7 per cent of the world’s total. The Russian Federation accounted for over half the latter figure.

Figure 5 shows the reserves-to-production ratio for the world from 1980 to 2004 and the situation for 2004 by world region. While the reserves-to-production ratio is 81.6 years in the Middle East, it is only 14.2 years in Asia Pacific and 11.8 years in North America. Not all organisations agree with these figures, a situation that will be discussed later in this case study.

Figure 6. Imports and exports of oil in 2004.

Figure 6 shows recent data for the import and export of oil by world region. Europe, the USA, China and Japan are the major importers while exports are led by the Middle East, the former Soviet Union and West Africa.

Economic development affects the relationship between GDP and oil usage. MEDCs use half as much oil per real dollar of GDP, as in the mid-1970s, due to:

  • Improved energy efficiency
  • A switch to other sources of energy
  • A shift from manufacturing to services.

Many of the fastest growing economies today are relatively inefficient users of oil. To produce one dollar of GDP, developing countries use more than twice as much oil as developed countries.

The US government’s Energy Information Agency predicts that the demand for oil will rise by 54 per cent in the first quarter of the twenty-first century. This amounts to an extra 44 million barrels of oil each day by 2025. Much of this extra demand will emanate from Asia. All estimates indicate that the Persian Gulf’s share of the oil trade will rise steadily over the next two decades and, along with it, the risk of terrorist attack and embargo by the key producing countries.






















Figure 1. Texaco marine petrol station on the river Amazon.
Figure 1.
Texaco marine petrol station on the river Amazon.
Click here to enlarge.


Figure 2. Oil consumption by area.
Figure 2.
Oil consumption by area.
Click here to enlarge.


Figure 2. Oil production by area.
Figure 3.
Oil production by area.
Click here to enlarge.


Figure 4. Distribution of oil reserves in 1984, 1994 and 2004.
Figure 4.
Distribution of proved oil reserves in 1984, 1994 and 2004.
Click here to enlarge.


Figure 5. The ratios of reserves-to-production.
Figure 5.
The ratios of reserves-to-production.
Click here to enlarge.



Global development: The fight against povertyThe energy situation in BritainLondon: Contrasts in the quality of life between the inner city and the suburbsMortality: Global patterns and trends Population in India Urban Regeneration: The London Olympics 2012 Resource Management: Fishing in the EU The Global Oil Situation Rural Settlement in the Isle of Purbeck Global Fertility Decline Home Members' Home Page Case Studies Home Page Physical Geography Human Geography Download & Print This Case Study Glossary Synoptic Links Specification Linkup Exam Questions Mark Scheme Supporting Exercises Further References The UK and the Global Car Industry Reading: Urban Planning And Development Access to Geography To Re-purchase Contact Us FAQs