OIL PRODUCTION INCREASINGLY CONCENTRATED-AGAIN

The oil market pendulum is swinging back from diversification of supply to more concentrated sourcing. Just 15 countries are expected to account for up to 84 percent of the net growth in global oil production capacity over the next ten years. This is a group of countries that CERA, borrowing from the G8, calls the ""O15""-the Oil 15. CERA's O15 includes, in order of absolute growth in capacity, Russia, Saudi Arabia, Canada, Iraq, Brazil, Kazakhstan, Iran, Kuwait, Algeria, Qatar, Libya, Nigeria, United Arab Emirates, Angola, and Azerbaijan.

Strong growth has already pushed the O15's share of global production capacity from 51 percent in 2002 to nearly 62 percent in 2007. This shift will become more pronounced after 2010. By 2017 the O15 will represent nearly 66 percent of global production capacity. Implications of this trend are noted below.

*O15 market perspectives. Recent years have witnessed a rise in explicit and implicit oil price expectations and objectives. Many countries have higher revenue goals because of growing population or development priorities, and all take note that the world economy has been experiencing strong growth with higher prices. Although an expectation for high oil prices-in the $50s and $60s per barrel, for example-does not automatically translate into such an outcome, these expectations do coincide with the shift toward the O15 in terms of growth.

*Supply risks. Many of the O15 countries face domestic or regional political and security uncertainties. Periodic bouts of political change or insecurity in or around O15 countries create potential for global supply growth to fall short of expectations. Anxiety about the reliability and adequacy of supplies will remain a feature of the oil market.

*Energy security initiatives. Energy security concerns in major oil importing markets are driven by a number of factors. The growing concentration of production capacity will be one of them. The drive to enhance energy security is a key motivator for increasing investment in oil substitutes, such as biofuels, and greater demand-side efficiency. The combined long-term impact of oil substitutes and improved efficiency could be offsets to this shift on the supply side.

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CERA Reports Online, a wholly owned subsidiary of IHS Energy, is a leading advisor to international energy companies, governments, financial institutions, and technology providers. CERA delivers critical knowledge and independent analysis on energy markets, geopolitics, industry trends, and strategy. CERA's expertise covers all major energy sectors--oil and refined products, natural gas, and electric power--on a global and regional basis.