The Export Land Theory

Export Land Theory

Source: Adapted from an example displayed on Wikipedia.

The Export Land Theory underlines that because of growing internal consumption a larger share of the oil production goes towards satisfying the needs of the internal market and correspondingly a lesser quantity is available for exports. If this process takes place among the majority of oil exporting countries, then the availability of oil supplies on global markets would be strained and prices could spike. On the above figure a country is assumed to be producing 2 million barrels per day (mbd) and consuming 1 mbd, leaving 1 mbd to be exported. With the assumption that production is declining at the rate of 5% per year and that consumption is increasing at the rate of 2.5% per year, it would take about a decade for the country to see its oil exports drop to 0 (assuming that every surplus is exported). However, several nuances must be brought forward:

  • Production. Assuming a continuous and linear decline of production is unrealistic because as production declines, prices and efforts made at finding new reserves would accelerate. This would mitigate the production decline process over a longer period of time. Additionally, global business cycles have an impact on production.
  • Consumption. The assumption that consumption (demand) steadily increases is also invalid. For a variety of reasons, namely business cycles (growth and recession), technological innovation (more efficient use), substitution (usage of other sources of energy) or even demographics (population stabilization and decline), demand could easily remain constant, increase at a much lower rate, or even decline. For instance, many oil exporting countries are subsidizing fuel prices for their populations, which leads to waste and over consumption. If with a decline in revenue generating exports, an oil-exporting country decides to remove some of these subsidies and let the national population pay market prices, it can then be expected that national consumption could level and even decline.
  • Exports. Because of the variations noted on production and consumption, exports are likely not to decline in a linear fashion and may actually increase if national consumption declines.

Still, the fundamentals of this perspective remain valid on the long run.