oversight

International Energy Agency: How the Agency Prepares Its World Oil Market Statistics

Published by the Government Accountability Office on 1999-05-07.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  the Budget, United States Senate



May 1999
                  INTERNATIONAL
                  ENERGY AGENCY

                  How the Agency
                  Prepares Its World Oil
                  Market Statistics




GAO/RCED-99-142
      United States
GAO   General Accounting Office
      Washington, D.C. 20548                                                                                  Leter




      Resources, Community, and
      Economic Development Division

      B-282384                                                                                        Letter

      May 7, 1999

      The Honorable Pete V. Domenici
      Chairman, Committee on the Budget
      United States Senate

      Dear Mr. Chairman:

      Oil companies, investment firms, governments, and other participants in
      the world oil market need timely and accurate information on world oil
      supply, demand, and stocks to make decisions about current and future
      sales and purchases of oil.1 The International Energy Agency (IEA),
      among other sources, provides such information to participants in the
      world oil market.

      IEA is an organization of 24 industrialized member nations that was
      established in the wake of the 1973-74 Arab oil embargo.2 Based in Paris,
      IEA is an autonomous organization within the framework of the
      Organization for Economic Cooperation and Development (OECD).3 In
      addition to other functions, IEA develops detailed statistics on world oil
      supply, demand, and stocks that it publishes in its monthly Oil Market
      Report. The objective of the report is to show historical statistics for the
      preceding 4 years and up to 18 months of projections.4 In general, when
      the historical statistics show a difference between the quantity of oil
      supplied and the quantity demanded, that is, an excess of supply over
      demand, or vice versa, such a difference is expected to be reflected in a
      change in oil stocks. Differences between the historical world oil supply




      1
        The International Energy Agency uses the term “stocks” to refer to oil in inventory. Accordingly,
      unless otherwise stated, we will use stocks in this report to refer to oil in inventory.
      2
        The 24 member countries of IEA are Australia, Austria, Belgium, Canada, Denmark, Finland, France,
      Germany, Greece, Hungary, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway,
      Portugal, Spain, Sweden, Switzerland, Turkey, the United Kingdom, and the United States.

      3 OECD is an international organization that monitors economic trends in the free market economies of
      its 29 members. Its member-countries include the 24 IEA member nations and the Czech Republic,
      Iceland, South Korea, Mexico, and Poland.

      4
          IEA’s oil market projections are prepared every summer and revised monthly.




      Page 1                                            GAO/RCED-99-142 International Energy Agency
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                   and demand statistics that are not accounted for by changes in OECD oil
                   stocks can be generally referred to as “missing barrels.” 5

                   In its April 1998 issue of the Oil Market Report, IEA reported that
                   differences existed between its world oil supply and demand statistics that
                   could not be accounted for by changes in stocks, implying that some oil
                   was missing. Concerned about the overall quality of IEA’s world oil market
                   statistics and the importance of such information to the world oil market,
                   you asked us to review how IEA prepares its world oil market statistics and
                   to examine the issue of the missing barrels. Specifically, as agreed with
                   your office, this report responds to the following questions: (1) How does
                   IEA prepare its historical and projected world oil market statistics? and (2)
                   What accounted for the missing barrels in IEA’s historical world oil market
                   statistics in 1998?



Results in Brief   IEA uses a “bottom-up” approach to prepare its historical and projected oil
                   market statistics. Under this approach, IEA constructs historical and
                   projected oil market statistics for individual countries and adds them
                   together to develop world totals. For its historical statistics, IEA uses
                   questionnaires and information from various other sources--such as
                   national governments, international organizations, and oil companies--to
                   obtain the data. According to oil market experts we spoke with, IEA’s
                   historical statistics are the best available data on world oil supply, demand,
                   and stocks.6 For its projected statistics, IEA uses its own analysis and
                   judgments based on a number of factors that influence world oil supply and
                   demand. These factors include, for example, for supply, changes in oil
                   production rates for 400 oil fields and, for demand, changes in the structure
                   of the economy and energy demand of each country. IEA keeps the price of
                   oil constant throughout the projection period because the agency has a
                   policy of not forecasting oil price.



                   5 IEA refers to these imbalances as “miscellaneous to balance” in its Oil Market Report but indicated
                   that they can be referred to as missing barrels. More specifically, IEA refers to the imbalances as
                   missing barrels if non-OECD oil stocks are assumed to be zero and there is no change in the amount of
                   oil in “floating storage”/transit (see the report section on IEA’s Historical Oil Statistics for more
                   discussion on oil in floating storage/transit).

                   6
                     Oil market experts and officials we contacted preferred not to be identified individually. Accordingly,
                   throughout the report, we have maintained their anonymity and, for the most part, presented aggregate
                   views collectively expressed by these experts and officials. App. I shows a full listing of the companies,
                   agencies, and organizations we contacted.




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                                  Missing barrels are accounted for by two factors: (1) limitations in the
                                  statistics on oil supply, demand, and stocks reported to IEA, such as
                                  preliminary data that are subject to future revision; and (2) actual oil held
                                  in stocks but not reported as part of IEA’s official oil stock statistics.
                                  Although highlighted by IEA in April 1998, missing barrels are not new,
                                  having occurred in 24 of the last 26 years. In 1998, IEA estimated world oil
                                  supply at 75.3 million barrels per day, world oil demand at 73.7 million
                                  barrels per day, and increases in OECD oil stocks at 0.4 million barrels per
                                  day. The remaining 1.2 million barrels per day (or 438 million barrels for
                                  the year) are the estimated missing barrels for 1998, and represent about
                                  1.6 percent of the approximately 75 million barrels traded in the world oil
                                  market every day.



IEA Uses a Bottom-Up              IEA prepares its historical and projected oil market statistics using a
                                  bottom-up approach that relies on statistics for each country. These
Approach to Prepare               statistics are developed through questionnaires and other information
Its Historical and                sources, depending on the country.
Projected Oil Market
Statistics

IEA’s Historical Oil Statistics   In developing its historical oil statistics, as illustrated in figure 1, IEA relies
                                  on its access to data through questionnaires from all OECD countries and
                                  augments this information with data from oil companies, consulting
                                  groups, and other sources. Because IEA does not have the same access to
                                  data through questionnaires from non-OECD countries, it relies on a wide
                                  variety of sources for information, according to IEA officials.




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Figure 1: IEA’s Framework for Developing Its Historical World Oil Market Statistics

           OECD


    •Monthly questionnaire
    •Variety of other sources
    to supplement                             IEA
                                                    Judgement/
                                                    estimation
                                                    added
         Non-OECD

     •Variety of sources, such as,
     governments, international
     organizations, etc.
Source: Information from IEA.


In developing their historical statistics on oil supply, IEA officials said that
they obtain the data directly from the OECD member governments, oil
companies, and consulting groups. IEA then checks these detailed
country-level data against totals for similar, more aggregated data that are
reported separately through its monthly oil statistics questionnaire. This
questionnaire, sent to all 29 OECD countries, asks for official information
on oil supply (production), demand, and stocks. To complete the statistics
on world oil supply, IEA obtains data for non-OECD countries through
governments, international organizations (such as the United Nations and
the World Bank), oil companies, and the oil industry trade press.

IEA officials said they use a similar approach in developing their historical
statistics on world oil demand and stocks. That is, they use a questionnaire
to develop information on oil demand and stock levels for each OECD
country, while they rely on a variety of sources to develop the demand data
for non-OECD countries. IEA officials said that IEA does not collect
statistics on oil stocks in the non-OECD countries.

IEA’s statistics include oil that is in “floating storage” (that is, being held in
marine tankers used for temporary storage) and oil in transit at sea by
obtaining estimates of oil in these sources from firms that monitor oil
tanker traffic. This oil may be from OECD and/or non-OECD countries.
However, IEA officials said that because the statistics on oil in floating



Page 4                                  GAO/RCED-99-142 International Energy Agency
                                     B-282384




                                     storage and in transit at sea are estimates, they might not necessarily
                                     represent the actual amounts of oil in these situations.

Historical Statistics Are the Best   Many of the oil market officials and experts we talked to said that IEA’s
Available but Have Some              historical oil market statistics are the best available because the agency’s
Limitations                          unique direct access to the national governments allows it to collect
                                     comprehensive data. They also said IEA’s long history and familiarity with
                                     data from these governments and other entities allow it to make better
                                     judgments about the reasonableness of the data being provided and thus
                                     follow up on apparent inconsistencies. IEA officials told us that the
                                     statistics from the OECD countries are generally of better quality and more
                                     reliable than those from the non-OECD countries. Nonetheless, IEA
                                     officials pointed out certain limitations regarding the historical statistics on
                                     supply, demand, and stocks for both OECD and non-OECD countries.
                                     These limitations can introduce errors into the data, although the
                                     magnitude and direction of these errors are not clear.

                                     For historical supply statistics, IEA officials said that some of the numbers
                                     reported to them are preliminary and, as such, are subject to revision. They
                                     also stated that they use their judgment to estimate and fill in data not
                                     available from various sources, or reconcile data collected from multiple
                                     sources. In addition, they mentioned that significant time lags exist in
                                     some of the reported data. For example, data reported to IEA for its
                                     December 1998 issue of the Oil Market Report could have lags of up to 12
                                     months for some non-OECD countries. That is, some producing countries
                                     would report data as of December 1997. In these cases, IEA officials said
                                     that they use estimated statistics to fill in the months of 1998, until data
                                     become available later from the usual sources. 7 Such estimates, to the
                                     extent that they remain estimates, may overstate or understate oil supply
                                     for the applicable months.

                                     In the case of historical demand statistics, IEA officials told us that they
                                     also use judgments and/or estimations to fill in missing data and reconcile
                                     data collected from multiple sources. In addition, some of the non-OECD
                                     countries report their demand data in quarterly and annual averages. In
                                     these cases, IEA breaks the data into monthly averages using its judgment
                                     and analysis of prior years’ monthly patterns or patterns in neighboring


                                     7
                                       This is different from missing data. While lagged data may later be reported to IEA, allowing it to
                                     replace the estimated ones in a future issue of the report, missing data are not likely to become
                                     available from the sources that IEA relies on.




                                     Page 5                                            GAO/RCED-99-142 International Energy Agency
                                 B-282384




                                 countries, which may not necessarily represent the actual monthly
                                 numbers. The officials also pointed out that monthly oil demand data are
                                 not available for the Former Soviet Union and China, two countries that
                                 account for about one-third of the non-OECD oil demand. IEA officials
                                 said that they use “apparent demand,” defined as oil production minus net
                                 oil exports, as a surrogate for these two countries’ demand. However, such
                                 apparent demand estimates are only approximations because, as IEA
                                 officials pointed out to us, export data from non-OECD countries, including
                                 China and the Former Soviet Union, are not reliable.

                                 For the statistics on oil stocks, IEA officials noted that they do not collect
                                 data for non-OECD countries and that the statistics on stocks of OECD
                                 countries include only primary stocks, such as those held in refineries, oil
                                 terminals, and pipelines. These OECD oil stocks do not account for oil held
                                 in relatively small storage facilities (known as independent storage) in
                                 various OECD locations. According to IEA, these independent storage
                                 stocks can add up to a large quantity of oil. Finally, reported OECD stock
                                 data are often preliminary and subject to revision.


IEA’s Projected Oil Statistics   IEA prepares its oil supply and demand projections on the basis of its own
Are Based on Its Own             analysis and judgments; IEA officials do not consider them as forecasts.8
                                 The supply projections are based on IEA’s analysis of 400 individual oil
Analysis and Judgments
                                 fields and areas in the 77 oil-producing countries. Members of the
                                 Organization of Petroleum Exporting Countries (OPEC) are not included in
                                 this projection because IEA would, in effect, be indicating the potential
                                 direction of world oil price by predicting OPEC supply. (See below for how
                                 IEA treats OPEC supply.) According to IEA officials, to derive the supply
                                 projections, their analysis includes judgments about such factors as the
                                 rate at which oil production from each field will increase or decline, the
                                 length of time for a field’s production to peak and stabilize, field
                                 maintenance, and start-up dates for new fields. In developing its supply
                                 projections, IEA’s analysis also considers the operating capacity of oil
                                 exploration and production support and service industries such as drillers
                                 and equipment and service contractors. In addition, IEA considers other
                                 oil production-related information obtained from oil field operators,
                                 producer-country governments, consultancies, and the oil industry trade

                                 8
                                   According to IEA, a forecast would entail predicting OPEC supply and crude oil and petroleum
                                 product prices, and their effects on demand and non-OPEC supply. OPEC was created in 1960; its
                                 current members include Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
                                 United Arab Emirates, and Venezuela.




                                 Page 6                                            GAO/RCED-99-142 International Energy Agency
                        B-282384




                        press. IEA officials told us that they assume that the price of oil remains
                        constant throughout the projection period because IEA has a policy of not
                        forecasting the price of oil. Furthermore, the officials said that they do not
                        make adjustments for contingent factors, such as potential weather-related
                        events or other random disruptions, like equipment failures and
                        disruptions in oilfields located in politically unstable areas.

                        To prepare its projected statistics of world oil demand, IEA officials told us
                        that they consider historical data on oil demand and economic growth rates
                        for each country in the world as a backdrop for their judgments and
                        assumptions. They then consider, for each country, such factors as the
                        changes in the share of each fuel used relative to the aggregate energy used
                        as well as changes in the structure of the economy. As in the case of
                        supply, the demand projections assume normal weather conditions and
                        constant oil price throughout the projection period.

                        In its analyses, IEA’s projected world oil demand exceeds the projected
                        supply from the 77 non-OPEC countries. IEA assumes that OPEC supply
                        and stock change will make up the difference.



Missing Barrels Are     IEA and most of the oil industry officials and market experts we contacted
                        told us that the missing barrels in IEA’s oil market statistics are due to both
Due to Limitations in   limitations in the historical oil market data and the data on actual oil held
Statistics and          in stocks that are not part of the statistics on oil stocks covered by IEA.
                        Furthermore, they could not quantify how much of the missing barrels are
Unreported Oil Stocks   due to statistical limitations and how much are the result of physical oil
                        storage in unreported stocks. Moreover, missing barrels are not a new
                        condition, and the amount and direction of the missing barrels have
                        fluctuated over time. As discussed earlier, although the historical oil
                        statistics published by IEA are considered by oil market experts to be the
                        best available, they have limitations that can introduce errors.

                        Such limitations suggest that, at any point in time, the historical oil supply
                        and demand as well as the stock data reported by IEA could be overstated
                        or understated by an unknown magnitude. In fact, IEA officials told us that
                        they continuously revise their historical statistics over time, as new
                        information becomes available. This means that the reported amount of
                        missing barrels at any point in time could later change and become smaller
                        or larger, positive or negative.




                        Page 7                                GAO/RCED-99-142 International Energy Agency
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                            IEA and most oil industry and market officials we contacted told us that
                            part of the missing barrels in 1998 could be oil physically held in stocks that
                            are not counted by IEA statistics. IEA’s statistics on oil stocks do not
                            account for non-OECD stocks. IEA and several oil market experts that we
                            contacted told us that some of the missing barrels could be in storage tanks
                            located in non-OECD countries. They also said that some of the oil could
                            be in some independent storage tanks in OECD countries that are not
                            reported in the official statistics on oil stocks submitted to IEA, or in the
                            previously mentioned “floating storage” and oil in transit at sea. According
                            to several experts we talked to, oil might be stored because the price of oil
                            during 1998 was, more often than not, higher in the future months than in
                            the near-term months. This provided an incentive for increased oil storage
                            for future sale.


Number of Barrels Missing   According to the historical statistics in the February 1999 issue of IEA’s Oil
in 1998                     Market Report, an average of 1.2 million barrels per day , or a total of 438
                            million barrels of oil for the year, were regarded as missing in 1998.

                            Table 1 shows IEA’s statistics on world oil supply, demand, OECD oil stock
                            change, and floating storage/oil in transit in 1998. For example, average
                            world oil supply for 1998 was 75.3 million barrels per day, while world oil
                            demand was 73.7 million barrels per day. Thus, world supply exceeded
                            world demand by 1.6 million barrels per day. This implies that world oil
                            stock should have increased by that much. However, the stock data
                            reported to IEA by OECD countries showed that stocks increased by only
                            0.4 million barrels per day, and the amount of oil in floating storage/in
                            transit did not change. Therefore, an average 1.2 million barrels of oil per
                            day were unaccounted for, or missing, in 1998.




                            Page 8                                GAO/RCED-99-142 International Energy Agency
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Table 1: Missing Barrels in 1998 (Millions of barrels per day)

                               1st Quarter 98             2nd Quarter 98             3rd Quarter 98           4th Quarter 98              Average 98


Supply                                   76.5                          75.6                      74.1                     74.9                  75.3
Demand                                   74.5                          72.1                      73.2                     74.8                  73.7
Supply exceeds
demand                                     1.9                          3.4                       0.9                       0.1                  1.6
OECD Oil Stock
change                                    -0.1                          1.7                       0.4                      -0.5                  0.4
Floating Storage/Oil in
Transit                                    0.2                          0.1                       0.0                      -0.1                  0.0
Missing barrels                            1.9                          1.7                       0.5                       0.6                  1.2
                                            Note: Numbers may not total because of rounding.
                                            Source: IEA data from table 1, World Oil Supply and Demand, Oil Market Report, Feb. 9, 1999.


                                            As the table shows, a larger portion of the missing barrels in 1998 occurred
                                            during the first half of the year, with about 1.9 million barrels per day in the
                                            first quarter and 1.7 million barrels per day in the second quarter. These
                                            levels decreased considerably by the third and fourth quarters, with
                                            missing barrels dropping to 0.5 million barrels per day and 0.6 million
                                            barrels per day, respectively.

                                            An average of 1.2 million barrels per day (or 438 million barrels of oil for
                                            the year) that were missing in 1998 represent about 1.6 percent of the 75
                                            million barrels per day traded in the world oil market.9 Thus, about a 0.8
                                            percent error in the historical statistics for both oil supply and demand
                                            could account for the entire year’s missing barrels.


Missing Barrels Are Not                     Differences between IEA’s historical world oil supply and demand
New                                         statistics, which are not reflected in changes in oil stocks, are not new and
                                            have been larger and smaller in the past. Using IEA’s data from 1973 to
                                            1998, figure 2 shows missing barrels have occurred in 24 of the last 26
                                            years, in varying magnitudes and directions. For example, the number of
                                            missing barrels was higher than the 1998 level in 1973, 1974, and 1976,
                                            averaging about 1.6 million barrels per day in 1974 and 1.3 million barrels
                                            per day each in 1973 and 1976. On the other hand, the number was lower


                                            9
                                                The 75 million barrels per day of oil is the average of the supply and demand for 1998.




                                            Page 9                                              GAO/RCED-99-142 International Energy Agency
                      B-282384




                      for all the other years shown, with no missing barrels in 1978 and 1984.
                      Similarly, 14 of the 26 years had positive missing barrels, while 10 other
                      years had negative missing barrels. Positive missing barrels implies that oil
                      supply exceeded demand but was not reflected in stock increases, while
                      negative missing barrels implies that oil demand exceeded supply but was
                      not reflected in the amount of oil drawn from stocks.



                      Figure 2: Missing Barrels, 1973-98




                      Source: IEA.




Agency Comments and   We provided a draft of this report to IEA for review and comment. We
                      discussed the report with IEA officials, including the Head, Oil Industry and
Our Evaluation        Markets Division, which prepares the Oil Market Report, and the Head,
                      Statistics Division. IEA agreed with the report and provided clarifying
                      comments that we incorporated, where appropriate.




                      Page 10                              GAO/RCED-99-142 International Energy Agency
              B-282384




Scope and     To determine how IEA prepares its statistics on world oil supply, demand,
              and stocks, we interviewed IEA officials and reviewed relevant documents
Methodology   from the agency. We also interviewed other oil industry and market
              officials to gain an understanding of their familiarity with how IEA
              prepares its world oil market statistics. Appendix I lists all the companies,
              agencies, and organizations we contacted.

              To determine what accounted for the missing barrels in IEA’s world oil
              market statistics in 1998, we interviewed IEA and other oil industry and
              market officials. We also reviewed relevant documents from IEA and other
              sources and analyzed oil market statistics from IEA and others.

              We conducted our review from November 1998 through April 1999 in
              accordance with generally accepted government auditing standards.


              As arranged with your office, unless you publicly announce its contents
              earlier, we plan no further distribution of this report until 30 days after the
              date of this letter. At that time, we will send copies to Senator Frank
              Murkowski, Chairman, and Senator Jeff Bingaman, Ranking Minority
              Member, Senate Committee on Energy and Natural Resources; Senator Don
              Nickles, Chairman, and Senator Bob Graham Ranking Minority Member,
              Subcommittee on Energy Research, Development, Project, and Regulation,
              Senate Committee on Energy and Natural Resources; Representative Joe
              Barton, Chairman, and Representative Ralph M. Hall, Ranking Minority
              Member, Subcommittee on Energy and Power, House Committee on
              Commerce; and Representative Ken Calvert, Chairman, and Representative
              Jerry F. Costello, Ranking Minority Member, Subcommittee on Energy and
              Environment, House Committee on Science. We will also send a copy of
              this report to Mr. Robert Priddle, Executive Director of the International
              Energy Agency. We will also make copies available to others on request.




              Page 11                               GAO/RCED-99-142 International Energy Agency
B-282384




Please call me at (202) 512-3841 if you have any questions about this report.
Major contributors to this report were Daniel Haas, Godwin Agbara, and
Michael Sagalow.

Sincerely yours,




Susan D. Kladiva
Associate Director, Energy,
 Resources, and Science Issues




Page 12                              GAO/RCED-99-142 International Energy Agency
Page 13   GAO/RCED-99-142 International Energy Agency
Appendix I

Companies, Agencies, and Organizations
Contacted by GAO                                                                                    AppenIx
                                                                                                          di




Integrated Oil           British Petroleum/Amoco
                         Mobil Oil Corporation
Companies                Texaco Inc.



Federal and              U.S. Department of Energy
                         International Energy Agency
International Agencies

Consultants/Industry     BT Alex Brown Incorporated
                         Center for Global Energy Studies
Analysts                 Merrill Lynch & Company
                         PIRA Energy Group
                         Smith Barney, Inc.
                         Simmons and Company International



Associations             American Petroleum Institute
                         Independent Petroleum Association of America



Oil Industry Trade       Energy Intelligence Group

Press




(141295)       Letrt     Page 14                          GAO/RCED-99-142 International Energy Agency
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