Revision on OPEC and oil prices
What is OPEC?
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A producer cartel founded in 1960 – now has thirteen members although several other
countries are considering becoming members (and Indonesia’s place in under threat)
Controls around 45% of world crude oil output (compared to 55% in the mid 1970s) and
just over half of world oil exports
But has a larger share of world crude oil reserves (long run importance?)
Controls it’s own supply through a system of output quotas
Many of the OPEC nations have accumulated huge FX reserves as the world price of oil has
soared – contributing to the growing power of sovereign welfare funds
UK is a net importer of oil, along with Norway and the USA it is not part of OPEC
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•
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Current members of OPEC are:
Algeria
Iran
Angola
Iraq
Ecuador
Kuwait
Indonesia
Libya
Nigeria
Qatar
Saudi Arabia
United Arab
Emirates
Venezuela
OPEC's mission is to coordinate and unify the petroleum policies of Member Countries and ensure
the stabilization of oil markets in order to secure an efficient, economic and regular supply
of petroleum to consumers, a steady income to producers and a fair return on capital to
those investing in the petroleum industry.
These aims are worth focusing on
– in particular the aim of
providing a steady income to
producers and a fair return on
capital – what is a fair return?
This raises questions of equity.
OPEC's Oil Production and Share of World Total
60
60
55
55
50
50
45
45
40
40
35
35
30
30
25
25
80
80
Barrels/Day (millions)
70
60
70
World Output
60
50
40
50
40
OPEC Output
30
30
20
20
10
70
millions
Percent
Percentage share of world output (top pane), output (million barrels per day) bottom pane
10
72
74
76
78
OPEC's percentage
80
82
84
86
OPEC countries
88
90
92
94
96
98
00
02
04
06
Total World
Source: Reuters EcoWin
OPEC acts as a swing producer –
meaning that it can change
supply to bring about a change in
the balance between global oil
demand and supply. To have any
control over global prices it needs
to act together – as a producer
cartel – and, as with many other
examples of price fixing, there are
frequent tensions within the cartel
about how best to impact on the
market.
Too high a price risks accelerating research and investment from oil-importing nations to find
alternatives to oil (damaging in the long run for OPEC). But high prices in the short run gives
many of OPEC’s members much needed foreign exchange reserves which are needed to fund
infrastructure projects in their domestic economies.
Importance of the dollar
For the moment, OPEC continues to use the US dollar as its reference price for a barrel of crude.
Oil producing countries can of course convert dollars into any currency that they want, but when
the dollar is falling (as it has been recently) this has the effect of reducing the value of each barrel
of oil exported from OPEC countries. This can have a damaging effect on a country’s trade and
budget (fiscal) position especially if oil exports are a high percentage of total exports.
OPEC’s production relative to capacity
OPEC Crude Oil Production against Capacity
Million barrels per day, source: International Energy Agency
35
34
34
33
33
32
32
31
31
Barrels/Day (millions)
31.56M
OPEC Sustainable Production Capacity 34.73M
30
30
OPEC Production Capacity
29
29
28
28
27
27
26
26
25
The chart on the left shows OPEC’s
current production set against
estimates of their production capacity:
Capacity is influenced by:
1. Capital investment in by each of
the oil exporting countries e.g.
in drilling equipment and other
plant
2. Investment in finding new
reserves of oil that might be
economically viable
millions
35 Total OPEC Crude
25
OPEC Oil Production
Worth noting that OPEC has been
raising output in recent years – the
assertion that they have “cut supply to
increase oil prices” is simply wrong – as a whole OPEC is producing at around 90 per cent of its
capacity – think about what that might mean for the price elasticity of supply of crude oil from
OPEC producers?
24
24
Q1
Q3
02
Q1
Q3
03
Q1
Q3
04
Q1
Q3
05
Q1
Q3
06
Q1
Q3
07
Source: Reuters EcoWin
Although OPEC production has been increasing – so too has global demand for oil (especially
from the USA and emerging market countries) - and it is this will has been the main factor putting
upward pressure on crude oil prices. Oil is priced at over $100 a barrel and has been for some
time – but this is NOT due to a shortage of oil in world markets
Instead
•
90
85
85
80
80
75
75
70
70
65
65
60
60
55
55
50
50
millions
90
30.0
30.0
25.0
25.0
20.0
20.0
15.0
15.0
10.0
10.0
5.0
5.0
0.0
72
millions
•
Barrels/Day (millions)
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Shortages of oil refining capacity
has been a factor
Oil as a commodity has attracted
speculative buying as oil
consumers have bought forward
to hedge against price volatility
The price of crude carries a high
risk premium because of geopolitical tensions - situation in
Iraq and US-Iranian tensions
The falling value of the US dollar
has attracted speculative buyers
of oil because other currencies
can now buy more barrels of oil
as a result
Barrels/Day (millions)
•
World Oil Demand
Million barrels per day, source: International Energy Agency
0.0
74
76
78
Total Demand
80
82
84
China
86
88
90
Europe
92
94
96
98
00
02
04
06
08
North America
Source: Reuters EcoWin
Ultimately the world price of oil is determined mainly by demand rather than supply. As the swing
producer in the global oil market, OPEC can influence the direction of prices but fundamentally it
is all about how much oil we need and the price we are willing to pay.
OPEC cartel in profile (BBC)
Oil markets explained (BBC)