Energy Intelligence Unit Releases Report On OPEC - A world view and its role in 21st Century

OPEC's ‘Policy Statement' states that there is a right of all countries to exercise sovereignty over their natural resources.

01 APRIL 2014, DUBIA, UNITED ARAB EMIRATES
Summary
Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its current configuration, and thus is a critical concern for many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, to a high of 53% for the Middle East. Other geographic regions’ consumption patterns are - South and Central America (44%), Africa (41%), and North America (40%). The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations being the largest consumers. In the 1960s and 1970s, multi-governmental organizations of oil–producing nations OPEC and OAPEC played a major role in setting petroleum prices and policy. Oil spills and their cleanup have become an issue of increasing political, environmental, and economic importance.

Introduction

Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization in its current configuration, and thus is a critical concern for many nations.

Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, to a high of 53% for the Middle East. Other geographic regions’ consumption patterns are - South and Central America (44%), Africa (41%), and North America (40%). The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations being the largest consumers.

After World War II ended, the countries of the Middle East took the lead in oil production from the United States. Important developments since World War II include deep-water drilling, the introduction of the Drillship, and the growth of a global shipping network for petroleum relying upon oil tankers and pipelines.

To develop petroleum industry successfully and gainfully, Governments such as the United States government provide a heavy public subsidy to petroleum companies, with major tax breaks at virtually every stage of oil exploration and extraction, including the costs of oil field leases and drilling equipment.

National Oil Companies (NOC, as opposed to IOC, International Oil Companies) have come to control the rights over the largest oil reserves; by this measure the top ten companies all are NOC. The production, distribution, refining, and retailing of petroleum taken as a whole represents the world's largest industry in terms of dollar value.

In the 1960s and 1970s, multi-governmental organizations of oil–producing nations OPEC and OAPEC played a major role in setting petroleum prices and policy. Oil spills and their cleanup have become an issue of increasing political, environmental, and economic importance.

OPEC and Its History

OPEC has twelve member countries: six in the Middle East, four in Africa, and two in South America. OPEC's twelve Members collectively supply about 41 per cent of the world's oil output, and possess more than three-quarters of the world's total proven crude oil reserves. According to US government, in 2011 OPEC will break above the $1 trillion mark earnings for the first time at $1.034 trillion and it is beating the $965 billion peak set in 2008.

Organization of Petroleum Exporting Countries (OPEC) was created in response to the 1959 imposition of import quotas on crude oil and refined products by the United States. In 1959, the U.S. government established the Mandatory Oil Import Quota program (MOIP), which restricted the amount of imported crude oil and refined products allowed into the United States and gave preferential treatment to oil imports from Canada, Mexico, and, somewhat later, Venezuela.

This partial exclusion of Persian Gulf oil from the U.S. market depressed prices for Middle Eastern oil; as a result, oil prices “posted” (paid to the selling nations) were reduced in February 1959 and August 1960. It was also time when international oil market was largely separate from centrally planned economies, and was dominated by multinational companies.

OPEC was founded to unify and coordinate members' petroleum policies. Venezuela and Iran were the first countries to move towards the establishment of OPEC in the 1960s by approaching Iraq. OPEC is an intergovernmental organization that was created at the Baghdad Conference in 10–14 September 1960, at the initiative of the Venezuelan Energy and Mines minister Juan Pablo Pérez Alfonso and the Saudi Arabian Energy and Mines minister Abdullah al-Tariki, the governments of Iraq, Iran, and Kuwait also joined the efforts.

OPEC's ‘Policy Statement' states that there is a right of all countries to exercise sovereignty over their natural resources. Because OPEC is an organisation of countries (not oil companies), individual members have sovereign immunity for their actions, meaning that OPEC is not regarded as being subject to competition law in the normal way.

In the 1970s, OPEC began to gain influence and steeply raised oil prices during the 1973 oil crisis in response to US aid to Israel during the Yom Kippur War. It lasted until March 1974. OPEC added to its goals the selling of oil for socio-economic growth of the poorer member nations. In 1973, OPEC was joined by nine more governments: Libya, Unite Arab Emirates, Qatar, Indonesia, Algeria, Nigeria, Ecuador, Angola, and Gabon. OPEC was headquartered in Geneva, Switzerland before moving to Vienna, Austria, on September1,1965. Ecuador withdrew at the end of 1992, and Gabon withdrew in 1994.

In response to the high oil prices of the 1970s, industrial nations took step to reduce dependence on oil. Utilities switched to using coal, natural gas, or nuclear power while national governments initiated multi-billion dollar research programs to develop alternatives to oil.

In the 1980s, the price of oil was allowed to rise before the adverse effects of higher prices caused demand and price to fall. The OPEC nations, which depended on revenue from oil sales, experienced severe economic hardship from the lower demand for oil and consequently cut production in order to boost the price of oil.

During this time, environmental issues began to emerge on the international energy agenda. To deal with the growing surplus of oil in the marketplace, OPEC adopted in March 1983 a formal system of production allocations that imposed—for the first time—individual ceilings on the output of each member.

In the 2000s, a combination of factors pushed up oil prices even as supply remained high. Prices rose to then record-high levels in mid-2008 before falling in response to the 2007 financial crisis. OPEC's summits in Caracas and Riyadh in 2000 and 2007 had guiding themes of stable energy markets, sustainable oil production, and environmental sustainability.

It is critical to find that current observations of OPEC on the global economy are- the high sovereign debt in the Euro-zone; high unemployment in the advanced economies, especially the Euro-zone; and slow growth, coupled with inflation risk, in the emerging economies. Indeed, the biggest challenge facing global oil markets in 2014 is global economic uncertainty, with the fragility of the Euro-zone remaining a cause for concern. However the world oil demand is forecast to increase during the year 2014.

Non-OPEC Oil Producers Scenario

Oil producers operating outside the Organization of Petroleum Exporting Countries (OPEC) are responsible for producing 60 percent of the world's oil and face increasing production hurdles. Experts say many of the non-OPEC producers have older, less productive wells, rising costs for new projects, and in some cases rising demand at home that may cut into exports. Higher prices have made difficult oil projects more lucrative. Many non-OPEC producers are faced with wells that are quickly depleting

A 2008 BP report on world energy shows that production among the Organization for Economic Cooperation and Development nations, which include four top independent producers-Canada, Norway, the United States, and Mexico-dropped by about two million bpd in the last decade. Meanwhile, the former Soviet states increased production by more than 40 percent over that same time period.

Cline said one of the biggest challenges for producers is skyrocketing costs for labor and steel, noting that costs for "everything that you need to build a modern oil project are rising very fast." Some new projects lack infrastructure, such as pipelines, which help bring new oil to market quickly and cheaply. Landlocked projects in Kazakhstan, for example, face extremely high transportation costs. The production can go low due to the lack of investment.

The wildly fluctuating oil prices and the inability for some firms to get financing because of the credit crisis will deter investment in any type of new oil production, leading to a supply crunch.

OPEC and Its Sustainable Efforts

According to current estimates, more than 81% of the world's proven oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 66% of the OPEC total. OPEC Member Countries have made significant additions to their oil reserves in recent years, for example, by adopting best practices in the industry, realizing intensive explorations and enhancing recoveries. As a result, OPEC's proven oil reserves currently stand at 1,200.83 billion barrels.

Some petroleum industry operations have been responsible for water pollution through by-products of refining and oil spills. The industry is the largest industrial source of emissions of volatile organic compounds (VOCs), a group of chemicals that contribute to the formation of ground-level ozone (smog).

The combustion of fossil fuels produces greenhouse gases and other air pollutants as by-products. Pollutants include nitrogen oxides, sulphur dioxide, volatile organic compounds and heavy metals. The OPEC has responsibility for the safe environment also. OPEC included safe environment on the guiding principles in its theme.

OPEC became prominent in supporting the oil sector, as part of global efforts to address the economic crisis. OPEC’s second and third summits in Caracas and Riyadh in 2000 and 2007 established stable energy markets, sustainable development and the environment as three guiding themes, and it adopted a comprehensive long-term strategy in 2005.

To ensure that the world economy benefits from regular and secure oil supplies, OPEC Member Countries continue to invest to expand upstream capacity. Over the period to 2015, according to OPEC's projects database, around 132 projects with an overall estimated cost of some $300 billion are being undertaken by OPEC members. The net increase in OPEC's liquids capacity by 2015 is estimated to be close to 7.0 mb/d above 2010 levels, leading to comfortable levels of spare capacity.

Regardless of all the challenges and uncertainties, OPEC Member Countries continue to invest in additional capacities. On top of the huge capacity maintenance costs that Member Countries are faced with, they continue to invest in new projects and reinforce their commitment to the oil and gas market and as well as to the security of supply for all consumers.

A recent review of existing refinery projects indicates that around 7.5 mb/d of new distillation capacity will be added to the global refining sector over the period of 2011-2015, of which almost 50% will materialize in the Asia-Pacific and another 30% in the Middle East and Latin America.

Thus, by 2015, OPEC Member Countries have over 11 mb/d of downstream capacity. Moreover, substantial investments are also underway as part of equity shares in refineries outside of national borders. The largest new refineries are expected to come on stream in Saudi Arabia and the UAE, with several expansion projects under construction in other countries.

The cumulative investment required for the realization of projected downstream capacity in OPEC Member Countries to 2015 is estimated at around $50 billion. This is part of OPEC's ongoing efforts to support market stability by supplying required products to consumers.

As stated OPEC is an international organization of sovereign states, with a legitimate, permanent and essential mission for both its Member Countries and mankind in general to ensure that energy reaches all people and all nations, rich and poor alike, as an essential element in the sustainable development of mankind.

This is why these investments need to be implemented immediately. Investments made into oil and gas projects that stretch beyond maintenance and production expansion would significantly benefit these natural resource heavy economies.

OPEC and Investment in its Economies

OPEC countries, for the most part, all rely on one primary commodity for the majority of what they earn. All of these countries are also food-deficit countries. This means that they must rely on importing agricultural goods in order to meet their food needs. The income that these countries receive from oil exports is not truly income; it represents the liquidation of capital or the draining of a finite stock of the oil.

The dominance of the world oil market by OPEC has brought a steady stream of revenue for its member countries. Why haven’t these countries developed world leading economies then? The total combined GDP and GNP of OPEC countries is only a fraction of the United State’s.

Iz Osayimwese argues that a lack of investment opportunities and needs in relation to the amount of domestic savings has hurt these nations. Lack of development can also be attributed to the unstable social organization in the Middle East, where most of the member countries are. Major armed conflicts in the 80’s, 90’s, and the present have greatly affected their economies. Money has to be invested to rebuilding the countries instead of using the money to further these economies.

This is absolutely crucial for OPEC member countries to continue and increase investment in their own countries in the coming years. The economies of these countries are dominated by oil export revenues. Although this revenue will continue to increase in the future, there is a point where oil will run out, and all the money that is generated by oil will disappear with it.

Of equal importance is investment in social capital; education, transportation, technology, telecommunications, and healthcare, etc. If these investments are made while oil revenues are steadily increasing, OPEC member countries will benefit socially and economically in the future.

While domestic investment plays a key role in the development and progress of these economies, regional spending is also very important. while expending money on regional spending, these countries are not only helping those around it, they are also helping themselves.

Algeria, Libya, and Nigeria can increase regional spending as well and help development in Africa. Indonesia can contribute to the development of Southeast Asia. Venezuela has taken an active role in talking to Brazil and other countries to contribute to the growth of Latin America.

Investment from other countries would also help bolster the economies of OPEC countries. High tariffs and strict protective policy have created a barrier to greater trade opportunities. Lowering these tariffs and opening up these countries to greater international trade can be an effective way for them to compete in the world trade market.

Oil revenues amassed by OPEC provide a big opportunity for a big role in foreign aid. The Special Fund, renamed as the OPEC Fund for International Development (OFID). A Solemn Declaration 'reaffirmed the natural solidarity which unites OPEC countries with other developing countries in their struggle to overcome underdevelopment,' and called for measures to strengthen cooperation between these countries", operating under a reasoning that the Fund's resources are additional to those already made available by OPEC states through a number of bilateral and multilateral channels.

So far, OPEC has stepped up and become a major player in world foreign aid for developing countries. Once these OPEC countries bolster their economies and OECD countries become more involved with their ODA, the entire world economy will be strengthened greatly.

All of these factors can help contribute to greater economic development and success of OPEC member countries.

Conclusion

OPEC is a swing producer and its decisions have had considerable influence on international oil prices. OPEC's mission is to coordinate the policies of the oil-producing countries. The goal is to secure a steady income to the member states and to secure supply of oil to the consumers.

In order to bring balance in World economic order and lifting up the less advanced nations and share the prosperity, the OPEC's goals- selling of oil for socio-economic growth of the poorer member nations is laudable. The goal added with the guiding theme of stable energy markets, sustainable oil production, and environmental sustainability is future friendly strategy.

A significant factor that confounds OPEC’s attempt to manage the market price is the lack of timely and accurate information about changes in the level of demand for oil and the availability of non-OPEC oil supplies. OPEC has to develop a system that can help to get precise information to make right decision. The mistake has to be detected and rectify immediately instead it takes years before it is detected and rectified. For example, none anticipated the surge in Asian demand that triggered the sudden tightening of oil markets in 2005.

There is deep and adverse impact on the international oil prices, world economy and economies of its member when there is conflict between among the members or internal politics. The OPEC members must bring peace within themselves to strengthen the organization and its members countries. Of course, this is going to bring stability in the world resulting in prosperity for all.

For example- Leading up to the 1990–91 Gulf War, the division of OPEC countries occasioned by the Iraq-Iran War and the Iraqi invasion of Kuwait marked a low point in the cohesion of OPEC. However, the September 11, 2001 attacks against the United States, and the following invasion of Afghanistan, and 2003 invasion of Iraq and subsequent occupation prompted a sharp rise in oil prices to levels far higher than those targeted by OPEC themselves during the previous period.

The powerful nations have been attempting to maintain the status quo whereas the balance has to shift in view of the current economic situation. For instance the low declining US economy, debt issue of Euro economy. China, Malaysia and India etc. emerging economic power houses. There is always fear of losing power by the powerful nations of the past. For example-On 19 November 2007, global oil prices reacted violently as OPEC members spoke openly about potentially converting their cash reserves to the euro and away from the US dollar. OPEC has to work to deal with such situation without impacting the oil prices and world economy.

OPEC is using a price mechanism where the production is restricted to increase the price based demand and supply principles. With time, this principle is not going to work as it happened in US slashing interest rate worked well in the beginning however it failed to boost the economy during the current period.

The stated goal of increasing government take from 50% to 80% of total profits was pursued largely through the imposition of tax and administrative reforms by individual OPEC members, including the introduction of fictional “tax reference prices” that boosted the tax base, and therefore government take, without altering the stated tax rate and without much impact on the market price of oil. OPEC was concerned with winning for itself a bigger share of the pie, rather than growing the size of the pie.

There has to be an effective system to monitor, detect, and punish members who cheat the system such as quota system to reap the benefits of such restrictions. The Compliance has to be strict instead of sporadic. The means of such temptation has to be plugged for healthy practice.

The potential for conflicting interests involves not only the question of which members “deserve” larger quotas, but what is the preferred market price level for OPEC oil. Members with low-cost, long-lived reserves will take a long view of the future and may be reluctant to push prices too high given the fear of induced technological innovations that would usher in new forms of energy (or energy conservation) that eventually compete against OPEC. The OPEC has to work on these conflicting interests and come up with agreeable solutions.

An important factor that looms large in the future of OPEC is the role to be played by serendipitous events and geopolitical tensions. A large portion of OPEC’s apparent historical impact on the price of oil has come about not as the result of deliberate plans crafted by a purposeful cartel, but as the by-product of clashing national agendas that encompass far more than the petroleum sector.

During the past thirty-five years, most of the idle capacity held by OPEC members has been involuntary—taken out of production due to military conflict. Much of the hard work that any cartel has to do—commanding the determination and discipline to restrict output—has in OPEC’s case been provided fortuitously.

The value of crude oil produced and sold on the world market exceeds $1 billion each day. Even a relatively small impact on the unit price of oil represents an enormous transfer of wealth between consumers and producers. Moreover, the disruptive impact of sudden price “shocks” and heightened volatility threatens the goal of sustained and steady global economic growth.

As consumers, investors, and government officials continue to wrestle with these problems, it is no exaggeration to say that OPEC has left an indelible imprint on the world economy through its impact on the price of oil.

The OPEC can add values to improve its functioning in the light of above observations. This can certainly help OPEC accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness, of risks- internal or external, controls and its governance in order to be a strong player in world economy the forthcoming time with its conspicuous presence.

OPEC Relations with United States

Visit of US President Barack Obama to Saudi Arabia and meeting the King Abdullah. There is no doubt that relationship between two countries has been frosty for many reasons. The Saudi Arabia believes that relationship with Westerns, particularly with USA for stronger security and steady market for its vast oil reserve. The relations between the U.S. and Saudi Arabia were strained after the September 11 attacks in 2001, ousting of Hosni Mubarak in Egypt, and Israeli–Palestinian conflict. Ever since relations have tangibly soured on every front, with the outreach to Iran and ambivalence on Syria.

The two nations have encountered obstacles in the path of successful relationship since it first began. Eventually, the relationship reconstructed itself after each conflict and became stronger with time. The U|S believed that drilling shale oil fiends in North Dakota and Texas will put US on the path to energy independence, weakening economic interdependence between the two nations. So the US finds itself free to address policy differences with oil as less of a bargaining chip. The global picture for Saudi Arabia has changed fundamentally as a result of the growth of unconventional oil in US.

Saudi Arabia and the rest of the Gulf exporter are turning their attention eastward. For Saudi Arabia and other Middle East producers, the shale boom is accelerating the redirection of oil shipments toward Asia. China, which overtook the U.S. as the world’s largest oil importer in September last year, is becoming an increasingly important customer. It imported 53.9 million tons of Saudi crude in 2013, or about 1 million barrels a day. That’s 28 percent more than in 2009, according to Chinese customs data.

Though greater energy independence has altered the strategic framework, the U.S. still views Saudi Arabia as a critical player in globally linked energy markets. Two facts show the scale of change in global energy markets. The U.S. output reached an average of 7.45 million barrels a day last year, 39 percent more than in 2009.

As a result, U.S. imports from the Organization of Petroleum Exporting Countries, where Saudi Arabia is the leading member, fell to their lowest level since 1996 last year to an average of 3.49 million barrels a day. That’s a decline in trade worth about $166 million a day based on current prices. Even though Saudi Arabia remains the second-largest foreign supplier of U.S. crude after Canada.

The U.S. may still need Saudi Arabia’s oil in the long term if its domestic shale oil boom peters out, according to the Paris-based International Energy Agency. U.S. oil production is projected to level off and then slowly decline after 2020. The IEA estimates 2,500 new wells a year are needed to sustain output of 1 million barrels a day in North Dakota’s Bakken Shale.

In the meantime, the U.S. and Saudi Arabia have a chance to reset their relationship after friction over Iran and Syria, said Ayham Kamel, director for Middle East and Africa at Eurasia Group in New York.

U.S. energy independence won’t signal withdrawal from the Gulf region, but a reassessment of priorities instead,” Kamel said. “Obama’s visit is a golden opportunity for Saudi officials to discuss a re-framing of their partnership. This would stop the deterioration in the relationship.”

Author

Global Intelligence Unit is a "Think Tank" engaged in global audits of economies, industry and crtical issues. Global Intelligence Unit is an affliate company of Global International Sellers.

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Sources:-

Quotes
"The Christians had a better chance against the lions than the American consumer has against the opec cartel." - Ed Markey
"“The global picture for Saudi Arabia has changed fundamentally as a result of the growth of unconventional oil in the U.S.,” said Valerie Marcel, an associate fellow at Chatham House, a think-tank in London. “Saudi Arabia and the rest of the Gulf exporters are turning their attention eastward and that has an impact on how they see the West.”" - Bloomberg Businessweek
""Think Oil" - Energy Intelligence Unit - Think Tank Based in UAE" -Antonio Bhardwaj
"The water is elixir of life. Oil is elixir of modern industry, economic development, growth and success. The OPEC is pillar of modern economy. " -Kesar Sandhu
"OPEC can survive without West but West can't live without OPEC" -Kesar Sandhu
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