The University of Salford

School of Computing Science and Engineering

Petroleum and Gas Engineering

Petroleum Economics & Project Management

Module Co-ordinator:

Dr Lateef Akanji

Assignment 1.:

The Contribution of OPEC in the global petroleum economic

stabilization, efficient supply & crude oil policy of member &

non-member nations

Aseh Seigha Dennis

Student No.: @ 0 0341 0 0 4

April, 2013

Submission Date: 24th April, 2013

AbstractOPEC was formed as a joint action between five countries in 1960 in Baghdadto set a fair price for crude oil in the world market, According to current estimates Twelve members account for 40% of world oil production and 80% ofproven oil reserves with the bulk of opec oil reserves in the middle east amounting to 66% of the opec total.OPEC members regularly discuss oil prices and set crude oil production quotas. OPEC revenue has grown over the last years, but instability in revenue has been related to geopolitical crisis, instability in one or more OPEC member states, or lower world demand. This report applies statistical analysis to data explainingthe contribution of opec in the global petroleum, economic stabilization, efficient supply & crude oil policy of member & non-member nations.

IntroductionThe organization of petroleum exporting countries(OPEC) was created on 10th

September 1960 in Baghdad, Iraq. The organization was founded as a result of several meetings between high-level delegates from Iraq, Iran, Kuwait, SaudiArabia and Venezuela. These states argued that the oil price at that time around$2.0/bbl(and at times much lower due to auctions) was unfair & should be adjusted.The creation of OPEC was necessary in order to balance oil marketing between major suppliers and demanders & set rules for pricing. OPEC member countries have made significant additions to their oil reserves in recent years, by adoptingbest practices in the industry, realizing intensive explorations and enhancing recoveries. As a result OPEC’s proven oil reserves currently stand at1,199.71billion barrels. Opec has been dealing in the US dollar since 1960 for pricing oil(gas is not involved). The pricing of this crude oil is based on several oil brands known as OPEC basket brands.

Aims of OPEC To coordinate & unify the petroleum policies of the member countries

and to determine the best means for safeguarding their individual and collective interests.

To seek ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful andunnecessary fluctuation; and

To provide an efficient, economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in thepetroleum industry.

Member CountriesCurrently the organization has twelve(12) member states including five(5)founding members; Six(6) in the middle east, four in Africa and two in southAmerica.The OPEC Statute distinguishes between the founder members and full members.(those countries whose applications for membership have been accepted by the conference.The statute stipulates that any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of member countries, may become a full member of the organization, if accepted by amajority of three-fourths of full members, including the concurring votes of all founding members.

Joined

OPEC[1]

Population

(July 2008)[2]

Area

(km²)[3]Country Region

A l g e ri a Africa 1969 33,779,668 2,381,740

N i g eria Africa 1971 146,255,300 923,768

A n g o l a Africa 2007 12,531,357 1,246,700

E c u a d or South America 2007[ A 1] 13,927,650 283,560

Iran Middle East 1960[ A 2] 75,875,224 1,648,000

Iraq Middle East 1960[ A 2] 28,221,180 437,072

K u wa i t Middle East 1960[ A 2] 2,596,799 17,820

L i b y a Africa 1962 6,173,579 1,759,540

Q at a r Middle East 1961 824,789 11,437

S a u di A r a b i a Middle East 1960[ A 2] 28,146,656 2,149,690

Un i t ed A r ab

E m i r at e s Middle East 1967 4,621,399 83,600

V e n e z u e l a South America 1960[ A 2] 26,414,816 912,050

11,854,977

km²Total 369,368,429

N/b: Ecuador initially joined in 1973, left in 1992 and rejoined in 2007

Former members

Joined

OPECCountry Region Left OPEC

G a b on Africa 1975 1994

In d o n e si a East Asia 1962 2008

OPEC and Global Oil SupplyOPEC was formed to promote effective management of petroleum resourceendowment in the member nations. OPEC’s market influence was of global significance in the 1970s as oil prices quadrupled. The organization controlled nearly 90% of oil export capacity at the peak of its market power.The organization, within the context of the current dynamics in the global petroleum economy seems to function more as an incremental oil producer than the dominant primary global oil supplier it was in the 1970s

Paradoxically, The organization has also changed the operational environmentof the global petroleum industry over the past four decades. Its self-imposed or inherited market role to balance the global oil supply & demand using its production capacity is more evident now than ever before.

The global call on OPEC to manage the supply aspects of global oil market is not at variant with the organizations’ original objectives. In fact, one of the original objectives of OPEC has been to eliminate harmful and unnecessary fluctuations in global oil prices. The organization stated unambiguously in its statute, that it would put together production strategy that ensured oil price stability in the global oil market. Thus, since early 1982, at its 63rd extraordinary meeting, OPEC adopted fixing an overall production ceiling with quota allocations to each member nations in its effort to manage global oil supply inorder to stabilize prices. This strategy can be aptly described in economic terms as a price limiting production approach.

The price limiting strategy is intended to produce just enough oil to achieve and maintain a balance between supply & demand under a stable price profile, however must characteristically be maintained to deter the entry of new sources of oil as substitutes for opec oil.

Influence of OPEC on PricesOPEC's influence on the market has been widely criticized, since it becameeffective in determining production and prices. Arab members of OPECalarmed the developed world when they used the “oil weapon” during the Yom Kippur War by implementing oil embargoes and initiating the 1973 oil crisis. Although largely political explanations for the timing and extent of the OPEC price increases are also valid, from OPEC’s point of view, these changes were triggered largely by previous unilateral changes in the world financial system and the ensuing period of high inflation in both the developed and developing world. This explanation encompasses OPEC actions both before and after the

g.

outbreak of hostilities in October 1973, and concludes that “OPEC countrieswere only 'staying even' by dramatically raising the dollar price of oil.”

Oil Embargo of 1973In 1973 the persistence of the Arab-Israeli conflict finally triggered a response that transformed OPEC into a formidable political force. After the Six Day War of 1967, the Arab members of OPEC formed a separate, overlapping group, the Organization of Arab Petroleum Exporting Countries, for the purpose of centering policy and exerting pressure on the West over its support of Israel. Egypt and Syria, though not major oil-exporting countries, joined the lattergrouping to help articulate its objectives. Later, the Yom Kippur War of 1973 galvanized Arab opinion. Furious at the emergency re-supply effort that had enabled Israel to withstand Egyptian and Syrian forces, the Arab world imposedthe 1973 oil OPEC & its influence on price of Oilembargo against the United States and Western Europe, while non-Arab Opec members did not

SecretariatThe executive organ of the Organization of the Petroleum Exporting Countries(OPEC). Located in Vienna also functions as the Headquarters of the Organization, in accordance with the OPEC Statute provisions of the Opec Statute. It is responsible for the implementation of all resolutions passed by the Conference and carries out all decisions made by the Board of Governors. Italso conducts research, the findings of which constitute key inputs in decision- makinThe Secretariat was originally established in 1961 in Geneva, Switzerland. In April 1965, the 8th (Extraordinary) OPEC Conference approved a Host Agreement with the Government of Austria, effectively moving the Organization’s headquarters to the city of Vienna on September 1, 1965.

OPEC Basket Price

OPEC basket is a weighted average of oil prices collected from various oil producing countries. This average is determined according to the production and exports of each country and is used as a reference point by OPEC to monitor worldwide oil market conditions. The new OPEC Reference Basket (ORB) Introduced on 16 June 2005, is currently made up of the following: Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi

Pric

e($)

Arabia), Murban (UAE) and Merey (Venezuela). OPEC daily basket price stood at $93.96 a barrel on Thursday 13th January 2011

120

Yearly Basket Price

100

80

60

40

20

01998 2000 2002 2004 2006 2008 2010 2012 2014

Years

Hubbert Model

The Hubbert model approach accurately models the oil-production history of OPEC countries. Most OPEC countries will peak between 2020 & 2030, and they will remain the worlds supplier of crude oil for the next 200 years. After more than 50years of research and analysis by Hubbert, it is now clear that the rate at which oil producing countries can produce oil is reaching the maximum possible level referred to as Peak oil. With a great effort and expenditure, the current level of oil production can possibly be maintained for a few more decades beyond which oil production will begin a permanent and irreversible decline.

Hubbert historic production data to a symmetric bell-shape curve based on thye following principles

The production rate must begin at zero; then after passing through one maximum it must decline to zero

The area under the prediction rate vs time curve is equal to the ultimate oil recovery as the time approaches infinity.

The basic assumption of Hubbert’s approach is that the production rate q(t) ordNp is a quadratic function of the cumulative production domain expressed as;( )

Where NP is the cumulative production, a & b are constants with a =growth

Non-Opec Members

Oil production from countries outside the organization of petroleum exporting countries(OPEC) currently represents about 60% of world oil production. Key centers of non-opec production include north America, regions of the former soviet union & the north sea

Non-OPEC actual production was unrestricted and peaked in 1988 at38.1MMSTB/D, then declined to 34.1MMSTB/D in 1993. Production increased during 1994-1995 to 36.3MMSTB/D, mainly as a result of increased north sea field activity. The figure below shows that non-opec countries closely follow the Hubbert model. The non-opec model indicates that the production peaked in1991.

In contrast to OPEC oil production, which is subject to central co-ordination, non-opec producers make independent decisions about oil production

Conclusion

Crude oil is the world’s most internationally traded commodity, and with the world not running out of oil itself, but rather its ability to produce high-quality cheap and economically extractable oil on demand is declining.This report evaluated OPEC data on contribution in global economic stabilization, efficient supply and crude oil policy of member and non-member nations. Results suggest that if OPEC really wants to accomplish a stable oil market, then each member nation must accept some joint responsibility and bear some equitable production based on these criteria as and when necessary

ReferencesOmowumi, O. Opec oil production strategy and its implication on global oilmarket stability. Society of Petroleum Engineers. April 2003

Talabani, S. Floating supply for a balanced and stable market Part 1. Society ofPetroleum Engineers. March 2009

Al-Bisharah, M. Forecasting OPEC crude oil supply. Society of PetroleumEngineers. March 2005

Basil, A. OPEC and its influence on the price of oil. March, 2011.

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