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.: @00341004 April, 2013
Submission Date: 24 April, 2013
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Abstract OPEC was formed as a joint action between five countries in 1960 in Baghdad to 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% of proven 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 explaining the contribution of opec in the global petroleum, economic stabilization, efficient supply & crude oil policy of member & non-member nations. Introduction th The organization of petroleum exporting countries(OPEC) was created on 10 September 1960 in Baghdad, Iraq. The organization was founded as a result of several meetings between high-level delegates from Iraq, Iran, Kuwait, Saudi Arabia 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 adopting best practices in the industry, realizing intensive explorations and enhancing recoveries. As a result OPECs proven oil reserves currently stand at 1,199.71billion 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 and unnecessary 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 the petroleum industry.

Member Countries Currently the organization has twelve(12) member states including five(5) founding members; Six(6) in the middle east, four in Africa and two in south America. 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 a majority of three-fourths of full members, including the concurring votes of all founding members.

Country

Region

Joined [1] OPEC

Population
(July 2008)
[2]

Area [3] (km)

Algeria

Africa

1969

33,779,668

2,381,740

Nigeria

Africa

1971

146,255,300

923,768

Angola

Africa

2007

12,531,357

1,246,700

Ecuador

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

Kuwait

Middle East

1960

[A 2]

2,596,799

17,820

Libya

Africa

1962

6,173,579

1,759,540

Qatar

Middle East

1961

824,789

11,437

Saudi Arabia

Middle East

1960

[A 2]

28,146,656

2,149,690

United Arab Emirates

Middle East

1967

4,621,399

83,600

Venezuela

South America

1960

[A 2]

26,414,816

912,050

Total

369,368,429

11,854,977 km

N/b: Ecuador initially joined in 1973, left in 1992 and rejoined in 2007
Former members
Country Region Joined OPEC Left OPEC

Gabon

Africa

1975

1994

Indonesia East Asia

1962

2008

OPEC and Global Oil Supply OPEC was formed to promote effective management of petroleum resource endowment in the member nations. OPECs 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 environment of 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 rd stability in the global oil market. Thus, since early 1982, at its 63 extraordinary meeting, OPEC adopted fixing an overall production ceiling with quota allocations to each member nations in its effort to manage global oil supply in order 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 Prices OPEC's influence on the market has been widely criticized, since it became effective in determining production and prices. Arab members of OPEC alarmed 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 OPECs 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

outbreak of hostilities in October 1973, and concludes that OPEC countries were only 'staying even' by dramatically raising the dollar price of oil. Oil Embargo of 1973 In 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 latter grouping 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 imposed the 1973 oil OPEC & its influence on price of Oil embargo against the United States and Western Europe, while non-Arab Opec members did not Secretariat The 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. It also conducts research, the findings of which constitute key inputs in decisionmaking. The 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 Organizations 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

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

Yearly Basket Price

120 100 Price( $) 80 60 40 20 0 1998 2000 2002 2004 2006 2014 Year s 2008 2010 2012

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 Hubberts approach is that the production rate q(t) or dNp 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 at 38.1MMSTB/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 in 1991. 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 worlds 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

References Omowumi, O. Opec oil production strategy and its implication on global oil market stability. Society of Petroleum Engineers. April 2003 Talabani, S. Floating supply for a balanced and stable market Part 1. Society of Petroleum Engineers. March 2009 Al-Bisharah, M. Forecasting OPEC crude oil supply. Society of Petroleum Engineers. March 2005 Basil, A. OPEC and its influence on the price of oil. March, 2011. http://en.wikipedia.org/wiki/Member_states_of_OPEC accessed 15/04/2013 http://www.opec.org/opec_web/en/about_us/25.html accessed 15/04/2013 http://www.opec.org/opec_web/en/about_us/26.html accessed 16/06/2013 http://www.eia.gov/finance/markets/supply-nonopec.cfm accessed 16/062013