EVOLUTION OF OPEC The Organization of the Petroleum Exporting Countries

(OPEC) is a permanent, intergovernmental Organization, was established in Baghdad.

OPEC comprised 12 members: Algeria, Angola, Ecuador, Iran, Iraq Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates Venezuela.

OPEC's objective is to co-ordinate and unify petroleum policies among Member Countries, in order to secure fair and stable prices for petroleum producers.

The 1960sOPEC’s formation by five oil-producing developing countries

in Baghdad which occurred at a time of transition in the international economic and political landscape.

The 1970sOPEC rose to international prominence

Member Countries took control of their domestic petroleum industries and acquired pricing of crude oil on world markets.

The 1980s– Prices began to weaken.

OPEC’s share of the smaller oil market fell heavily and its total petroleum revenue dropped below a third of earlier peaks, causing severe economic hardship for many Member Countries. 

The 1990sPrices moved less dramatically than in the 1970s and 1980s, and timely OPEC action reduced the market impact of Middle East hostilities in 1990–91. But excessive volatility and general price weakness dominated the decade .Solid recovery followed in a more integrated oil market, which was adjusting to the post-Soviet world, greater regionalism, globalisation, the communications revolution and other high-tech trends.

The 2000sOPEC oil price band mechanism helped strengthen and stabilise crude prices. But a combination of market forces, speculation and other factors transformed the situation in 2004, pushing up prices and increasing volatility in a well-supplied crude market.

2010 Markets till now• Main risk to the oil market.• Heightened risks surrounding the international financial system weighed on

economies. • Escalating social unrest in many parts of the world affected both supply and

demand, although the market remained relatively balanced. 

WHAT ARE PETRODOLLARS? Definition : Petrodollar is a United State dollar earned by the country through the sale of petroleum.

The term petrodollar was coined by Ibrahim Oweiss, a professor of Economics at Georgetown University.

Petrodollars are the primary source of government revenue in many Middle Eastern countries. These funds represent a massive amount of investment capital and, are often traded on the eurocurrency market. They are also used for development purposes.

BENEFITS FOR PETRODOLLARS

Global demand for dollars. Artificial demand for dollars was created by providing

incentives to countries that conduct oil trade to dollars.

Global demand for US debt securities.Recycle petrodollars by encouraging investment of profits made from oil sales in US Debt securities.

Buy Oil in domestic currency.

Oil Price Trends 2006 – 2008 : Price of oil rose due to

surge in global demand • The recession caused demand for

energy to shrink in late 2008

Oil prices stabilized by October 2009 and established a trading range between $60 and $80.

For about three and half years the price largely remained in the $90–$120 range

By December 2014, the price of benchmark crude oil reached their lowest prices since 2009.

Decline in Oil Price in 2015

Causes for Decline… U.S. shale oil production increased.

The ‘No' vote in Greece on the economic program.

Lower economic growth in China.

Higher oil exports from Iran.

Continuing growth in global petroleum and other liquids inventories.

SHALE OIL REVOLUTION Definition-: Shale oil is an unconventional oil produced from oil shale rock

fragments by pyrolysis, hydrogenation, or thermal dissolution. These processes convert the organic matter within the rock into synthetic oil & gas.

HISTORY : Shale oil extraction industries were established in France during the 1830s and

in Scotland during the 1840s. The oil was used as fuel, as a lubricant and lamp oil; the Industrial Revolution had created additional demand for lighting. It served as a substitute for the increasingly scarce and expensive whale oil.

The discovery of crude oil in the Middle East during mid-century brought most of these industries to a halt.  In response to rising petroleum costs at the turn of the 21st century, extraction operations have commenced, been explored, or been renewed in the United States, China, Australia and Jordan.

IMPACT OF SHALE OIL Energy combines with labour and capital to produce economic

output (as measured by GDP).

Import and export prices are modelled as a weighted average of commodity and no commodity prices. A decrease in the price of oil will improve the terms of trade for a net oil importer, and conversely see them deteriorate for a net oil exporter.

Oil prices are directly and indirectly linked to consumer prices. Lower Oil prices will generally boost Consumer spending power, especially in net oil importing economies.

CHALLENGES OF SHALE OIL Governments in current net oil importing countries with potential shale oil

resource needs to understand the economic payback from creating policies to encourage exploitation of shale oil (both on its own and relative to other unconventional resources).

Governments in OPEC nations and other major net oil exporters need to assess the likely impact of shale oil on global oil prices and their own revenues, budgets and economies.

Oil companies have to assess their current portfolios and planned projects against lower oil price scenarios.

Businesses that support national and international oil companies with services and equipment need to consider the implications for their strategy and operating model.

Success of OPEC as a cartel and Challenges to

OPEC

Success of OPEC as a cartel

Secure and steady supply of oil– OPEC understands it’s responsibility as a frontline energy source

and works to ensure a stable, secure, well-managed oil sector.

– The very first resolution of the Organization aims to achieve stable oil prices, “with a view to eliminating harmful and unnecessary fluctuations”

– A steady income for producing nations; an efficient, economic and regular supply of petroleum to consuming nations; and a fair return on their capital to investors.

Fifty years old – a success in itself

Organization would not last long.

Fifty years on, the small group of developing countries has evolved into a group of 12 that is respected far and wide as an established part of the international energy community.

It has survived and it has prospered. It has also helped maintain stable and regular supplies of oil to the market; expand its role on the global stage;

Helped enhance and build better cooperation and dialogue among producers and consumers, and created a facility — the OPEC Fund for International Development — for channeling aid to developing nations

Sustainable development

Establishment of effective bilateral and multilateral aid institutions, OPEC Fund for International Development (OFID).

Promotes South-South solidarity through cooperation between OPEC Member Countries and other developing countries; primarily by helping provide the financial resources for countries need to realize their economic and social development goals.

OPEC and the environment Investing billions of dollars over the past decades in

flared-gas recovery projects.

Recognizes the realities of global climate change and supports comprehensive, fair and realistic efforts to reduce the environmental impacts of global energy use.

OPEC and its Member Countries have been active participants in the longstanding United Nations-sponsored negotiations on climate change.

Strengthening of National Oil Companies

OPEC attaches great importance to the continued strengthening of its Member Country NOCs, and the further development of positive and constructive NOC-to-NOC and NOC-to-IOC relationships.

OPEC Member Countries strive to strengthen cooperation in upstream and downstream scientific research and technological development among themselves and with international institutions, as well as widening and deepening dialogue with all industry stakeholders.

Challenges to OPEC Short Term

Dealing with the crisis of supply interruptions. Dealing with fluctuations in oil revenue because of variations in prices

and levels of production.

Long Term Maintain its reference price band and a quota system. Make the quota system effective to maintain OPEC’s coherence and

unity. Dependence of their economies on a single main source of income

OPEC Quota System Introduced in an attempt to stabilize prices by controlling production

came in March 1982 amidst falling prices following a severe contraction in world demand during the period 1980-86.

They agreed upon quotas for each member country and set the ceiling for a three-month period.

The quota system has essentially never worked because various members would produce beyond their quotas.

OPEC Quota System, Oct. 2002

OPEC World Wide Share OPEC Share of World Crude Oil Reserves - 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.

80% of the world's oil reserves are located in just 13 countries which make up OPEC (the Organization of the Petroleum Exporting Countries). Algeria, Venezuela, Saudi Arabia, Iran, Iraq, Kuwait, Angola, Indonesia, Ecuador, Libya, Nigeria, Qatar, and the United Arab Emirates.