UGANDA CHRISTIAN UNIVERSITY, MUKONOSTUDENT REGISTRATION NO. : RM 18M 23/314INSTITUTE : INSTITUTE OF PETROLEUM STUDIES,KAMPALAMODULE : INTRODUCTION TO OIL AND GASSUPERVISOR : PATRICK RUHARUZADATE : 23.03.2019TITLE OF THE RESEARCH TOPIC : CAN OPEC REALISTICALLY MEET ITS STATED OBJECTIVES OF STABILIZING OIL PRICES IN THE INTERNATIONAL MARKETS?TABLE OF CONTENTS TOC o “1-3” f h z u CHAPTER ONE PAGEREF _Toc5063261 h 11.1 Introduction PAGEREF _Toc5063262 h 11.2 History and Objectives of OPEC PAGEREF _Toc5063263 h 11.3 What does OPEC do? PAGEREF _Toc5063264 h 2CHAPTER TWO PAGEREF _Toc5063265 h 32.1 The 2008 Oil Price Crisis PAGEREF _Toc5063266 h 32.
2 OPEC’s role during the oil price crisis 2008 to 2009 PAGEREF _Toc5063267 h 3CHAPTER THREE PAGEREF _Toc5063268 h 43.1 The Global dynamics in the Oil and Gas industry? PAGEREF _Toc5063269 h 43.1.1 Effects of Geopolitics on OPEC. PAGEREF _Toc5063270 h 43.1.2 The challenge of Alternatives PAGEREF _Toc5063271 h 43.1.3 The Shale oil factor PAGEREF _Toc5063272 h 53.1.4 Natural gas PAGEREF _Toc5063273 h 63.1.5 The strong U.S Dollar effect PAGEREF _Toc5063274 h 63.2 Diminishing influence of OPEC PAGEREF _Toc5063275 h 73.3 Looking to the future PAGEREF _Toc5063276 h 93.
4 OPEC influence on global oil prices PAGEREF _Toc5063277 h 10CHAPTER FOUR PAGEREF _Toc5063278 h 124.1 Recommendations and Conclusions PAGEREF _Toc5063279 h 12BIBLIOGRAPHY PAGEREF _Toc5063280 h 13CHAPTER ONE1.1 IntroductionIn 2008 prices of oil dropped significantly which was following the world financial crisis known as the Recession. The Economies of the world nearly came to a standstill and so the oil demands declined. To realize the objectives, OPEC tried to change the bad situation by controlling the supply and demand of crude oil and thereafter, the oil prices stabilized by 2009. This paper tries to examine whether changing market environment, OPEC can still realistically meet its stated objectives. It further assesses other factors that affect the oil market in the world. The findings indicate that though OPEC has an influence in shaping the world oil market, the future appears different due to many factors inclusive of new technologies and geopolitics.1.2 History and Objectives of OPECOn September 10-14, 1960 in Iraq, five OPEC (Organization of Petroleum Exporting Countries) countries founding members allied to regulate the supply of oil and held its first meeting. These were Iraq, Iran, Saudi Arabia, Kuwait, and Venezuela.It is a permanent intergovernmental organization, created by the said countries with the headquarters in Geneva Switzerland with objectives; coordinating and unifying the petroleum policies of the Member Countries and to determine the best means for safeguarding their individual and collective interests; seeking ways and means of ensuring the stabilization of prices in international oil markets, with a view to eliminating harmful and unnecessary fluctuations; andproviding an efficient economic and regular supply of petroleum to consuming nations and a fair return on capital to those investing in the petroleum industry. In October 1973, the Organization of Arab Petroleum Exporting Countries (AOPEC) consisting of the Arab Majority of OPEC plus Egypt and Syria declared significant production costs and an oil embargo against the U.S and countries that supported Israel in the Yom Kipper War.OPEC currently has 14 Members including Angola, Algeria, Ecuador, Equatorial Guinea, Gabon, Libya, Nigeria, Qatar, United Arab Emirates, and the Democratic Republic of Congo which account for nearly 45% of global production and over 70% of proven global oil reserves making its decisions a major factor of world oil prices. In the 1970s OPEC’s impact was high as its members gained authority over their internal petroleum industry and started influencing global crude oil prices. The Arab Oil embargo in 1973 and the Iranian Resolution in 1979 increased the oil value. In 1976 OPEC Fund for International Development was established. After hitting a high record in the early 1980s oil prices started declining in 1986 due to oversupply and customer shift towards renewable energy.In the early 2000s, OPEC established a “Price-bond” mechanism that helped the stabilization of the price of crude oil. Prices kept growing and escalated in 2008.1.3 What does OPEC do?When OPEC wants to increase the price of crude oil it just reduces production. When oil production drops, gas companies get shaken. A simple threat of oil reductions raise crude oil prices on the world market.CHAPTER TWO2.1 The 2008 Oil Price CrisisThe decline of oil prices in 2008 helped following Financial Crisis globally. World economy shrunk and so was the demand for oil.Oil prices dropped from $ 144.29 in July to $ 33.87. OPEC reduced production by 16% in 8 months to pull down stability under the command of Saudi Arabia the largest producer. Crude oil production and consumption dropped by 1.5% and 1.2% respectively before returning to parity from 2008 to 2010. US producers reduced on drilling operatives until prices started to grow and moved, switching from conventional drilling to horizontal drilling. At one time oil went from $30 per barrel range from December 2008 to April 2009 when it took 126 days for WTI prices to go from $ 33.87 on December 19, 2008, to $ 51.55 on April 24, 2009As OPEC cut down production by 202 million barrels a day in an effort to reduce the supply, increasing demand and hence prices.2.2 OPEC’s role during the oil price crisis 2008 to 2009OPEC role helped in the recovery of the crude oil prices. The Cartel elected to decrease crude oil production in a series of four ensuring production cuts that began in the fourth quarter of 2008 to early 2009. It announced production cuts of 4.2 mm bpd and implemented 2.0 mm bpd in actual crude production cuts. It maintained this production level in 2009 and prices bounced back in late 2009.CHAPTER THREE3.1 The Global dynamics in the Oil and Gas industry?3.1.1 Effects of Geopolitics on OPEC.Non-OPEC oil producing countries have long criticized OPEC’s power to increase oil prices. Its influence is weakening as U.S oil production has increased and alternative energies have been produced. OPEC’s influence has been challenged including divisions be it political as being influenced by other nations or economic either in their own countries or by external influences within its membership. The coming of the USA as a major oil exporter and world changes to cleaner energy sources together with the bad relations between USA and Saudi Arabia are likely to affect the OPEC in the near future.OPEC’s powers have fought amongst themselves as well. Regional power struggles, differences in opinions, on strategy and target prices with increased budgets in some rich member states have raised oil price or the price at which they remain solvent.Struggles among OPEC members grew into conflicts, for instance, Iraq and Iran waged on an 8-year war. Sovereignty and National survival and not just the price of oil were at stake. The invasion removed about four Million barrels of oil from the world market and caused a price increase.3.1.2 The challenge of Alternatives Unconventional oils such as Shale and sand based oil extraction leased energies due to recent technologies have helped ramp up output. Most OPEC members view high oil prices as short term. The revenue makes importing countries to make investments in alternative fuel sources. In 2009 USA crude oil production, shale, and sand-based oil extraction helped increase output. OPEC to counter this began to deal with Russia and other main exporters to make a joint approach that includes coordinating production, drafting a new, shared charter and called for the possibility of a new “OPEC+” organization. This has opened a new chapter in OPEC’s history leading to some criticisms that OPEC might no longer be free to change course without Russian buy-in. It has caused tension for USA Allies in the Cartel who now compete for demands from Moscow and Washington.The manufacture of electric vehicles running on renewable energy represents a big threat to OPEC. Rising fossil fuel costs and Government subsidies for renewable energy have attracted investments in the sector. Climate change concerns are likely to affect OPEC. OPEC recognized clean energy as a challenger. The shale revolution has equally challenged OPEC that made it react to the hydraulic fracturing technology by driving prices down. OPEC assumed that shale production would no longer be economically viable. Technology has attracted American producers to invest-in previously untapped oil at decreasing cost, leading the U.S to become the leading producer of oil. The production output as it increases reduces the control of OPEC Countries control and this would affect the demand and supply in the oil market. Different geopolitical interests in OPEC’s members have reduced trust within the organization which makes it not simple to enforce collective mutually beneficial decisions. 3.1.3 The Shale oil factorU.S shale production has increased greatly because of increased efficiency, operational cost cuts and improving technology. Average production costs have fallen by 30/40% for U.S shale wells, compared with just 10% to 12% elsewhere. 60% of shale world oil is believed as commercially viable at $60 per barrel, only 20% of conventional deep-water oil production is. The shale oil has proven much more flexible due to its short drilling cycle. It does not need a large initial capital input to quickly recover when prices rise. With a good fiscal regime and easing environmental laws, the U.S shale oil industry will get a further development. With technology, the production of Shale oil is a great achievement for the global oil crisis because it is relatively low-cost unconventional resources and can be spread all worldwide to address the global energy problem. Crude oil is considered a non-renewable energy source and may be finite in the long run. The oil consumption rate is to faster than its generation rate since in view of how it is formed and renewable energy is looked at as the best alternative source.3.1.4 Natural gas Natural gas is a substitute for oil in some energy applications much as it is not global in real sense but may have an effect on crude oil demand, supply and price. In 2012, the USA became the world’s largest producer of hydrocarbons, reclaiming a rank it had 60-70 years ago and has remained there.3.1.5 The strong U.S Dollar effect This was the main driver for the price decline of crude oil in 2015. The dollar appreciated against the Euro leading to the appreciation in the index and a decline in oil prices, China’s devaluation of its currency caused traders to dump oil shares.The U.S nuclear development with Iran allowed more Iranian oil exports. It removed sanctions on Iran and the industry feared it would add to oversupply of oil. Markets reacted by reducing supply of oil, resulting in reduced prices. Russia though not a member of OPEC has a major influence in OPEC decisions. Without its support OPEC’s objectives might not get the effects as expected. In the era of conventional oil, the OPEC led by Saudi Arabia set the world oil price. Now shale oil production in the U.S also determines prices. Lack of trust has made it uneasy to enforce common decisions that would be mutually beneficial. Even if OPEC manages to reduce supply, the effect on the oil price will not be felt unless major non-OPEC producers like Russia and the U.S get involved.3.2 Diminishing influence of OPECTwo factors political and innovational are currently making an impact in the crude oil industry internationally. Conflicts in member countries with wars like in Nigeria, Iraq and uprising Libya cause shortfall in production. Many OPEC countries are high-cost producers and member states interests are becoming increasingly different. This is making it uneasy for the organization to agree on new production volumes. An effective freeze in production is difficult to achieve and be sustained in the long run. OPEC members do not always adhere to agreements to reduce production. More supply to the market is coming from U.S shale oil, bigger production from Norway and the delayed production of the Kashagan field in Kazakhstan production and Chinas economic slowdown. Any huge or longer lasting production cut from OPEC could eventually not yield. Reaching a price high enough to generate financial relief from its members but low enough to keep high-cost producers from re-investing the market calls for sophisticated micromanagement of world oil prices. This appears uneasy in view of the fact that non-OPEC and OPEC producers have not been able to agree on the production cut in 15 years. Saudi Arabia seems to have lost trust in its own reserves to preserve its stability economically and its regional influence due to climate protection policies internationally, technological advances in the alternative energy sources increasing usage of renewables and electric and hybrid vehicles. The transition from fossil fuels to other energy sources may come faster than expected. Oil price changes make immense incentives for innovation advanced production techniques that led to oil extraction and more effective drilling methods. These influence the market hence the price. Terrorism in The Gulf and on oil establishments, embargos and sanctions, natural disasters, microeconomic fluctuations, long term elasticity of demand and supply, geopolitical uncertainties, overall wealth of global economies, rise of new economic powers, lack of investments, the nature of the resource risk, technology advancement, rate of declining fields and impact of non-OPEC members and biomass are all factors that influence the world oil prices3.3 Looking to the futureLess reliance on oil imports from OPEC would allow U.S policymakers to be more assertive, potentially portending a rupture in the Saudi Arabia – U.S relationship or a tougher line against Venezuela. The growing significance of U.S oil production has raised some worries that U.S oil production policymakers could move closer to OPEC on climate change policy, as the U.S Administration has rolled back the regulation of fossil fuels and withdrawn from global commitment to reduce carbon emissions. The Saudi Arabia leadership encouraged the American administration’s withdrawal from the 2015 agreement on Iran’s nuclear program and the re-imposition of sanctions on Iranian oil, and a major challenge for the block will be keeping production steady and markets calm as Iranian oil exports reduce. The sanctions have been accompanied by increasing frustration inside the U.S Administration that needed allies like the Saudi Arabia and UAE to keep supply high to permit the U.S to sanction Tehran without disturbing oil costs. OPEC has instead reduce oil production since December 2018. Meanwhile, divisions within OPEC seem to persist. In January 2019, Qatar formally withdrew from OPEC indicating its misunderstanding with Saudi Arabia over the organization and an ongoing Saudi led blockage of the country. If Riyadh continues to enforce a more assertive foreign policy, it would be a challenge for Cartel to remain united. For OPEC and Russia, combined with the increase of shale oil, increasing U.S energy independence and world policies on global climate change, brings uncertainty. The refining industry among its stakeholders is a perceived risk, and its ability to sale energy to billions of consumers around the world.Others have responded by buying German residential solar battery maker Sonner and investing in Electric vehicle charging stations in Europe in addition to its hydrogen fuel business. BP is additionally getting in the Electrical vehicle charging business and has in agreement to demonstrate how its business can align Paris climate goals along with executive remuneration based on emissions reductions. Scientific innovations are rapidly taking a center stage in the industry heading at reducing over-reliance on crude oil.3.4 OPEC influence on global oil pricesFossil fuels is still of bigger importance to the global economic wellbeing even if other renewable energies emerge as the world demand is increasing with development and population growth. Bearing in mind that it’s mainly used in transportation be by land or air. For the foreseeable future, renewables, however admirable will be supplementary. With all sources of energy, conventional, unconventional along with renewable will doubtless be needed to adequately cover the ever-increasing consumption levels. OPEC has a significant influence on the oil price in times ahead. Over the long run, its capacity to influence the price shall be limited because the individual Countries have different incentives than OPEC as a whole, for instance, if a Country is uncomfortable with the cost of oil, it is in its interests to reduce the supply of oil so that prices rise. However, no individual country really desires to reduce supply as this could reduce revenues. The demand and supply determine the price equilibrium when OPEC share of the world oil declines with the new production coming from outside nations like the U.S and Canada OPEC expectations will be altered. The changes of oil prices created incentives for scientific innovation in new technology that have led to oil extraction and more effective drilling methods. The OPEC Countries can also take heed to the technological advancements and keep pace with the extent of developments to still have an influence in the oil market prices globally. OPEC has four-fifths world’s proven crude oil reserves nearly 850 Billion barrels. It will supply most of the crude in the years ahead, a market in which oil is believed to remain the leading energy source.CHAPTER FOUR4.1 Recommendations and ConclusionsOPEC is playing a big role in the global oil markets despite decreasing member reserves, move towards Renewable energies and new sources outside the group have affected the global market.But inasmuch as OPEC controls almost 50% of the oil production worldwide its impact will be felt, and while it might not last another 57 years OPEC’s effect is still to be felt as long as reliance is still on the crude oil use. OPEC continues to be powerful forasmuch as it implements its mission and objectives.BIBLIOGRAPHYBooksAleksander Dugin: Foundation of Geopolitics, 1997Ewan William Anderson: The Middle East Geography and Geopolitics, 2000Mordechai Abir: Saudi Arabia: Government, Society and the Gulf Crisis 1994 ” published by Westview press January 13, 1988.Aleksander Dugin: The Fourth Political Theory, 2009JournalsThe Geopolitics of the United States, Part 1: The Inevitable Empire. July 4, 2016 09:49 GMT ” Geopolitics of the United States, Part 2 American Identity and the Treats of Tomorrow “