Extractive Industries (Oil & Gas) and

Sustainable Development

Day 1 - Historical Oil Prices & Role of OPEC

City University
30th January – 2nd February 2023

Hooman Farnejad
Key Historical Events & Oil Price Volatility
1968 – 2022 (real 2010 prices)

Source:- Visualizing Historical Oil Prices

Fundamentals behind oil price volatility https://advisor.visualcapitalist.com/historical-oil-prices/

 Supply side (disruption by geopolitical issues, long-lead field developments, demand

uncertainties, OPEC quota policies, Inventories / OPEC spare capacity, sanctions etc.)
 Demand side (health of global economy, distruptive technologies, Climate change etc.)

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The Organization of Petroleum
Exporting Countries (OPEC)

Intergovernmental organization, consisting of 13 oil exporting

countries
 Algeria, Angola, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria,
Republic of Congo, Saudi Arabia, United Arab Emirates and Venezuela

Established in 1960 in Baghdad by five Founder Members: Iran, Iraq,

Kuwait, Saudi Arabia and Venezuela
 Subsequently registered with the UN Secretariat in 1962 (No. 6363)

The organization’s principal objective is

 “…to coordinate and unify the petroleum policies of its Member Countries and
ensure the stabilization of oil markets in order to secure an efficient, economic
and regular supply of petroleum to consumers, a steady income to producers
and a fair return on capital for those investing in the petroleum industry….”

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OPEC (2)
Cartel Group / Producer’s Alliance
 Member countries decide on production quotas. Oil prices are set by market depending
on global situation…Uncertainty in Global Demand is a challenge..
 Saudi Arabia the “swing producer” has large influence on global oil market due to
substantial production capability – centeralised by one company (Saudi Aramco) – and
being one of the lowest cost producers in the world

First oil price shock - “Arab Oil Embargo” (Oct 1973)

 OPEC had been unable to increase “posted” price until Oct 1973
 The Arab-Israeli war & Arab oil embargo to USA aimed at initiating policy change with
respect to Israel, rose oil prices by 300+% to ~$12 / barrel (“The Oil Weapon”)

The International Energy Agency (IEA) established in Nov 1974

 „the need by the major energy consuming countries to co-operate effectively on a broad
spectrum of energy policies and most urgently on the security of energy supply”
 USA starts to build “strategic petroleum reserves (SPRs)”

Second oil price shock - the Iranian Revolution (1978-79)

 Price of oil was elevated to ~$34 / barrel because of the revolution and Iraq-Iran war

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OPEC versus IEA

Both OPEC and the IEA share two virtually common objectives;
 Reduce the fluctuation in the oil prices
 Unification of petroleum policies for member countries

….The two organisations however have key critical distinctions….

 OPEC member countries have a high fiscal breakeven price to balance their
national budget and prefer higher oil prices
 OPEC considers that oil is a finite resource, that is depleting and must be
replaced by additional resources to meet global oil demand


 The IEA member nations (mainly OECD countries) tend to prefer lower oil prices
to boost growth of “diversified” economies

As part of energy / sustainability research it is paramount

importance to review at least both IEA and OPEC reports and
forecasts

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 Proven Oil Reserves
(~1.5 Trillion Barrels at end of 2021)

Source:- OPEC : OPEC Share of World Crude Oil Reserves

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Global Oil Supplies (OPEC & Non-OPEC)

OPEC members maintain the world's

entire spare crude oil production
capacity
 Spare capacity is an indicator of ability to
respond to potential disruptions in oil
supplies
 Developing and maintaining idle spare
production capacity is not cost-effective
 Business model of private oil companies
(IOCs) is focused on maximizing values
and revenues - as long as the price of
selling the oil is higher than the cost of
supplying it

“Call on OPEC”
 “the difference between global oil demand
and supply from non-OPEC countries”

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OPEC Cartel Enforcement Challenge
Cohesion and quota discipline
 Exceeding quota limit / cheating by members

Rivalry between groups of countries or member countries

 “hawks-countries” - Generally sanctioned countries (e.g. Iran / Libya / Venezuela) have
lower oil productions will request higher prices to get maximum revenue
 “doves-countries” – Generally countries with higher oil production output (e.g. Saudi
Arabia, UAE and Kuwait) target for “moderate” oil prices to limit energy switching /
substitution effects

OPEC members produce around 35- 40% of world crude oil, however their
export is more than 50% of global crude oil trade

Crude oil prices is set by “sentiments / speculation”

 3 major petroleum exchanges; The New York Mercantile Exchange, the International
Petroleum Exchange in London, and the Singapore International Monetary Exchange

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Energy Prices & Macroeconomic Impacts

Higher energy prices

 Supply-side driven (decrease in supplies – e.g. geopolitics, sanctions)
 Demand-side driven (increase in demand – e.g. global economic growth)

Macroeconomic impact of higher energy prices;

 Increases the cost of goods and services - Rise in inflation
 Adjustment to interest rates to combat inflation – Currency impact
 Reduction in disposable income and demand for domestic goods & services
 Businesses curtailing / postponing investment
 Slow-down in economic growth (GDP)
 Higher national budget deficits for oil consuming countries due to costlier
fuel imports & subsidies - Net impact will reduce public sector spending
 Alternative sources of affordable energy supplies – Renewables

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High Oil Prices & Economic Downturn

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OPEC Oil Restrictions on Prices
Initial Supply Restriction

Long-run Demand Response Long-run Supply Response

Source:- Adjusting to Oil Price Shocks

https://wps.pearsoned.com.au/wps/media/objects/1634/1673962/case03_2.htm
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Breakeven Price of Crude Oil
OPEC – “The low cost producer”

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Petroleum History / Timeline

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Petroleum History Timeline
500 B.C. 1781
 First man-made oil well dug in  Voynovich, chief of the Caspian
Mesopotamia during the reign of Darius expedition, finds the signs of oil & gas in
the Great Absheron peninsula and charts a detailed
map.
347 A.D.
 Oil wells are drilled in China up to 800 ft 1803
deep using drill bits attached to bamboo  Offshore oil extraction reported in Bibi-
poles Heybat Bay of the Caspian Sea
(Azerbaijan) from two hand-dug wells 30
600 A.D. meters away from the shoreline.
 Confucius wrote about wells drilled for
salt in China that encountered oil & gas 1855
 First oil well in Indonesia at Toenggal
1273 A.D.
 Marco Polo recorded visiting the Persian 1857
city of Baku (Caspian Sea), where oil was  First drilling of oil wells at Bend on the
being collected from seeps for use in Romanian side of the Carpathians
medicine and lighting and viewed the
“Eternal Fires” 1859
1725  Colonel Drake drills his discovery
 Peter the Great of Russia issues
well (69 feet) at Titusville,
regulations to control the shipping of oil on Pennsylvania
the Volga River
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 Petroleum History Timeline (2)
1870 1896
 John D. Rockefeller enters the oil  Daimler and Benz invention of car resurrect
the market for petroleum
refining business; forms Standard
Oil of (Cleveland, OH) to produce  First offshore oil production – from a pier at
kerosene for lighting purposes Summerland, California

1873 1901

 Nobel family (excluding Alfred, the dynamite  Spindletop gusher near Baumont, TX
inventor, who established the Nobel Prizes)  Knox D’Arcy signs concession agreement with
drills for oil in Baku area in Russia (modern Iran to explore for oil
day Azerbaijan)
1903
1882  Wright Brothers first aircraft
 Thomas Edison invests electric light bulb ,  Petroleum boom in California (Unocal)
endangering the future of petroleum markets
1907
1885
 Merger of Shell and Royal Dutch
 The Rothschilds develop petroleum in
Russia. Royal Dutch develops petrleum in 1908
Sumatra (Indonesia)
 Oil discovered in Iran (by Anglo-
1892 Persian later become BP)
 Marcus Samuel from Shell transport oil from  Henry Ford begins mass production of the
Suez canal (had opened in 1869) Model “T” paving the way for car ownership
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Petroleum History Timeline (3)
1911 1928
 Dissolution of Rockefeller’s  “Red-Line Agreement” allow a
Standard Oil cartel for violation of consortium of US, British, French,
“Sherman Antitrust Act” to form and Dutch companies to control
smaller oil companies which bulk of oil production from ex-
eventually became Exxon, Mobil, Ottoman territory, facilitated by
Amoco, Chevron etc. Calouste Gulbenkian (“Mr five
percent”)
1914 – 1918
 During the WWI, USA provides oil to 1931
Britain and France. Use of oil becomes  Oil price plummets to a few cents / barrel
vital in modern warfare
1933
1921
 Standard Oil of California (Chevron) is
 First experiment of using seismic waves to heavily involved in drilling in Saudi Arabia
image subsurface in Oklahoma
1938
1928  Petroleum boom in Kuwait and Saudi
 “As-Is” (Achnacarry) Agreement – Arabia… ARAMCO participation by US
Britain attempt to stabilize oil Companies bound by Red-Line Agreement
prices through collusion “Basing-  Nationalisation of the petroleum industry in
Point System” with mixed success Mexico

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Petroleum History Timeline (4)
1939 – 1945 1969
 Oil continues to play a vital role  Petroleum discovered in the North Sea but
not produced until 1975
during the WW II with “Basing-
Point” system still in force 1971
1953  Tehran & Tripoli Agreement
 Iran nationalise its oil industry (Mossadeq) 1973
and CIA’s overthrow the Iranian government
through organised military coup  First “Energy Crisis”; Arab oil
embargo against USA in
1956-1958
retaliation for its support for Israel
 Petroleum boom in Algeria, Angola, Nigeria – Syria / Egypt attack Israel in the
and Libya Yom Kippur war
 First offshore drill rig and jack-up rig
1979
1960
 Second “Energy Crisis”; Iranian
 Formation of OPEC
revolution causes major
1968 disruptions in oil supplies from
 Petroleum discovered in Alaska (Prudhoe Persian Gulf
Bay) but not exploited until 1977
1980
 OPEC troubles begin. Iran / Iraq war

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Petroleum History Timeline (5)
1982 1998 - 2001
 OPEC establishes production quotas  The Baku region and Caspian Sea in
general becomes the focus of interest for
and has occasional difficulties
IOCs, but the key issue is transportation to
ensuring adherence by member open sea and world markets
countries
2005
1989
 Renewable fuel support
 Exxon Valdez oil spill in Alaska
2010
1990  BP Horizon oil spill in the Gulf of Mexico
 Third “Energy Crisis”. Iraq invades
2011
Kuwait causing another major oil
disruption in supplies from Persian  Libya uprising
Gulf  US releases oil from Strategic Reserves

1997 2016
 Kyoto Protocol  Paris Climate Agreement

1998 - 2001 2022

 Petroleum is as inexpensive as bottled water  Fourth “Energy Crisis” Russia
 Birth of the super-majors BP/Amoco, invades Ukraine
Exxon/Mobil, Chevron/Texaco

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 History of US Oil Production
1850 – 2019

Source :- BP
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 Review of the
Group Work Cases

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