OPEC Production and Crude Prices: Review and Outlook

Abstract

Abstract The quantum jumps in oil prices that took place during the 1970's set in motion certain place during the 1970's set in motion certain irreversible forces that have changed the structural demand for energy. The 28% decline in energy demand per real GNP among the seven major industrialized countries (65% of the Free World's energy consumption) over the past fourteen years suggests that economic growth has been decoupled from the historical 1:1 ratio with energy consumption. Re-enforcing this view are the resultant negative elasticities (ratio the percent change in demand to the percent change in price) of 0.38–0.55 between the years 1973 and 1985. In 1980, a methodology was developed employing the concept of price elasticity and economic growth to ascertain the future demand pull on OPEC reserves and ultimately the direction of crude oil prices (See SPE paper 11314 dated March, 1983). A review of the methodology utilizing actual 1985 data indicates that the matrix of economic growth versus percent change in energy demand per real GNP has relatively strong predictive per real GNP has relatively strong predictive value. This review will be the first subject of discussion in the paper. The second part of the paper employs the same model in an attempt to forecast the demand pull on OPEC production, OPEC capacity pull on OPEC production, OPEC capacity utilization, and the expected price for crude in the early 1990's. However, the precipitous decline in oil prices in 1986 now suggests a slightly negative to positive elasticity and a possible turnaround in declining demand for OPEC possible turnaround in declining demand for OPEC crude. If OPEC can exercise production discipline and act as the world's swing producer to balance the oil supply-demand, there appears to be a good chance in the early 1990's for oil prices to stabilize at the $18.00-$20.00 per barrel level, with the call on OPEC crude production reaching levels near 80% of OPEC productive capacity, up from the current level of 64%. Introduction In 1980, the conventional wisdom among both industry and Wall Street analysts was that oil prices would continue their unrelenting advance, prices would continue their unrelenting advance, reaching levels of $50-$60 per barrel in the mid to late 1980's. Those forecasts were re-enforced after initial quantum jumps in oil prices occurred between 1973 and 1979 when crude oil advanced from $3.00 per barrel to $19 per barrel. Subsequently, a second quantum jump in oil price was experienced in 1980–81, when prices advanced to about $34 per barrel, prices advanced to about $34 per barrel, bolstered by the Iran-Iraq war. At that time, serious questions were being asked within our investment group about what happens to supply and demand schedules after a commodity increases in price by factors of 10X-25X. The urgency of this issue becomes quite apparent when one has approximately 25% of one's investment portfolio weighted toward energy and energy related equities. Obviously, the ability to develop a quantitative approach to a possible direction of oil prices would determine importantly the investment decision process regarding the amount of money to be process regarding the amount of money to be invested in the energy area. P. 79