OPEC Market Research Articles

Factors Influencing China’s Oil Diplomacy in the Middle East

Even though China extracts oil more than any other country in the Asia-Pacific region, the country is still hugely dependent on imports, and this dependence increases with each passing year. In recent years, the need for import of oil in China had risen from 35% in 2000 to 70% in 2017. Today, the People’s Republic of China mainly buys crude oil in the Middle East and political change in the region directly influence on Chinese foreign policy. In this study, we examined four critical factors that influence china’s oil diplomacy in the Middle East. Accordingly, Arab spring events, OPEC, China foreign policies and strategies, and influence of the U.S. in the region have direct or indirect effects on china’s oil diplomacy. China’s historical reaction to these factors is remarkable and made its energy security strategies in the Middle east. This study shows that the events of the Arab Spring hurt China’s oil diplomacy with the middle East countries. The developments taking place in the Middle East from the beginning of the Arab Spring have led to an increase in world oil prices. For China, this meant higher import bills and a reduction in the trade surplus, as well as slower economic growth, as the contribution of net exports decreased. OPEC market controlling strategies let China thinks to other oil producers, and oil exports from the Middle East reduced in front of increasing imports from other regions. U.S. as hegemon of the area somehow made steady pressure on China alliance, especially after making sanctions on Iran due to its nuclear programs. During the trade war between the two countries, the influence of the U.S. on China oil diplomacy more appeared.

OPEC, unconventional oil and climate change - On the importance of the order of extraction

We show that OPEC's market power contributes to climate change by enabling producers of relatively expensive and dirty oil to start producing before OPEC reserves are depleted. We examine the importance of this extraction sequence effect by calibrating and simulating a cartel-fringe model of the global oil market. While welfare net of climate damage under the cartel-fringe equilibrium can be significantly lower than under a first-best outcome, almost the entire welfare loss is due to the sequence effect of OPEC's market power. In our benchmark calibration, the cost of the sequence effect amounts to 15 trillion US$, which corresponds to 97 percent of the welfare loss. Moreover, we find that an increase in non-OPEC oil reserves decreases global welfare. In a counterfactual world without non-OPEC oil, global welfare would be 13 trillion US$ higher, 10 trillion US$ of which is due to lower climate damages.

Crude oil risk forecasting: New evidence from multiscale analysis approach

Fluctuations in the crude oil price allied to risk have increased significantly over the last decade frequently varying at different risk levels. Although existing models partially predict such variations, so far, they have been unable to predict oil prices accurately in this highly volatile market. The development of an effective, predictive model has therefore become a prime objective of research in this field. Our approach, albeit based in part on previous research, develops an original methodology, in that we have created a risk forecasting model with the ability to predict oil price fluctuations caused by changes in both fundamental and transient risk factors. We achieve this by disintegrating the multi-scale risk-structure of the crude oil market using Variational Mode Decomposition. Normal and transient risk factors are then extracted from the crude oil price using Variational Mode Decomposition and modelled separately using the Quantile Regression Neural Network (QRNN) model. Both risk factors are integrated and ensembled to produce the risk estimates. We then apply our proposed risk forecasting model to predicting future downside risk level in three major crude oil markets, namely the West Taxes Intermediate (WTI), the Brent Market, and the OPEC market. The results demonstrate that our model has the ability to capture downside risk estimates with significantly improved precision, thus reducing estimation errors and increasing forecasting reliability.

OPEC's market power: An empirical dominant firm model for the oil market

We estimate a dominant firm-competitive fringe model for the crude oil market using quarterly data on oil prices for the 1986–2016 period. The estimated structural parameters have the expected signs and are significant. We find that OPEC exercised market power during the sample period. Counterfactual experiments indicate that world GDP is the main driver of long-run oil prices. However, supply (depletion) factors have become more important in recent years.

OPEC's kinked demand curve

Asymmetric effects of oil prices on the macroeconomy imply multiple equilibrium prices for OPEC. I estimate world demand for crude oil, non-OPEC supply, and the effects of changes in price on world GDP using quarterly data covering 1973 to 2010. If OPEC's marginal cost is $20/bbl in 2014:III, and its discount rate is zero, estimated equilibrium prices are $44–88/bbl. Multiple equilibria incent OPEC to tolerate unstable prices, which, because of the asymmetry, lower world GDP. Both policies that increase responsiveness to price and policies that lower net demand to OPEC narrow and lower the range of equilibrium prices, but the former are more effective at doing so. OPEC responds to changes in the discount rate in the opposite way from competitive producers, so policies that secure oil-related property rights in OPEC countries and other policies that lower OPEC's discount rate narrow and lower the range of equilibrium prices. Monetary policy is more effective at accelerating or slowing macroeconomic activity the larger is OPEC's market share.

Assessing the impact of two recessions on the oil and gas industry: severity of declines and future outlook

Six years after the Great Recession of 2008/2009, the oil and gas industry is afflicted by a new crisis: OPEC’s global oil price war. Many see the 2014/2015 oil price plunge as a test of financial endurance between OPEC and US shale producers. Shale producers have added 4 million barrels of crude per day to global oil supply since 2010, and reduced the US need for Saudi imports. Canadian tar sand producers added nearly another 4 million barrels per day in less than a decade. Rising output of US shale oil and Canadian tar sand producers threatened to erode the OPEC market share. All growth in global oil demand has over the past decade led to a rise in market share only for non-OPEC producers. That is what Saudi Arabia and its OPEC associates wanted to stop. In an effort to put the new entrants (unconventional oil producers) out of business, the 2014/2015 oil price plunge has been deliberately prolonged by OPEC, which continues to oversupply the market by more than 1.5 million barrels per day. Unlike today, OPEC helped in 2008/2009 to restore oil prices rapidly by steep production cuts in response to lagging oil demand owing to the global recession. In this article, we compare the severity of the impact brought on by the two most recent oil price crises on the various types of oil companies. Tracking timely market capitalization and P/E ratios (share price per earnings) of the oil majors covering the 2008 epoch of oil price decline confirmed that oil company KPIs recovered rapidly during the second quarter of 2009 (Weijermars, 2010; 2011). An update of the analysis of key performance indicators (KPI) over the past decade provides insight into how companies are affected by poor market conditions. We examine the periods before the two recessions, and include post-2014 data after the beginning of the current oil price war. This study tracks the impact of economic downturns on 26 upstream oil and gas companies. In order to facilitate the analysis of the data for the 26 companies tracked on this study, they were split into peer groups based on shareholder structure, size of the corporation, degree of vertical integration and the types of oil/gas production most commonly performed by the company. The five different peer groups studied are majors, independents, US shale producers, Canadian oil sand producers and public private partnerships (PPP). The five peer groups and their respective companies are presented in Table 1. The KPIs chosen for our study are share prices, market capitalization and return on capital employed (ROCE). These were tracked annually, quarterly and daily between 2005 and 2014, and for the first half of 2015 with information available until completion of our study (July 2015).

OPEC's Market Power: An Empirical Dominant Firm Model for the Oil Market

In this paper we estimate a dominant firm-competitive fringe model for the crude oil market using quarterly data on oil prices for the 1986-2009 period. All the estimated structural parameters have the expected sign and are significant at standard test levels. We find that OPEC exercised its market power during the sample period. Counterfactual experiments indicate that world GDP is the main driver of long-run oil prices, however, supply (depletion) factors have become more important in recent years.

Endogenous Shifts in OPEC Market Power: A Stackelberg Oligopoly with Fringe

This article proposes a two-stage oligopoly model for the crude oil market. In a game of several Stackelberg leaders, market power increases endogenously as the spare capacity of the competitive fringe goes down. This effect is due to the specific cost function characteristics of extractive industries. The model captures the increase of OPEC market power before the financial crisis and its drastic reduction in the subsequent turmoil at the onset of the global recession. The two-stage model better replicates the price path over the years 2003-2011 compared to a standard simultaneous-move, onestage Nash-Cournot model with a fringe. This article also discusses how most large-scale numerical equilibrium models, widely applied in the energy sector, over-simplify and potentially misinterpret market power exertion.

OPEC's Market Power: An Empirical Dominant Firm Model for the Oil Market

In this paper we estimate a dominant firm-competitive fringe model for the crude oil market using quarterly data on oil prices for the 1986-2009 period. All the estimated structural parameters have the expected sign and are significant at standard test levels. We find that OPEC exercised its market power during the sample period. Counterfactual experiments indicate that world GDP is the main driver of long-run oil prices, however, supply (depletion) factors have become more important in recent years.

Explaining crude oil prices using fundamental measures

Oil is the world's most important commodity, and improving the understanding of drivers of its price is a longstanding research objective. This article analyses real oil prices during 1984–2007 using a monthly dataset of fundamental and market parameters that cover financial markets, global economic growth, demand and supply of oil, and geopolitical measures. The innovation is to incorporate proxies for speculative and terrorist activity and dummies for major industry events, and quantify price impacts of each. New findings are positive links between oil prices and speculative activity, bond yields, an interaction term incorporating OPEC market share and OECD import dependence, and the number of US troops and frequency of terrorist attacks in the Middle East. Shocks also prove significant with a $6–18 per barrel impact on price for several months.

Biofuels: Potential Production Capacity, Effects on Grain and Livestock Sectors, and Implications for Food Prices and Consumers

We examined four evolution paths of the biofuel sector using a partial equilibrium world agricultural sector model in CARD that includes the new RFS in the 2007 EISA, a two-way relationship between fossil energy and biofuel markets, and a new trend toward corn oil extraction in ethanol plants. At one extreme, one scenario eliminates all support to the biofuel sector when the energy price is low, while the other extreme assumes no distribution bottleneck in ethanol demand growth when the energy price is high. The third scenario considers a pure market force driving ethanol demand growth because of the high energy price, while the last is a policy-induced shock with removal of the biofuel tax credit when the energy price is high. Standard results hold where the biofuel sector expands with higher energy price, raising the prices of most agricultural commodities through demand side adjustment channels for primary feedstocks and supply side adjustment channels for substitute crops and livestock. On the other hand, the biofuel sector shrinks coupled with opposite impacts on agricultural commodities with the removal of all support including the tax credit. Also, we find that given distribution bottlenecks, cellulosic ethanol crowds marketing channels resulting in a corn-based ethanol price that is discounted. The blenders' credit and consumption mandates provide a price floor for ethanol and for corn. Finally, the tight linkage between the energy and agricultural sectors resulting from the expanding biofuel sector may raise the possibility of spillover effects of OPEC's market power on the agricultural sector.

The anatomy of three commodity booms

Three major commodity booms since the second world war are identified and analyzed. In all three, demand shocks predominated as triggers to the commodity price rises. The first boom, in 1950–51, was caused by the massive inventory buildup in response to the Korean war. The second, in 1973–74, was accentuated by widespread harvest failures and by OPEC's market management, which tripled the price of oil. The third boom started in 2004 and has not yet run its course. This time, the explosive growth of China's and India's raw materials demand has played a key role. The first two booms collapsed as the world economy went into recession and excessive inventories were sold out. The third boom may prove more durable since the world economy continues to expand briskly and commodity inventories have remained small.

Radioactivity concentration and heavy metal content in fuel oil and oil-ashes in Venezuela

Environmental radiation levels are modified in regions where the oil industrial activity is more aggressive, such as in the Zulia State and the Orinoco's Oil Belt. In these regions Venezuela is producing 1750 thousand barrels of oil from the near-to-the-surface or deep oil drilling, being its 2003 total OPEC market share 2932 thousand barrels of oil per day [1]. Petroleum constitutes an important source of energy and as the majority of natural sources it contains radionuclides and their disintegration products. The combustion of oil concentrates in the ashes those radioelements, which later enters the environment by different pathways producing adverse effects on the quality of man life. The concentration of radioelements varies greatly between oil fields, and then still requiring local survey studies in this area. Moreover due to the recent national interest in recycling processes, it becomes important to take care in the selection of materials that may contain by-products of industrial origin. In fact the oil ashes and other mining by-products are employable in the building industry. The concentration of radioactivity and heavy metals in crude oil, fuel oil N 6 and the ashes from power plants were determined. The analysis includes the two major thermoelectric power plants in Venezuela, Ricardo Zuluaga on the northern seaside of Caracas and Planta Centro on the littoral of Carabobo State. The study covers different samples: fuel oil N° 6, heavy and medium petroleum as well as fuel Oil N°6 ashes. Gamma spectrometry was used for measuring 226 Ra, 214 Pb, 214 Bi, 228 Ac, 212 Pb, 212 Bi, 208 Tl and 40 K, and heavy metallic cations were determined by ICP-MS, which also allows the direct determination of 232 Th and 238 U. In this material (oil ashes) the total activity concentration is above 300 Bq.kg -1 . Some criteria from the literature have been compared and used to investigate the applicability of oil ashes as an additive for building materials. The combustion concentrate also heavy metal cations, as is the case of Pb, Ni, Mn, V, Zn among others. The found high metal concentrations can represent an important environmental risk since the high amount of sulfates in the Venezuelan oil and ashes contributes to their dissolution and bioavailability.

Cyclical behaviour and shock‐persistence: crude oil prices

AbstractOil prices behave differently over different time‐horizons. For the short run, we examine the pattern of movements in crude oil prices over business cycles and test whether price increases influence global output and/or are influenced by economic cycles. For the long run, we focus on whether “shocks” to crude oil prices are persistent or not. Our findings indicate that the price of crude oil exhibits substantial cyclical behaviour, as verified by several tests carried out in this paper. The VAR analysis indicates that the price of oil is a pro‐cyclical variable. Moreover, the results show that, while, during the 1972–2003 period (when OPEC exerted more influence in the oil market), the oil market experienced substantial fluctuations in price, the price cycles were mean‐reverting and not shock‐persistent. This could indicate that OPEC market power can have stabilising effects.

Oil Exploration under Climate Treaties

In this paper we focus on how an international climate treaty will influence the exploration of oil in non-OPEC countries. We present a numerical intertemporal global equilibrium model for the fossil fuel markets. The international oil market is modelled with a cartel (OPEC) and a competitive fringe on the supply side, following a Nash–Cournot approach. An initial resource base for oil is given in the non-OPEC region. However, the resource base changes over time due to depletion, exploration, and discovery. When studying the effects of different climate treaties on oil exploration, two contrasting incentives apply. If an international carbon tax is introduced, the producer price of oil will drop compared to the reference case. This gives an incentive to reduce oil production and exploration. However, the oil price may increase less rapidly over time, which gives an incentive to expedite production and exploration. In fact, in the case of a rising carbon tax we find the last incentive to be the strongest, which means that an international climate treaty may increase oil exploration in non-OPEC countries for the coming decades and reduce OPEC's market share.

The shift in US oil demand and its impact on OPEC's market share

Tremendous political pressure is being exerted on the US government by different political parties to diversify its sources of foreign oil supplies by switching from the reliance on OPEC's oil to that originating from non-OPEC nations. Without a doubt, such a shift would adversely impact the market share of some OPEC members, particularly Saudi Arabia, Venezuela and Nigeria. These countries should therefore consider seriously the negative impact of this scenario and consequently formulate individual or joint production policies aiming at protecting their oil market share. To help OPEC achieve this objective, there is a need to estimate the demand function of US oil imports. This paper proffers an estimate of such a function, taking into account, among other variables, the impact of US Strategic Petroleum Reserve (SPR).

Global Energy Outlook: An Oil Price Scenario Analysis

At stable oil prices in the low 20s (US dollars per barrel), a reference case for oil market developments sees annual oil demand growth of 1.5 million barrels per day over the period 2000–10. At these prices, non-OPEC production growth, mainly from developing countries and the former Soviet Union, is expected to meet less than one-third of this increase in demand; this means that an annual rise in output of around 1 mb/d is required from OPEC, increasing to 1.4 mb/d yearly over the period 2010–20. However, high prices, above $30/b, lead to lower oil demand, and, in particular, a strong response in non-OPEC production for both conventional and unconventional oil. Consequently, there will be a sharp reduction in OPEC market share, with even production levels having to continually fall. Such a scenario suggests that a price of $30/b and above may be unsustainable. The moot question remains at what price non-linear non-OPEC production responses may be triggered in the future.

A note on OPEC market power and oil prices

A static model of OPEC as a cartel with a fringe group of competitive producers is used to define short-and long-run monopoly price curves as a function of OPEC's market share. A static model is used on the grounds that oil, as Adelman has argued, is not a depletable resource in the sense of the Hotelling theory, but is more like a normal good that can be produced with application of labour, capital, resources and technology. A rational cartel will choose prices that lie between the two curves. The shapes of the curves depend on the world price elasticity of demand for oil and on the supply response rate of competitive oil producers. As OPEC's market share increases, the distances between the two curves increase rapidly. This could lead to an unstable market since any price between the two curves would be obtainable in the short run. In the long run, prices above the long-run price curve will result in a loss of market share for the cartel (except in a growing market), reducing the cartel's market power. Future work will extend the model to consider dynamic pricing strategies as a function of the cartel's discount rate and world market response rate.

Book reviews

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The OPEC Market to 1985 and The Evolution of OPEC Strategy

The OPEC Market to 1985 and The Evolution of OPEC Strategy