OPEC Strategies Research Articles

The USA’s Shale Oil Revolution: OPEC Strategies and Oil Prices War in Global Economy

Background: At the beginning of 2020, the Covid-19 pandemic attacked the world and affected the continuity of the world economy. This condition also causes oil prices to decline further. OPEC plans a strategy to realize its role as a regulator of the world oil trade. Not only the global economy but the stock market is also affected by the decline in oil prices. Production of shale oil in the United States lowered OPEC oil prices, coupled with economic conditions during the Covid-19 pandemic which worsened the international economy. Aim: The authors examined changes in oil prices due to United States’ shale oil. Method: The qualitative method and literature review were employed in this study. The information was compiled from a variety of documents and other sources. Findings: The United States reduced its reliance on OPEC imports, which resulted in lower OPEC oil prices due to an oversupply and decreasing demand. Along with the Covid-19 epidemic, not only is the global economic collapse growing worse, but the decrease in oil prices in early 2020 is getting worse as well. Finally, the world economy suffered a downturn, which impacted the international capital market.

A financial option perspective on OPEC strategy

Abstract. The article examines the use of discretionary production by key OPEC members to protect the long-term value of their reserves. Although interpretations vary on its behaviour and market power, the organisation sees its role as promoting the security of supply through stabilising markets while protecting market share and ensuring a fair return to capital. Given the new and perennial challenges facing its members, there are diverse views on how these policy objectives may be promoted. Using option theory, we argue that the market stabilisation policy of OPEC in effect, provides free risk management to the global market and conflicts fundamentally with its long-term objective of protecting market share through discouraging high-cost marginal producers. Abandoning this policy, the returns to marginal producers, adjusted for risk, would be reduced. As implications of our research, rather than creating a social good through mitigating price risk, OPEC should allow markets to be volatile and even consider using its discretionary buffer in a pro-cyclic manner, to protect the long-term value of its reserves. Keywords. OPEC, Risk Management, Shale Petroleum. JEL. Q02, Q43, Q48, Q58.

The effect of oil and gas price and price volatility on rig activity in tight formations and OPEC strategy

Exploration of tight oil and gas formations has significantly increased US oil and gas production in recent years. However, detailed economic analysis of this production, including identification of the break-even price (BEP), the measure of price used to plan exploration and development, a synergy between price volatility and the BEP, and a feedback effect of tight oil production on oil prices, has yet to be carried out. Here we show that the BEP for rigs used to drill oil wells is $20 (~$50 nominal), the effect of price volatility on rig activity declines as the price for crude oil or natural gas moves above or below this BEP, firms use futures prices (not spot prices) to plan exploration and development, and new rig productivity affects both drilling activity and oil prices. The latter indicates that increases in new rig productivity can account for much of the 2014 oil price decline. Tight oil and gas extraction is costly and low prices lead to reduction in investments and eventually production. Here, studying the effects of price volatility on active rigs, researchers find the break-even price and show that firms use future and not spot prices to plan exploration and development investment.

Comments: Shale Sustainability

Editor's column Public and government concern over unconventional oil and gas production continues. Hardly a month goes by before another study into the potential health effects of shale production is launched or a public hearing is conducted regarding the impact of a project on the local landscape. For example, last month the Southwest Pennsylvania Environmental Health Project opened a public health registry to track and analyze the impact of shale gas development on people living near wells, pipelines, and other infrastructure. That followed the release of a Duke University study that concluded that hydraulic fracturing in the Marcellus Shale did not pollute groundwater in West Virginia but that wastewater spillage contaminated some surface water. Many of the reports and studies are drawing similar conclusions—that hydraulic fracturing poses little or no risk but that contamination can occur during the transportation or treatment process. Shale oil and gas development has certainly changed the world order in these commodities, from OPEC strategy and commodity prices to global import/export patterns. The US, with abundant gas still depressing prices, is becoming an exporter of liquefied natural gas rather than an importer. Shale oil is largely responsible for the low oil prices of the past 2 years, turning the US into the world’s “swing” producer, a position Saudi Arabia once held. Industry resiliency amid low oil prices led to slashing of service company costs, operational efficiencies, and high-grading of properties. As service costs now begin to rise, profitable production in a world of USD 40–60/bbl oil will require further innovation. But the industry also continues to face regulatory challenges based on environmental concerns. Maryland has recently followed New York in legislating against hydraulic fracturing. A new book, Sustainable Shale Oil and Gas: Analytical Chemistry, Geochemistry, and Biochemistry Methods by Vikram Rao and Rob Knight argues that this type of policymaking is hampered by inadequate data, which in turn is caused by shortcomings in analytical techniques. The authors describe new cost-effective analytical methods for detecting fugitive methane as well as particulate matter and volatile organic chemicals, including a portable shoe-box-sized mass spectrometer with performance approaching that of a laboratory machine. The last line of the book states, “That which cannot be measured, cannot be regulated or otherwise controlled or exploited.” They apply this reasoning to improving the economics of recovery as well. The book discusses analytical methods to illuminate the unconventional reservoir, including a fascinating method using DNA sequencing to characterize reservoir rock through examination of microbial populations. The book lays out how analytical chemistry, geochemistry, and biochemistry play prominent roles in hydraulic fracturing and that they are central to the three tenets of sustainable production: protecting the environment, protecting the well-being of local communities, and profitability. Innovation has been a necessity for survival in the low oil and gas price market, and continued innovation will result in an industry resilient to future unexpected challenges. And the authors contend that that innovation and production is achievable in environmentally responsible fashion.

Oil Price Versus Oil Output: Is Opec's Strategy Right?

The goal of this paper is to analyze the impact of OPEC’s oil price level versus oil supply strategy on the country’s gross domestic product (GDP) growth rate. Our motivation comes from a fundamental dilemma facing OPEC nations. Its members need to choose between the traditional OPEC cartel policy of setting quotas to target a certain oil price level versus that of choosing the oil output level that maximizes profits of oil producing firms. The main objective of this research is to investigate the relative efficiency of these two policies in promoting long-run economic growth in oil exporting countries. For that purpose, it uses time-varying parameter models in order to account for multiple structural breaks that characterize the crude oil market. This paper contributes to the oil and macroeconomics literature by showing that the impact of crude oil output on oil exporters’ GDP growth is much stronger than that of oil price fluctuations.

Comments: Ending the US Export Ban

Editor's column US companies began selling crude oil on the international market last month shortly after the US Congress ended the country’s 40-year-old ban on oil exports. The action is another byproduct of the US shale revolution and will do little to settle the current fight over global oil market share that has driven oil prices to decade lows. Congress enacted the ban in 1975, after the OPEC oil embargoes against the US in the 1970s drove gasoline retail prices higher and caused regional gasoline shortages. There has been an occasional relaxing of the ban, such as in the 1980s when shipments of crude began being allowed to Canada and in the 1990s when sales of Alaskan North Slope crude were permitted to relieve a glut of heavy oil on the US west coast. Last year, the ban on shipments of condensate was lifted, and both Pioneer Natural Resources and Enterprise Product Partners began selling condensate overseas. The first sales of US crude took place on 31 December and in the first week of January as ConocoPhillips and Enterprise shipped cargoes from Texas to Europe. The recent drilling boom in south and west Texas has ushered in a buildup in infrastructure to the refineries along the US Gulf Coast, which will make export easier. The shale boom made the argument in favor of the embargo seem antiquated. After falling steadily since 1985, US crude production began increasing in 2009 with the sharp rise in shale output. In 2009, US output rose to 5.4 million B/D and increased to 9.3 million B/D last year, as the country almost doubled production, according to the US Energy Information Administration. The US now rivals Saudi Arabia and Russia in terms of energy output and its crude production now surpasses its oil imports. In the short term, US crude exports should have little effect on the global oil market or oil prices. The world is currently awash in supply and shipping US crude to far-away places such as Asia is uneconomic compared with cheaper oil offered from the Middle East. But in the long term, when the global supply/demand balance tightens, Asia will have another option for crude, especially after a planned expansion of the Panama Canal is completed. Latin America may be a natural outlet for US oil as its refineries are geared to running the light, sweet crude such as that which comes from the Eagle Ford Shale. Most of the refineries on the US Gulf Coast are built to process heavier crude. Shale producers will have another market for their crude, which should encourage production once oil price levels rise again. A study by Columbia University predicted that lifting the export ban could increase US crude oil production by 1.2 million B/D. The American Petroleum Institute, which lobbied to lift the ban, said the US will now be a major player in the global oil market. While that is not likely in the short_ term, lifting the ban does add another wrinkle to the current battle over global oil market share, which has changed OPEC strategy and caused crude prices to plummet. JPT

Comments: A Pivotal Month

Editor's column This month should offer key clues to the direction of the oil market over the next several months. OPEC countries will meet on 5 June in Vienna in a regular meeting to discuss their current supply to the market and production quotas. And government figures released this month should begin to get a better handle on the decline in US production. OPEC’s last meeting, in November, contributed to the steep drop in oil prices when Saudi Arabia decided it would no longer play the role of “swing producer” and would instead defend market share. Although many took this as provocative, several executives speaking at the recent IHS CERA conference in Houston noted that OPEC fears prolonged high oil prices could lead to faster development of alternative energy, and the cartel is engaged in a “price discovery exercise” to determine the sustainability of US shale producers. “I think it’s going to be very useful to the industry to have a clear understanding of the resilience of these resources, how robust the resources are, and how they are able to withstand different price environments,” said ExxonMobil Chief Executive Officer Rex Tillerson. Most of the executives at the conference agreed that the current price downturn would last a while and that the current situation seemed closer to the downturn that occurred in the mid-1980s, rather than more recent price downturns. The OPEC strategy is definitely having an impact on North American production. The US Energy Information Administration last month lowered its 2015 and 2016 crude oil production growth forecasts. Its latest Short-Term Energy Outlook predicts that US crude production this year will increase 530,000 B/D (revised down from 550,000 B/D) and that 2016 growth will be 20,000 B/D (revised down from 80,000 B/D). US producers have cut spending, idled more than half of the country’s drilling rigs, and eliminated thousands of jobs. The number of active rigs working in the US had fallen for 23 weeks in a row as of mid-May.

OPEC’s Strategies

This paper investigates rationale explanations of OPEC’s strategies. Accounting for market characteristics in particular the sluggishness of demand and supply allows to explain price jumps as rational OPEC strategies from a narrow economic perspective (up and down) as well as from political objectives (at least up) due to the political payoff from standing up against the ‘West’. Although the temptation to accrue this political payoff was and remains high, the narrow economic profit motive coupled with an imperfect cooperation among OPEC members explains past price volatility and high prices much better than the usual reference to political events. A more specific prediction is that OPEC will switch back to setting prices since the current quantity strategy encourages oil importing countries to appropriate rents in particular in connection with the need to mitigate global warming.

Can reserve additions in mature crude oil provinces attenuate peak oil?

Following the peak in US crude oil production 30 years ago, more and more non-OPEC producers have seen their production decline as a result of resource depletion. OPEC, on the other hand has extracted a comparatively smaller proportion of its reserve base. Given that new non-OPEC discoveries are growing ever limited, we explore the role of reserve additions and OPEC in determining future crude oil supply: we formulate a model that embodies a weak and strong OPEC for various rates of reserve additions in mature crude oil provinces. Using this geo-economic partial equilibrium model that generates a peak in crude oil production, we show that although potential conventional crude oil resources may seem abundant, OPEC strategy could cause substantial crude oil reserve depletion in non-OPEC countries by 2050 (or even earlier) given likely depletion rates. In addition, we find that reducing reserve decline rates in mature crude oil provinces not only extends the time to exhaustion substantially, but also discourages OPEC from engaging in an overly strategic extraction behavior.

Can Reserve Additions in Mature Crude Oil Provinces Attenuate Peal Oil?

Following the peak in US crude oil production 30 years ago, more and more non-OPEC producers have seen their production decline as a result of resource depletion. OPEC on the other hand has extracted a comparatively smaller proportion of its reserve base. Given that new non-OPEC discoveries are growing ever limited, we explore the role of reserve additions and OPEC in determining future crude oil supply: we formulate a model that embodies a weak and strong OPEC for various rates of reserve additions in mature crude oil provinces. Using this geo-economic partial equilibrium model that generates a peak in crude oil production, we show that although potential conventional crude oil resources may seem abundant, OPEC strategy could cause substantial crude oil reserve depletion in non-OPEC countries by 2050 (or even earlier) given likely depletion rates. In addition, we find that reducing reserve decline rates in mature crude oil provinces not only extends the time to exhaustion substantially, but also discourages OPEC from engaging in an overly strategic extraction behavior.

Financial market pressure, tacit collusion and oil price formation

We explore a hypothesis that a change in investment behaviour among international oil companies (IOC) towards the end of the 1990s had long-lived effects on OPEC strategies, and on oil price formation. Coordinated investment constraints were imposed on the IOCs through financial market pressures for improved short-term profitability in the wake of the Asian economic crisis. A partial equilibrium model for the global oil market is applied to compare the effects of these tacitly collusive capital constraints on oil supply with an alternative characterised by industrial stability. Our results suggest that even temporary economic and financial shocks may have a long-term impact on oil price formation.

The Anarchy of Numbers: Understanding the Evidence on Venezuelan Economic Growth

ABSTRACT This paper studies the causes of Venezuela's low economic growth from 1950 to 1998. We show that there exist wide divergences in many commonly used estimates of GDP growth, and discuss the sources of those differences. We show that the choice of base year and linking techniques is crucial for the diagnosis of economic growth, and argue that the aggregate GDP and Total Factor Productivity (TFP) growth numbers are distorted by cuts in oil production that came about as a result of the country adopting the OPEC strategy of exploiting market power during the 1970s. We argue that non-oil growth and TFP numbers represent more adequate measures of economic performance and that, while far from satisfactory, these do not deviate significantly from those of other Latin American countries.

The Incentive to Cheat: An Empirical Analysis of OPEC

Relatively little is known about the payoffs to various kinds of strategies facing OPEC cartel members. We propose an empirically tractable procedure to calculate the payoffs to relevant OPEC strategies. Fresh insights into the problem of the quota system and deterring cheating are presented, stressing the importance of the nonrenewability of the oil stock, the short‐run rigidity of demand, short‐term capacity constraints, the presence of a backstop technology, and the different discount rates the cartel members are facing. We conclude that punishment is a dominant strategy for the Saudis and that the finite resource base in the oil industry substantially attenuates the incentive to cheat. Also, the biased market quota system in favor of small producers weakens, but does not eliminate, their incentive to cheat. In addition, we compute the price paths and payoffs corresponding to competitive, Cournot, and joint‐profit‐maximization solutions and contrast them with the actual historical patterns of OPEC behavior.

Dynamic demand, consumers' expectations and monopolistic resource extraction: An application to OPEC pricing policies

This paper introduces intertemporal decision making of the consumers, including different price expectations (myopic, rational), into the framework of monopolistic resource depletion. This adds another dynamic feature which has been neglected by and large by the literature. In particular a differential game of the von Stackelberg type between consumers and an oil extracting monopoly is considered. Analytical solutions are obtained when demand is linear. This framework is then empirically applied to derive and reconcile rational OPEC strategies and past behaviour.

The OPEC Market to 1985 and The Evolution of OPEC Strategy

The OPEC Market to 1985 and The Evolution of OPEC Strategy

The Brotherhood of Oil: Energy Policy and the Public Interest, by Robert Engler ; The Evolution of OPEC Strategy, by Fariborz Ghadar

The Brotherhood of Oil: Energy Policy and the Public Interest, <i>by Robert Engler ; </i> The Evolution of OPEC Strategy, <i>by Fariborz Ghadar</i>

Book reviews

Book reviews