OPECOPEC

Corey MerrillCorey MerrillKelsy AstonKelsy AstonChad LuntChad Lunt

Kelso LarsenKelso LarsenSo-Young LeeSo-Young Lee

OutlineOutline

Background Information – Corey Background Information – Corey Current Situation – KelsyCurrent Situation – Kelsy International Aspects – So-YoungInternational Aspects – So-Young Special Concerns – ChadSpecial Concerns – Chad Future of OPEC - KelsoFuture of OPEC - Kelso

Current SituationCurrent Situation

Background Information

What is OPEC?What is OPEC?

Organization of Petroleum Exporting CountriesOrganization of Petroleum Exporting Countries Permanent inter-governmental organization Permanent inter-governmental organization 11 oil producing and exporting countries 11 oil producing and exporting countries

throughout Africa and Asiathroughout Africa and Asia For these countries oil is the key to development For these countries oil is the key to development OPEC was formed at a meeting held on OPEC was formed at a meeting held on

September 14, 1960 in Baghdad, Iraq, by five September 14, 1960 in Baghdad, Iraq, by five Founder Members: Iran, Iraq, Kuwait, Saudi Founder Members: Iran, Iraq, Kuwait, Saudi Arabia and VenezuelaArabia and Venezuela

PurposePurpose

OPEC’s missionOPEC’s mission is to coordinate & unify the is to coordinate & unify the petroleum policies of Member Countries & ensure petroleum policies of Member Countries & ensure the stabilization of oil prices in order to secure an the stabilization of oil prices in order to secure an efficient, economic & regular supply of petroleum efficient, economic & regular supply of petroleum to consumers, a steady income to producers & a to consumers, a steady income to producers & a fair return on capital to those investing in the fair return on capital to those investing in the petroleum industrypetroleum industry

Impacts of OPECImpacts of OPEC OPEC does not control the oil market OPEC does not control the oil market OPEC did in fact set crude oil prices from the OPEC did in fact set crude oil prices from the

early 1970s to the mid-1980s, this is no longer early 1970s to the mid-1980s, this is no longer the case the case

Member Countries produce about 40% of the Member Countries produce about 40% of the world's crude oil and 15% of its natural gas world's crude oil and 15% of its natural gas

Exports represent about 55% of the crude oil Exports represent about 55% of the crude oil traded internationally traded internationally

OPEC's oil reserves are sufficient to last more OPEC's oil reserves are sufficient to last more than 80 years, while non-OPEC oil producers' than 80 years, while non-OPEC oil producers' reserves might last less than 30 years reserves might last less than 30 years

Current SituationCurrent Situation

Current Situation

President of OPECPresident of OPEC

Edmund DaukoruEdmund Daukoru From Bayelsa, an From Bayelsa, an

oil rich state in oil rich state in NigeriaNigeria

Was a geologistWas a geologist Developed a career Developed a career

with Shellwith Shell

OPECOPEC 11 members- Nigeria, 11 members- Nigeria,

Algeria, Libya, Iran, Algeria, Libya, Iran, Iraq, Kuwait, Qatar, Iraq, Kuwait, Qatar, Saudi Arabia, United Saudi Arabia, United Arab Emirates, Arab Emirates, Venezuela, and Venezuela, and Indonesia Indonesia

41.7% of the world’s 41.7% of the world’s oil production comes oil production comes from OPEC from OPEC

U.S. dollar is the unit U.S. dollar is the unit of oil sales of oil sales

English is the official English is the official language language

OPEC ConferencesOPEC Conferences Meets every March & Meets every March &

SeptemberSeptember Unify policies to promote Unify policies to promote

stability and harmony in oil stability and harmony in oil marketmarket

Fundamentals are current Fundamentals are current market situations and market situations and forecasts i.e. current growth forecasts i.e. current growth and supply & demandand supply & demand

New member applications New member applications are discussedare discussed

Budgets are decided uponBudgets are decided upon Recommendations and Recommendations and

reports are submittedreports are submitted

GoalGoal Have stability in the Have stability in the

marketmarket Deliver steady supply Deliver steady supply

of oil to consumersof oil to consumers Get oil to people at Get oil to people at

reasonable and fair reasonable and fair pricesprices

To obtain these To obtain these goals, OPEC goals, OPEC voluntarily produces voluntarily produces less oilless oil

The Current MarketThe Current Market

President Daukoru says “The President Daukoru says “The market is clearly oversupplied.”market is clearly oversupplied.”

Concerned with falling oil pricesConcerned with falling oil prices– July prices $78 a barrelJuly prices $78 a barrel–Current prices between $57-$61Current prices between $57-$61

OPEC decided to cut oil production OPEC decided to cut oil production outputoutput

Current SituationCurrent Situation

International Aspects

International AspectsInternational Aspects FunctionFunction - Representatives of OPEC Member Countries - Representatives of OPEC Member Countries

(Heads of Delegation) meet at the OPEC Conference to co-(Heads of Delegation) meet at the OPEC Conference to co-ordinate and unify their petroleum policies in order to ordinate and unify their petroleum policies in order to promote stability and harmony in the oil market. promote stability and harmony in the oil market.

Supported in this by the OPEC Secretariat, directed by the Supported in this by the OPEC Secretariat, directed by the Board of Governors and run by the Secretary General, and by Board of Governors and run by the Secretary General, and by various bodies including the Economic Commission and the various bodies including the Economic Commission and the Ministerial Monitoring Committee. Ministerial Monitoring Committee.

Consider the current situation and forecasts of market Consider the current situation and forecasts of market fundamentals, such as economic growth rates and petroleum fundamentals, such as economic growth rates and petroleum demand and supply scenarios. They then consider what, if demand and supply scenarios. They then consider what, if any, changes they might make in their petroleum policies. any, changes they might make in their petroleum policies.

http://www.opec.org/library/FAQs/aboutOPEC/q4.htm http://www.opec.org/library/FAQs/aboutOPEC/q4.htm

International AspectsInternational Aspects How has it interacted with organizational clients to help solve How has it interacted with organizational clients to help solve

problems?problems?

OPEC sets oil production quotas OPEC sets oil production quotas - - stability and harmony in the stability and harmony in the petroleum market (e.g. If demand ↑, or some oil producers are petroleum market (e.g. If demand ↑, or some oil producers are producing less oil, OPEC can increase its oil production, in order to producing less oil, OPEC can increase its oil production, in order to prevent a sudden rise in prices. OPEC might also reduce its oil prevent a sudden rise in prices. OPEC might also reduce its oil production in response to market conditions, as a means of countering production in response to market conditions, as a means of countering falling price)falling price)

OPEC controls the oil marketOPEC controls the oil market - - OPEC does not directly control the oil OPEC does not directly control the oil market, however, OPEC can have a strong influence on the oil market, market, however, OPEC can have a strong influence on the oil market, especially if it decides to reduce or increase its level of supply. especially if it decides to reduce or increase its level of supply.

OPEC oil production affects oil prices OPEC oil production affects oil prices - - NNon-OPEC producers on-OPEC producers can can actively support the Organization’s measures, since thisactively support the Organization’s measures, since this will will make make OPEC’s decisions more effective and to everyone’s benefit.OPEC’s decisions more effective and to everyone’s benefit. ThereThere are are many factors that influence the prices paid by end consumers for oil many factors that influence the prices paid by end consumers for oil products. products.

OPEC: Public Relations & Information Department , February 2005OPEC: Public Relations & Information Department , February 2005

International AspectsInternational Aspects OPEC influenceOPEC influencess world trade world trade - - The OPEC Member Countries established the The OPEC Member Countries established the

OPEC Fund for Inter-national Development in January 1976, in order to promote OPEC Fund for Inter-national Development in January 1976, in order to promote cooperation between OPEC Member Countries and other developing states, and to cooperation between OPEC Member Countries and other developing states, and to particularly help poorer, low-income countries in pursuit of their social and particularly help poorer, low-income countries in pursuit of their social and economic advancement. economic advancement.

OPEC supports environmental policies - OPEC supports environmental policies - OPEC is concerned about the OPEC is concerned about the environment and wants to ensure that it is clean andenvironment and wants to ensure that it is clean and healthy for future generations. healthy for future generations. OPEC also supports sustainable economic development, which requires steady OPEC also supports sustainable economic development, which requires steady supplies of energy at reasonable prices. supplies of energy at reasonable prices.

OPEC guaranteeOPEC guaranteess security of oil supply security of oil supply-- OPEC recognizes the need for massive OPEC recognizes the need for massive investment in exploration, drilling, pipelines and other oil related infrastructure and investment in exploration, drilling, pipelines and other oil related infrastructure and its Member Countries are investing to ensure continuous supply to fuel the engine its Member Countries are investing to ensure continuous supply to fuel the engine of world economic growth: consistency, transparency and certainty within the of world economic growth: consistency, transparency and certainty within the international oil community international oil community

OPEC: Public Relations & Information Department, February 2005OPEC: Public Relations & Information Department, February 2005

Current SituationCurrent Situation

Special Concerns

Special ConcernsSpecial Concerns

Political InstabilityPolitical InstabilitySlowing Demand GrowthSlowing Demand GrowthRebounding Non-OPEC SupplyRebounding Non-OPEC SupplyHigh Stock LevelsHigh Stock Levels

Political InstabilityPolitical Instability

IranIran

March 2003: IAEA March 2003: IAEA discovers Iran’s Nuclear discovers Iran’s Nuclear enrichment facility.enrichment facility.

““Fully Nuclear”Fully Nuclear” Anti-Israel SentimentAnti-Israel Sentiment

– Ariel Sharon commands Ariel Sharon commands Israeli troops to prepare for Israeli troops to prepare for war against nuclear Iran. war against nuclear Iran. ((http://www.timesonline.co.uk/article/0,,2089-1920074,00.html)http://www.timesonline.co.uk/article/0,,2089-1920074,00.html)

IraqIraq

Continued conflictContinued conflict Impending civil warImpending civil war Ownership of Ownership of

energy resourcesenergy resources

NigeriaNigeria

Nigerian Delta Nigerian Delta Insurgents Insurgents (MEND: (MEND: Movement for the Movement for the Emancipation of the Emancipation of the Nigerian Delta)Nigerian Delta)

Constant Constant harrasment to harrasment to foreign oil workers.foreign oil workers.

Oil rich states wish Oil rich states wish to secede. to secede.

Obasanjo

Slowing Demand GrowthSlowing Demand Growth

2006: the demand for OPEC crude is 2006: the demand for OPEC crude is expected to average 28.7 mb/d, expected to average 28.7 mb/d, representing a downward revision of representing a downward revision of 0.2 mb/d 0.2 mb/d

2007: the demand for OPEC crude is 2007: the demand for OPEC crude is expected to average 28.1 mb/d, expected to average 28.1 mb/d, representing a decline of 0.6 mb/d representing a decline of 0.6 mb/d versus 2006 versus 2006

Rebounding Non-OPEC SupplyRebounding Non-OPEC Supply

North America North America (Canada) filling in (Canada) filling in supply.supply.

Oil rich portions of Oil rich portions of Africa coming Africa coming “online.”“online.”

High Stock LevelsHigh Stock Levels

Lack of cooperationLack of cooperation Poor Poor

communicationcommunication

Current SituationCurrent Situation

Future of OPEC

Future of OPECFuture of OPEC

Dynamics-as-Usual (DAU)Dynamics-as-Usual (DAU) Protracted Market Tightness (PMT)Protracted Market Tightness (PMT) Prolonged Soft Market (PSM)Prolonged Soft Market (PSM)

DAU AssumptionsDAU Assumptions

Average growth rates of last 15 yearsAverage growth rates of last 15 years Oil demand increases annually by 1.5 Oil demand increases annually by 1.5

mbdmbd 75% of increase from developing 75% of increase from developing

countriescountries Transportation sector accounts for ½ Transportation sector accounts for ½

of increaseof increase

Future Demand FactorsFuture Demand Factors

Health of World EconomyHealth of World Economy Consuming Countries’ PoliciesConsuming Countries’ Policies Technological DevelopmentsTechnological Developments

– Transportation SectorTransportation Sector– Oil ProductionOil Production

Non-OPEC SupplyNon-OPEC Supply Quality IssuesQuality Issues

OPEC StrategyOPEC Strategy

Price StabilityPrice Stability Downstream BottlenecksDownstream Bottlenecks Technology & EnvironmentTechnology & Environment Trade BarriersTrade Barriers Increased CohesionIncreased Cohesion