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OPEC will keep its production

ceiling unchanged at 30 million

barrels a day. This decision was

reached on June the 5th, at the

latest meeting in Vienna, after two

days of meetings and proceedings

during the 6th International

Seminar. Oil was in Vienna to

gather, first hand, impressions,

reflections and comments about

the role of OPEC and the effects

of its decisions within the global

energy community. Providing us

with an insight into the latest

decision of OPEC is Deborah

Gordon, Director of Energy

and Climate Program,

Carnegie Endowment

for International Peace

Vienna•June 3/5 OPEC meeting

At the heart of OPEC

5

he global oil marketis in disequilibrium.OPEC’s continuousproduction stream—together with newalternative oils flow-ing from the UnitedStates, Canada, ande l s ewh e r e—a r eflooding the market.Asia’s economicdownturn and a slug-

gish global economy are constrainingconsumption and pushing supplyand demand further out of balance.OPEC hopes that demand will soonrecover and prices will rise. But noone knows where prices will ulti-mately settle—or if they will settle atall. With this backdrop, OPEC de-cided at its 167th meeting to stay thecourse, maintaining its 30 million bar-rel per day ceiling and urging mem-ber countries to adhere to it. OPECis sending the market a signal that,even through the lean years, its mem-bers plan to remain open for business.The terms, however, are highly un-certain. OPEC—along with everyoneelse—has been baffled by the multi-trillion-dollar reversal of fortune inthe global oil market over the pastyear. Oil’s dynamic economic, polit-ical, technological, and societal cir-cumstances often change withoutwarning. The lack of transparency,barriers to entry and exit, incentivesto profit from others’ losses, andmounting externalities can createblind spots.

OPEC’S CHARGEIt’s amid such opacity that OPEC hasreaffirmed its position to maintain oilproduction. That OPEC took thistack is not entirely surprising. Thatthe organization remained entirely in-tact is. Formed in 1960 with fivefounding members—Iran, Iraq,Kuwait, Saudi Arabia andVenezuela—and expanded to includeQatar, Libya, United Arab Emirates,Algeria, Nigeria, Ecuador, and An-gola, OPEC is often referred to as anoil cartel. However, this label may nolonger apply. According to BrownUniversity political scientist Jeff Col-gan, “its members continue to havequite different interests and are un-

likely to cooperate in any meaning-ful way.” And experts dating back tothe early 1980s have claimed thatOPEC is an oligopoly with Saudi Ara-bia as the price leader and largest pro-ducer. While the relationship amongits members is mystifying, OPEC hasstraightforward enough objectives. Itsgoals are to coordinate petroleum poli-cies among member countries in or-der to stabilize prices for petroleumproducers and efficiently manage thesupply of petroleum to consuming nationswhile ensuring a fair return on capital.

REALITY CHECKHow realistic are OPEC’s objectivesamid today’s unprecedented marketuncertainty? • Coordinate policies among itsmembers? Yes, at least for the mo-ment.

• Stabilize prices for producers? Im-possible. OPEC couldn’t preventsoaring prices last year or fallingprices this year.

• Efficiently manage oil supplies? Du-bious. OPEC isn’t acting rational-ly to reduce oil production in linewith anemic demand.

• Ensure a fair return on capital? Un-attainable. OPEC argues that cur-rent returns are inadequate. But to-morrow’s oils will likely cost morethan $60 per barrel.

If OPEC can only achieve one of itsstated objectives, namely coordination(an achievement in itself), does thatcall into question its very existence?

PAST AS PRELUDE?It is not entirely clear what lessonsOPEC can glean from more than fivedecades of experience in oil markets.But it’s worth briefly recountingthem to see if history can serve as aguide. Perhaps OPEC’s greatest fearis an era of oil price volatility, pittingmembers against one another, creat-ing rifts with non-OPEC producers,potentially destabilizing nations thatdepend on oil revenues, and con-founding consumers. The ability toachieve price parity, however, may bemore difficult than in the past. (Seethe Figure on p. 7).During the postwar period, throughthe 1950s and 1960s, oil prices hov-

by DEBORAHGORDON

TStrategies reflections&

ered around $3 per barrel ($20 in real,inflation-adjusted terms). In recenthistory, there has never been a morestable period in oil markets. The1970s marked unprecedented oilmarket upheavals. U.S. recessionsdampened oil demand and oil-richTexas removed its production limits,shifting the power to control prices toOPEC. Geopolitics roiled oil markets

due to an Arab oil embargo, theIranian Revolution, and the Iraq-Iran war. The 1980s saw plummetingoil prices. OPEC attempted to setproduction quotas to stabilize prices.When members exceeded quotas,Saudi Arabia assumed the role ofswing producer, cutting its produc-tion. Tiring of economic self-sacrifice,the Saudis more than doubled pro-duction in 1986. Prices tumbled andremained weak through the decade.The 1990s brought more geopoliti-cal strife. Oil prices spiked during thefirst Gulf War, but steadily declinedto a recent all-time low by 1998.Japan’s stagnation, high oil invento-ries, and expansionary oil productionpolicies precipitated this fall. OPEC’srigid approach to weak prices was notconsidered very effective. By the2000s, with the global economy hum-ming and China booming, oil demandsurged, driving up prices. By 2008, theoil market had hit an all-time high.And it’s this set of circumstances thatcaused an oil paradigm shift chocked-full of market uncertainty.

TURNING THE PAGEIn the summer of 2014, the oil mar-ket was soaring in the triple digits. Ayear later, oil is selling for nearly halfthat price. OPEC’s concerns over oilprice uncertainty aside, there may betransformational changes coming to

oil markets. As cheap, conventionalresources dwindle, oils that fueled thetwentieth century are giving way toan array of alternative oils. This is ex-tending the age of oil. According tooil analyst Blake Clayton, author ofMarket Madness: A Century of OilPanics, Crises, and Crashes, there is anassumption that “if [oil] has not beenfound yet, or cannot be extracted withtoday’s technology or at today’s prices”that it won’t ever exist. Yet we haven’trun out of oil and history has re-peatedly refuted this claim. The twistin the story is that much of tomor-row’s oil won’t be as cheap as yester-day’s. Prices will rise to cover high-er operational costs, mounting envi-ronmental externalities, increasingrisks, and demanding economic rents.And the higher future oil prices rise,the more there is at stake for tomor-row’s marginal oil producer.

OPEC’S GLUESaudi Arabia is OPEC’s de factoleader and largest producer, supply-ing approximately one-third of its oil.Whether its dominance will last, andwhether the organization can be heldtogether are burning questions. In themeantime, the Saudis and their stanchposition appear to be the glue hold-ing OPEC together. There are nu-merous explanations for the Saudi’ssteadfast decision for OPEC to main-

tain production. The most honest isthat OPEC doesn’t have the ability toengage in a price war. But there areother possible reasons. First, pump-ing oil while prices are low helps Eu-rope, China, and others’ economiesto recover, slowly rebooting demand.This could cement relationships withthose buyers the Saudis need in thefuture. Second, maintaining produc-tion delivers an economic blow toRussia, Saudi Arabia’s real oil com-petitor. The Saudis may also be at-tempting to slow America’s frackingboom and Canada’s oil sands devel-opment, which are more price sensi-tive than their (and most OPEC na-tions’) production. By holding pro-duction relatively constant, the Saud-is gain pertinent information on themarginal costs of North America’s un-conventional oils. And last but notleast, in pressing their position, theSaudis may be reminding OPECmembers who’s really in charge whenit comes to future realignments in oilmarkets. Backing down is not anoption; they aren’t going to cut pro-duction. According to Saudi Ara-bia’s Oil Minister Ali al-Naimi in De-cember, “[That’s a] position we willhold forever, not [just] 2015.”

BREAKING BONDSDespite support for the Saudis’ po-sition from the Qataris, Kuwaitis

6

OPECmeeting

THE AUTHORDeborah Gordon isdirector of Carnegie’sEnergy and ClimateProgram, where herresearch focuses on oiland climate change

issues in North America and globally.Gordon has managed an active energyand environmental consulting practice,taught at Yale School of Forestry andEnvironmental Studies, and directedthe Energy Policy Program at the Unionof Concerned Scientists. She began hercareer with Chevron. She is the authorof two books, Steering a New Courseand Two Billion Cars (with DanielSperling), and numerous otherpublications.

and Emiratis, there may yet be a con-flict brewing within OPEC. Iraq’ssurging production and the possibil-ity of Iran returning to its post-sanc-tions oil output with a successfulnuclear deal could threaten Saudi Ara-bia’s influence and authority. Nigeriais grumbling. In February, Nigeria’sOil Minister, Diezani Alison-Madueke, complained, “almost allOPEC countries, except perhaps afew in the Arab bloc, are very un-comfortable.” Venezuela is scheming.In April, Eulogio del Pino, the headof the state oil company PDVSA, pro-posed blending their extra-heavy oilwith light Algerian and Angolan oilto compete against swelling NorthAmerican supplies. Ecuador, OPEC’ssmallest member, is bargaining. Itspresident, Rafael Correa is slashingbudgets, reforming taxes, and bor-rowing from China. What leveragedo the Nigerians, Venezuelans, andEcuadorans really have to swayOPEC policy? They can attempt toprotest or get creative. Or they canexit—which they are reluctant todo. It may be less that the Saudis havesucceeded in retaining membership intrying times than there is nowhere fordiscontent members to go. Can the Saudis hold OPEC togeth-er? There are more questions thananswers surrounding OPEC, its po-sition, and tomorrow’s oil supplies.How will the oil sector reshape itselfthis time around? In reconfirming itsdecision to maintain oil output amidslow economic growth and increas-ing global oil supplies, can OPECmanage this sector’s growing risks?Will greater competition come fromwithin OPEC or without?

RISKIER BUSINESSThere’s no debating that oil is riskybusiness—economically for investors,operationally for industry, geopolit-ically for nations, socially for com-munities, and environmentally for theearth. But is it getting riskier? Twomajor concerns from differentspheres, both private (speculation) andpublic (climate change), are barrelingdown on OPEC and oil markets. To-gether these unpriced externalitiesimpose significant premiums on oilmarkets that are estimated to cost asmuch as a barrel of oil itself, or pos-sibly more. On a private front, spec-ulation may be driving oil marketsmore than supply and demand. Ac-cording to OPEC Secretary Gener-al Abdalla Salem El-Badri, in anApril bulletin commentary, actualmarket fundamentals may not besolely responsible for plummeting oilprices. Instead, he stressed that spec-ulators—“phantoms of energy mar-kets”—have played a meaningful rolein the fall. Dealing in “paper barrels,” where the

player never takes physical possessionof actual barrels has futures marketstrading an order of magnitude morevirtual barrels than the market cansupply. Moreover, speculators rou-tinely arbitrage oil, purchasing low-priced crude and holding it in storage,until they can recoup handsomeprofits. Oil volatility is becoming anew asset class for investors. OPEC’sMonthly Oil Market Report observedlast September while prices werefalling that “hedge funds and othermoney managers chose to reducetheir net long positions in Brent andWTI futures trading by a hefty 73percent and 45 percent, respectively,exerting even more downward pres-sure on prices.” Oil volatility is thought to havejumped to its highest level since thefinancial crisis. OPEC is concernedthat speculation will ultimately desta-bilize markets.

SOCIAL LICENSEFrom a societal perspective, the ex-ternalities associated with oil arelarge and increasing. It is unclear howseriously OPEC and its western com-petitors take their social license to op-erate. The upcoming climate talks inParis could offer a meaningful re-minder. And the reminder may benecessary. Apparently, when an au-dience of over 300 delegates gatheredthis June at OPEC’s International En-ergy Seminar was asked in a show ofhands whether they believed a bind-ing agreement to limit global warm-ing would result, no one raised theirhand. Saudi Arabia could assume aleadership role, however. Their oilminister reportedly continues to warnabout the “dangers of the industryfailing to act to help to limit globalwarming.” So too could the EU oil in-dustry—Royal Dutch Shell, Total,Eni, BG Group, BP, and Statoil.Ahead of OPEC’s seminar, they col-lectively called for a “binding global

system to govern carbon pricing.”And Shell’s CEO, Ben van Beurden,proclaimed that the global energy sys-tem needs to undergo “a transitionfrom the traditional model based onoil and coal to a progressively clean-er, less carbon-intensive model.” In-spiring words from OPEC and non-OPEC producers. But are they actionable? High oilprices spurred new oil supplies. Lowoil prices will likely spur growing oildemands. Both run the risk of in-creasing the oil sector’s climate foot-print.

TOMORROW’S OILAs conventional oil dwindles, pro-ducers and refiners will have to learnhow to handle a new array of alter-native oils. These resources are verydifferent from the conventional oilsOPEC produces, and from each oth-er. For example, Alberta’s oil sandsand North Dakota’s light tight oilhave little in common except that theycan be turned into marketable pe-troleum products—and even therethey differ. In a recent report, Know Your Oil, theCarnegie Endowment for Interna-tional Peace, Stanford University,and the University of Calgary esti-mate that there is an 80 percent dif-ference in total life-cycle greenhousegas emissions between the highest-and lowest-emitting oil in a sample of30 global oils. That difference in only5 percent of the world’s current pro-duction is surprisingly large—andlarge enough to matter. What’s more,prospective unconventional oils mod-eled using Carnegie’s Oil-ClimateIndex are expected to expand thatemissions range further. The largeand variable climate footprint of oilspeaks to the issue of stranded assetsthat suffer from unanticipated orpremature write-downs, devalua-tions, or conversion to liabilities.Significant oil assets will almost cer-

tainly be stranded. There are esti-mated to be at least ten times morefossil fuel reserves slated for future ex-ploitation than is compatible with the2 degree Centigrade climate tar-get—the safety limit agreed to by theworld’s nations.

THE EVOLUTION OF OPECOPEC is being challenged on manyfronts. Its future is not guaranteed. Inorder to survive, the organization mayneed to innovate, regroup, restruc-ture, and renew its mission. Impor-tant questions remain. Will OPECnations like Saudi Arabia diversifytheir economies away from oil? CanOPEC provide a larger tent andwould that improve market func-tion? Can OPEC burnish its imagethrough greater integration and trans-parency in the global system? Can oilrevenues bring national and region-al stability? How will the world’smajor oil consumers—China, India,and others—figure into the equation? Full disclosure from here on out—oras close to that as is possible forOPEC—will likely be necessary forthe organization’s very survival. Pe-troleum exporters—OPEC and allothers—will need to compete moreopenly in the global marketplace. Ac-cording to Oxford Institute for En-ergy Studies founder, Robert Mabro,in The Oil Price Crisis of 1998, it’s a“fallacy to believe that withholding in-formation on production, invest-ments or stocks improves the pro-ducer’s [market] position. Trans-parency pays much higher dividends.”It will benefit OPEC to be creativeand candid about its plans to evolve.Motivations for OPEC to evolvecould advance on many differentfronts: economic rivalry from otheroil producers, threats from uncon-ventional oil resources, geopoliticaltensions and regional strife, techno-logical breakthroughs on oil alterna-tives, societal concerns stemmingfrom climate change, or unforeseenrisks. Come December 4th, OPECwill meet again about productionlevels. The odds are high for keepingthe status quo if you take the Saudisat their word. The odds are small oth-erwise for adopting a radical shift. Ei-ther way, OPEC has some seriousthinking to do. And it’s best for all in-volved if OPEC thinks out loud.

7

OPEC, HOPE

The graph relates the recessions of the U.S. economy (green stripes)with the trend in the price of WTI crude oil.

REAL, INFLATION-ADJUSTED OIL PRICE 1946-2015

1950

$20

$40

$60

$80

$100

$120

$14WTI PRICE

1960 1970 1980 1990 2000 2010

Source: Macrotrends.net

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DEMAND. “The world will need more energy in the decadesahead, as the global population expands and economies grow, and ascountries seek to provide the energy poor with access to modern energyservices, the global need for energy will grow. In OPEC’s most recentWorld Oil Outlook, energy demand is set to increase by around 50percent between 2015 and 2040. I think that most of us here today alsounderstand that the world has enough energy resources to meet theseexpected future energy needs. The key questions about our energyfuture relate to deliverability and sustainability.”Looking ahead, from the perspective of oil we see demand growing to 111 million barrels a day by 2040, an increase of around 18 millionbarrels a day. This expansion will require huge investments. It means we need to have clarity in terms of demand and, in turn, supply.

CRUDE’S ROLE. “Fossil fuels will continue to play a dominant role in meeting energy demand, although their overall share will fall fromaround 82 to 78 percent during this period. By the 2030s, the share of oil, coal and gas are anticipated to be at similar levels, at around 25 to 27 percent.”“Yes, we need to continue to develop renewables. But they cannot beseen as a replacement for fossil fuels in the coming decades.”

RELATION WITH NON-OPEC COUNTRIES. “We also welcomerecent OPEC and non-OPEC discussions. I have read many reports thatsuggest OPEC is targeting specific non-OPEC countries or producerswith its decisions. This is not true. We welcome all energies. Wewelcome all producers. In the current market environment, I think we can all appreciate that thechallenge of maintaining the supply-demand balance and reaching pricestability requires the cooperation of major non-OPEC producers. Weshould remember what cooperation between OPEC and non-OPECproducers achieved back in the 1998-1999 crisis. While none of us canplot the exact path of our energy future, I think we can all agree that ourshared objective must be a stable and sustainable energy future for all.”

“I expect a growing demand; it iscurrently higher than expected and this indicates the rise in prices,which will rise again later this year. I expect a price of around $75 abarrel.”

ADEL ABDEL-MAHDI

IRAQI OILMINISTER

Voices of the key players

45,935

30,285

Crude oil

Production

non-OPEC

OPEC

WHICH IS ITS WEIGHT?In comparison withdata on reserves(thousands of barrels)and production(thousands of barrelsper day), it is evidentthat the Organizationcontrols 3/4 of worldreserves, but producesfar less than the non-OPEC countries.(as of December 2014)

Source: Eni

ABDALLA S. EL-BADRI

OPEC SECRETARYGENERAL

OPECmeeting by Simon Tompkins

9

OPEC, HOPE

“Have we ever told Iran what to produce? Production is a sovereignright. They are free to do as they want.”

ALI AL-NAIMI OIL MINISTER

OF SAUDI ARABIA

“There is a great deal of cooperation between us, through thesecretariat, which monitors the dynamics of the market andcirculates information that is useful in responding to these dynamics.OPEC does not apply its policies and isolate itself from the marketand among ourselves there is a great deal of cooperation and mutualunderstanding. This is the atmosphere prevailing at the moment.”

MOHAMMEDSALEH AL SADA

MINISTER OF ENERGY OF QATAR

“I strongly believe that GulfOPEC members should givetheir support by keeping the cartel’s production ceilingunchanged.”

“OPEC role as reliable supplierwill be enhanced for decades to come, despite on-goingrecent growth in non-OPECsupplies. Hence...”

ALI AL-OMAIR OIL MINISTER OF KUWAIT

“We believe return of Iranian oil to the market should be gradual, not needing a long time. Instantly or one month after lift of sanctions,we will supply half a million barrels of oil a day to the market and after six to seven months we will raise it to the level of one millionbarrels a day.”

BIJAN NAMDARZANGENEH OIL MINISTER OF IRAN

52,607

36,668

449,754,90827%

1,206,170,00073%

Reserves

NGLGas

to LiquidsCoal

to Liquids

Total production

61796132 493

251

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OPEC aims to protect its traditional role as swing producer. For José Maria Botelho de Vasconcelos, Angolan Minister

of Petroleum, with whom we met up during the OPEC InternationalSeminar, the only response to the significant challenges facing theorganization is to continue working.

Many in the energy sector believe that OPEC has lost its roleas a swing producer, in other words, as a cartel capable ofeasily decreasing or increasing extraction. What do you thinkabout this?

I don't believe this to be the case. OPEC is an institution that has beenaround for about fifty years and we are working to keep up its role anddefinitely not to lose it.

Over the next ten years OPEC expects that the price of oil isunlikely to return to $100 a barrel. This would obviously createa problem for exporting countries.

We are an exporting country, we continue to export and at the moment the price is not favorable for us but we continue working. Even during thisseminar, oil producers, as well as oil companies, are working to establish a long-term forecast. I believe this is a sign that our activity will continue.

How much of an effect will the growing power of non-OPECcountries, especially the United States and Russia, have onthe development of OPEC’s role?

I believe it would be better to ask this question directly to non-OPECcountries.

“This is what all of us should be thinking aboutglobally, prices should be reasonable in order to be able to make long-term plans in ourcountries, for example, with regard to education,health, roads and whatever else may be needed.”

PEDROMERIZALDEPAVÒN

MINISTER OFHYDROCARBONSOF ECUADOR

Middle East 22,128Saudi Arabia 9720UAE 2759Kuwait 2800Iran 2812Iraq 3332Qatar 706Africa 5144Algeria 1121Angola 1661Libya 460Nigeria 1902Latin America 3013Ecuador 551Venezuela 2462OPEC 30,285(thousand barrels/day)

Crude oil production in 2014

Middle East 792,344,000Saudi Arabia 265,789,000UAE 97,800,000Kuwait 101,500,000Iran 157,800,000Iraq 144,211,000Qatar 25,244,000Africa 106,644,000Algeria 12,200,000Angola 9,011,000Libya 48,363,000Nigeria 37,070,000Latin America 307,182,000Ecuador 8,832,000Venezuela 298,350,000OPEC 1,206,170,000non OPEC 449,754,908WORLD 1,655,924,908(thousand barrels)

Crude oil production in 2014

An institution working to keep its role

OPECmeeting

The Magnificent 12

The cartel of producing countries is working to preserve its mission and to establish a long-termforecast for the oil market

ANGOLA Interview with José Maria Botelho de Vasconcelos, Minister of Petroleum

J. M. BOTELHODE VASCONCELOS

MINISTER OF PETROLEUMOF ANGOLA

11

OPEC, HOPE

“We have made the best decisionthat we could, and we continue towork on strengthening OPEC andmaintaining a reasonable and fairprice for our main resource, oil.”

Middle East 4838Saudi Arabia 1828UAE 819Kuwait 300Iran 630Iraq 87Qatar 1174Africa 1084Algeria 457Angola 74Libya 38Nigeria 515Latin America 210Ecuador 0Venezuela 210OPEC 6132(thousand barrels/day)

LNG productionTotal oil production (*)

ASDRÚBALCHÁVEZ

VENEZUELA’S OILAND MININGMINISTER

“I am to assure OPEC Heads of Delegation, of a new dawn in Nigeriaand the capacities of a new President who understands andappreciates the prospects and challenges of our Organization like no other former Nigerian Head of State, having being a Minister of Petroleum Resources before.”

JAMILASHU’ARA HEAD

OF DELEGATION OF NIGERIA

UAE Suhail Mohamed Al Mazrouei, Minister of Energy

OPEC has never had the role of a swing producer, accordingto The Minister of Energy of the United Arab Emirates, SuhailMohamed Al Mazrouei, who spoke to us in an interview after the conferencein Vienna. He believes that OPEC and non-OPEC countries are“complementary” and that the Organization should not worry about prices,but rather about supply.

According to many people, OPEC has lost its role as a swingproducer, especially as a result of last year’s decision not to cutproduction. Is this really true? Could OPEC be reborn andstrengthen its role?

OPEC’s role has never been that of a swing producer. In reality, we are the most reliable producers, and one of the most economical producers in the world, if not the most economical. We should always be a basicproducer. Our production is reliable, economical and should be the best.More expensive production should take place when the price is right. This is a logical process in a market involving raw materials. And this is where we find ourselves today.

How much of an effect are non-OPEC countries having onOPEC’s role?

We are complementary, we are producers of oil and other raw materials,where the most expensive product is at the top and the most reliable base at the bottom. This is what is happening. And it’s logical.

OPEC forecasts that over the next ten years, oil will not returnpermanently to a price above $100 a barrel, and that its highestprice in 2025 will be $76... If accurate, this scenario putsexporting countries in a difficult position.

I could never predict the price of oil in the future. Because I would always be wrong.

But the price is a problem, first and foremost, for exportingcountries.

Our job is not to worry about the price, but to be concerned about supplyand to make sure that supply is sufficient. The price will regulate itself on itsown. It’s the market that will regulate the price.

S. MOHAMEDAL MAZROUEI UAE ENERGYMINISTER

“We are the most reliable producers”The production of theOrganization is reliable,economical and shouldbe the best. The price?It’s the market thatregulates the price. Thereal task is to guaranteesufficient supply

Source: Eni

Middle East 26,966Saudi Arabia 11,548UAE 3578Kuwait 3100Iran 3442Iraq 3419Qatar 1880Africa 6228Algeria 1578Angola 1735Libya 498Nigeria 2417Latin America 3223Ecuador 551Venezuela 2672OPEC 36,417(thousand barrels/day)(*) does not include GTL, CTL,biofuels and processing gains