On September 14, 1960 OPEC began operations as an ad-hoc talk-shop of sorts, and five years later became a permanent part of Vienna’s international bureaucracy. I have decided to send my birthday greeting to them early however, because today (March, 17) is the day (in 2007) that I began my course on oil and gas economics at the Asian Institute of Technology (AIT) in Bangkok, during which I explained to various students that no matter what they had been led to believe by other researchers and lecturers, a new oil day had arrived due to the sophistication of OPEC, and only those present who worked for oil firms would find it invigorating.
Some doubts initially pervaded my classroom, however I managed to dispel any scepticism by informing those young ladies and gentlemen that anything less than a perfect comprehension of what I regarded as OPEC’s real (versus ‘putative’) strategy would not be appreciated by my good self when I was marking their final examinations.
Approximately 14 months later I was presenting a long lecture on OPEC and oil at the Ecole Normale Superieure (Paris), and the price of oil was moving up at a record pace. I did not regard this as a surprise, because in reality the price of oil had started to increase in 2003 (although in recent lectures I have traced the background of that rise to about the turn of the century). In 2008 the oil price accelerated upward, and those were the days when people like Matthew Simmons and Boone Pickens were talking about an approaching oil price of $200/b, while the Russian oil insider Alexis Miller gave as his estimate $250/b. Unfortunately no one talked at length about what this kind of price movement meant macro-economically and for the financial markets, though whenever I was asked I described it as clearly destructive.
The great surprise came later. It did not come when the price of oil began to descend at the same rate as it had climbed, but in March of 2009, when OPEC countries succeeded in reducing their production by approximately 85 percent of the amount proposed by the OPEC ‘high command’ (or 85% of 4.2 million barrels per day (= 3.6mb/d). I have read that certain influential analysts believed that regardless of what the OPEC leadership proposed, the price of a barrel of oil would fall to less than a barrel of coca-cola, but that did not happen, nor could it have happened, nor is it likely that it will ever happen again.
According to Sandrine Torstad, who is an analyst for Statoil (Norway), things are somewhat different today than in 2008, because at least four of OPEC’s members partially ignore OPEC quotas, and as a result OPEC’s output has increased (to slightly more than 40 percent of the output of conventional oil). Both Ms Torstad and the ‘experts’ of the International Energy Agency (IEA) apparently feel that on the basis of oil production statistics, and predictions for the forthcoming growth in oil demand, the bad news is over for oil producers, and perhaps during the foreseeable future everyone will be happy with the evolution of the oil market, to include consumers and refiners.
Maybe they will and maybe they won’t, but I doubt whether any joy will be experienced by yours truly. I am not privy to the thinking of the U.S. Central Intelligence Agency (CIA) on the present state of petroleum markets, but at one time they published some projections (l979), and an extrapolation of their offerings resulted in an estimate for the future production of Saudi Arabia that was more than twice that that indicated as desirable by the Saudi government. That was one of my first encounters with the great world of oil production forecasts, and these exercises are even more lopsided now than they were then.
A few days ago I engaged in a short discussion with a Washington (DC) academic about the oil future, and he actually had the gall to suggest that I read an article on oil discoveries published in a certain newspaper. But why not? The prediction of this journalist ‘expert’ for the sustained output of e.g. Saudi Arabia was totally absurd, but politically correct, because it was in line with the hype constantly imposed by certain academics and others on their audiences.
By Ferdinand E. Banks
REFERENCES
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Banks, Ferdinand E.(2007). The Political Economy of World Energy: An Introductory
Textbook. London and Singapore: World Scientific.
U.S. Central Intelligence Agency (1979). The World Oil Market in the Years
Ahead. (Washington).
