THE WORLD OIL MARKET
Mohan G. Francis
With the Bush administration busily moving military forces to the Gulf region, the sense
of an impending war has begun to make an impact on the world petroleum markets. The
price of crude oil to be delivered in February 2003 in the New York Mercantile Exchange
has risen to US$33.36 per barrel, hitting a record high since November 2000. Further the
futures price for crude also climbed to US$31.66 as people worrying about the impending
war prepared against any contingency.
The increase in prices due to a possible war with Iraq is a reflection of the importance of
the Middle East as a major reserve and source of supply of the world’s oil. The
importance of the Middle East in the world oil market is one of the reasons why the
justifications offered by the United States of America for a possible war with Iraq are
looked upon with a degree of skepticism. A brief description of the world oil market in
terms of the major producers, consumers, exporters and importers would explain the
justification for the degree of skepticism on the US argument for war on Iraq.
OPEC VS. NON-OPEC
Member of the Organization of Petroleum Exporting Countries (OPEC) countries
include: Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the
United Arab Emirates, and Venezuela.
Members share some key characteristics that allow them, as a group, to have a significant
influence on world oil markets, despite their lack of monopoly over world oil production:
• Members are important oil exporters; they are very large producers and very small
consumers. Not counting Indonesia, member’s net exports averaged 85% of total
oil production in 2001. (Refer Table 1.) Hence, member’s interests are very
different from most non-OPEC countries, including the United States (which is
the world’s largest producer, consumer and importer).
• Member’s oil industries are mostly nationalized, allowing OPEC member’s
political establishments to increase or decrease oil production. Through managing
the world’s oil supply, OPEC can work to increase or decrease world oil prices to
help meet the group’s economic and /or political goals. Member governments rely
heavily on oil revenues.
• The lion ‘s share of the world’s spare oil production capacity lies in the OPEC
countries. Non-OPEC countries hold approximately a combined 500,000 barrels
per day (bbl/d) of spare oil production capacity at any given time, while OPEC
spare production capacity estimates for 2002 are as high as 8 million bbl/d
(including Iraq).
• According to 2002 estimates, 80% of the world’s proven reserves are located in
OPEC member countries.
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• Production, or “lifting” costs are far lower in OPEC countries than in most non-
OPEC countries. Prolonged periods of low oil prices make the world more reliant
on cheaper-to-produce OPEC oil.
Table 1: Dependency of OPEC member countries on Petroleum Exports
Dependency on Petroleum Exports
Country Value of petroleum exports/Value of total Exports*100
(In million US $)
1) Libya 97.26%
2) Kuwait 92.40%
3) Iran 89.00%
4) Saudi Arabia 86.24%
5) Nigeria 82.53%
6) Iraq 79.70%
7) Venezuela 74.06%
8) Qatar 67.96%
9) Algeria 61.62%
10) United Arab Emirates 54.13%
11) Indonesia 16.35%
In contrast to OPEC countries, non-OPEC countries share the following characteristics:
• Most non-OPEC countries are net oil importers. Of the 96 non-OPEC countries
for which data was available (from the Energy Information Administration), 67
(71%) were net oil importers in 2001. Even large producers can also be large
importers. The seven largest non-OPEC producers in 2001 had net average
exports of 15% of total oil production.
• Most major non-OPEC countries have private oil sectors (Mexico is one notable
exception); the political establishment generally has very little control over
production levels. Companies react to international price expectations, exploring
and drilling more and in higher cost areas when prices are high, and focusing on
lower-cost production when prices are low.
• Private companies keep very little spare production capacity. Hence, in the case of
a significant world oil production disruption, OPEC (rather than private oil
companies) would be the primary immediate source of additional oil to displace
the loss.
• Non-OPEC lifting costs tend to be higher than OPEC lifting costs, which makes
non-OPEC production more vulnerable to price collapses. Prolonged periods of
low prices can drive higher cost producers out of business, and make major oil
companies focus less on higher cost areas.
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Figure1
WORLD OIL PRODUCTION
World Oil production by region, 2001:
In the year 2001, the Middle East was the largest producing region with 29% of total
world production. North America accounted for 20%, with the remaining 51% dispersed
fairly evenly throughout the world. (Figure 2)
Figure 2:
World Oil Production by region,2001 Middle East 29%
Africa 10%
Far East and
Oceania 11%
North America
20%
Central and South
America 9%
Western Europe
9%
PROVEN CRUDE OIL RESERVES
The location of proven world crude oil reserves is far more concentrated in OPEC
countries than current world oil production. Of the world's 1.03 trillion barrels of proven
reserves, 819 billion barrels (80%) are held by OPEC. Because non-OPEC countries'
smaller reserves are being depleted more rapidly than OPEC reserves, their overall
reserves-to-production ratio -- an indicator of how long proven reserves would last at
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current production rates -- is much lower (about 15 years for non-OPEC and 80 years for
OPEC). This implies increased OPEC production as a proportion of world production
over the long term.
Figure 3:
Refined products
As of January 2002, 72.7 million bbl/d of the world's 81.2 million bbl/d of crude oil
refinery capacity was located in non-OPEC countries. Countries with high petroleum
demand tend to have large refinery capacities. The U.S. has far more refinery capacity
than any other country, with 143 of the world's 732 refineries, and a crude oil refinery
capacity of about 16.6 million bbl/d. Russia's refinery capacity stands at an estimated 5.4
million bbl/d. Japan (4.8 million bbl/d) and China (4.5 million bbl/d) are the only
remaining countries with refinery capacities exceeding 3 million bbl/d.
There are several countries that are important to world trade in refined petroleum
products despite very low (or non-existent) levels of crude oil production. For instance,
Caribbean nations have very limited oil production (170,000 bbl/d in 2000), but refinery
capacity of about 1.6 million bbl/d. Much of this refined product is exported to the United
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States. Other countries that are important sources of refined petroleum products yet have
very limited domestic production include the Netherlands, South Korea and Singapore.
Figure 4:
Worldwide crude oil refinery capacity,
January 2002
Other 51%
U.S 20%
Russia 7%
Japan 6%
China 6%
Total OPEC 10%
World Oil Production by country, 2001:
Of the 14 countries that produced more than 2 million barrels per day in 2001, seven
were OPEC members. The remaining seven were not OPEC members, including United
States of America (the world’s largest oil producer for the year), Russia, Mexico, China,
Canada, Norway and the United Kingdom.
In terms of country wise production, United States is the largest producer, followed by
Saudi Arabia, Russia, Iran and Mexico (Table 2). But a mere enumeration of the top oil
producers by itself cannot explain the dynamics of the oil market. A listing of the top
world oil net exporters are essential to have the grasp of the dynamics of the world oil
market in terms of dependence and control.
Non-OPEC production is expected to rise the next 1-3 years, with the greatest increases
in the former Soviet Union, including Russia and the countries bordering the Caspian
Sea; and in North America with Mexico, Canada and the United States of America all
expected to grow.
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Table 2: Country wise oil production, 2001
Top World Oil Producers, 2001*
Country Total Oil production**
(Million barrels per day)
1) United States 9.02
2) Saudi Arabia 8.73
3) Russia 7.29
4) Iran 3.82
5) Mexico 3.59
6) Norway 3.41
7) China 3.30
8) Venezuela 3.07
9) Canada 2.80
10) United Kingdom 2.59
11) Iraq 2.45
12) United Arab Emirates 2.42
13) Nigeria 2.26
14) Kuwait 2.15
The countries highlighted in Blue are members of OPEC
*Table includes all countries with total oil production exceeding 2 million barrels per day
in 2001
** Total Oil Production includes crude oil, natural gas liquids, condensate, refinery gain,
and other liquids.
Top World Oil Net exporters, 2001:
Of the world’s top net exporters, OPEC countries are more strongly represented. Nine of
the twelve countries exporting more than one million barrels per day in 2001 were OPEC
members. Russia, Norway, and Mexico are the world’s largest non-OPEC exporters. The
U.S is the world’s largest importer. China is also a net importer, while Canada and United
Kingdom are smaller net exporters.
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Table 3: Country wise Net Export of Oil
Top World Oil Net Exporters, 2001*
Country Net Oil exports
(Million barrels per day)
1) Saudi Arabia 7.38
2) Russia 4.76
3) Norway 3.22
4) Iran 2.74
5) Venezuela 2.60
6) United Arab Emirates 2.09
7) Nigeria 2.00
8) Iraq 2.00
9) Kuwait 1.80
10) Mexico 1.65
11) Libya 1.24
12) Algeria 1.24
*Table includes all countries with net exports exceeding 1 million barrels per day in
2001.
The countries highlighted in Blue are OPEC countries
World Oil Consumption, 2001:
Of the 76.0 million bbl/d of oil that the world consumed in 2001, OPEC countries
together consumed about 5.8 million bbl/d, or 8%. Most of the world's largest oil
consumers are also net oil importers. Of the world's top ten oil consumers in 2001, only
Russia and Canada were net oil exporters. Brazil, the world's sixth-largest consumer,
imported about 560,000 bbl/d. The remaining top consumers also are listed as the world's
largest oil importers.
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Table 4: Country wise Consumption of Oil
Top World Oil Consumers, 2001*
Country Total Oil Consumption
(Million barrels per day)
1) United States 19.7
2) Japan 5.4
3) China 4.9
4) Germany 2.8
5) Russia 2.5
6) Brazil 2.2
7) South Korea 2.1
8) France 2.0
9) Canada 2.0
10) India 2.0
* Table includes all the countries that consumed more than 2 million bbl/d in 2001
The interesting features of Table 4 are:
• There is not a single OPEC country in the top ten oil-consuming countries. This is
in fact a reflection of the level of development of their economies in terms of the
development of industry, transport, communications etc., particularly those areas
which are significant consumers of oil
• The only developing countries in the top ten oil consumers are China, Brazil and
India. This reflects the fact that economic development processes in these
countries are characterized by an intensive and increasing use of oil and thereby
increasing dependence on oil.
• Of the top ten oil consumers, only four come in among the top ten producers of
oil for the year 2001- U.S, China, Russia and Canada. Of these U.S and China
consume more than what they respectively produce, making them dependent on
imports.
• Russia, Brazil and Canada are the only net exporters among the top ten oil
consumers, with Russia being the only one among the top ten oil producers.
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Top World Oil Importers, 2001:
Table 5: country wise Import of Oil
Top World Oil Importers, 2001*
Country Net Oil Imports
(Million barrels per day)
1) United States 10.8
2) Japan 5.4
3) Germany 2.7
4) South Korea 2.1
5) France 2.0
6) Italy 1.7
7) China 1.6
8) Spain 1.5
9) India 1.3
* Table includes all countries that imported more than 1 million bbl/d in 2001
The interesting features of the Table 5 are:
• Seven of the top nine importers are present in the list of the top ten Oil
consumers. The two countries not in the list of ten highest oil consumers but in
the high importers list are Spain and Italy.
• Seven of the nine members are OECD (Organization for Economic Cooperation
and Development) countries, the exceptions being China and India.
• China and India are the only developing nations in this importers list. It implies
that their development process is highly vulnerable to the supply of oil from the
rest of the world as well as price volatility in the oil market.
Measure of dependency on Oil Imports:
The dependency of a country on oil imports can be expressed as a ratio between the
country’s imports and its total consumption.
The following table provides the import to consumption ratio for the top consumers of oil
for the year 2001.
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Table 6: Measure of Dependency on Oil Imports
Measure of Dependency on Oil Imports
Country Imports of Oil/Consumption of Oil*
1 Japan 1.00
2 South Korea 1.00
3 France 1.00
4 Germany 0.96
5 India 0.65
6 United States 0.55
7 China 0.33
8 Brazil 0.25
9 Russia 0
10 Canada 0
* If Imports can be denoted by M and consumption of Oil by C. M/C varies between 0
and 1.
Non-OPEC production coordination with OPEC:
A few non-OPEC countries that share some traits of OPEC countries sometimes
coordinate their production policies with OPEC. While non-OPEC restrictions are very
small, the participation of these non-member countries are more likely to pressurize the
member countries to adhere to their own output restriction policies. Therefore, non-
OPEC coordination with OPEC often carries significance beyond what the output data
might imply. The section will consider the coordination of some of the non-OPEC
countries with OPEC.
Mexico:
Mexico has had more involvement with OPEC than any other major non-OPEC oil
producing country. Since 1997, Mexico has attended most of OPEC's meetings (more
than any other non-OPEC country). Mexico has made seven pledges to restrict exports
since 1997. Mexico was a key player in organizing OPEC's 1998 production cuts, as
Mexican officials negotiated between OPEC members Saudi Arabia and Venezuela
(these countries had been at odds over production agreements). Like OPEC member
countries, Mexico's oil sector is in public hands, with 100% government-owned PEMEX
being the only oil company in Mexico. This allows the government to control oil
production and export decisions. Mexico's output restrictions generally apply to exports
rather than total production, and PEMEX data show that the targets are usually kept.
Russia:
Russia has attended many of OPEC's meetings since 1997 and has made three
commitments to reduce production and/or exports in coordination with OPEC. Russia
was the world's largest oil producer until oil production collapsed in 1992. Production has
rebounded since 1998, and the country soon could be in a position to regain its status as
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the leading global producer. Oil production in Russia is mostly in the hands of the private
sector, while government-owned Transneft controls the pipeline network.
There is often considerable ambiguity regarding whether Russia's reduction pledges are
for production or export cuts. It is also unclear from what level of production Russia
intends to cut, or for how long.
Norway:
Norway does not generally participate in OPEC meetings, but the world's third-largest
exporting country has adjusted its production in coordination with OPEC on three
occasions since 1998. While the Norwegian oil sector historically has been state-
dominated through 100% state-owned Statoil and majority state-owned Norsk Hydro,
major restructuring is augmenting the role of the private sector. Norsk Hydro is no longer
majority state-owned, and the Norwegian government began selling shares of Statoil in
the spring of 2001. Additionally, many private international oil companies are active in
Norway.
Because Norway is an extremely small oil consumer, its reduction commitments affect
production rather than exports (the domestic market would not be large enough to absorb
extra production resulting from shut-in exports).
Oman:
Oman is a smaller Persian Gulf oil producer that has attended most of OPEC's meetings
in the last few years. Since 1997, Oman has made three commitments to reduce
production, in cooperation with OPEC. State-controlled Petroleum Development Oman
(PDO) dominates the country's oil sector.
Angola:
Angola, sub-Saharan Africa's second-largest oil producer (behind OPEC member
Nigeria), has attended a few of OPEC's recent meetings. Angola made its first-ever
commitment to reduce production in December 2001, promising to cut 22,500 bbl/d. This
decision came after OPEC's November 14, 2001 decision to make its 1.5 million bbl/d
production cut contingent upon non-OPEC pledges to cut production by 500,000 bbl/d.
Angola's oil production began to rise in late 2001, with the start up of its new Girassol
field.
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