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Analysis: Who Controls The World’s Oil

‘The oil business was more like an epic card game, in which the excitement was worth more than great stacks of chips.’

-William C. Mellon

According to EIA data, Fossil fuel will contribute to 79% of world energy mix in 2035. So, having control over the lifeline of the world is what many countries are looking for. To understand this battle between countries, we will consider some aspects of oil industry.

1.      Volatility in oil prices and its geopolitical and economic dependence.

2.      Total proven reserves and R/P ratio.

Volatility in oil prices and response observed

Just like presence of various cycles in the nature, oil industry seems to have its own cycle. This cycle has reference to variation in the oil prices based on various geopolitical events. As shown in the adjoining graph since 1970s we are observing various ups and downs in pricing. But the case of latest oil price slump is different from the history. This oil price slump, averaged $52/b in 2015 and $38/b in the start of 2016, is mainly due to the U.S. shale oil boom, slowing of economies of top oil importers which resulted in decrease in demand, and lifting export bans on US and Iran. In the earlier same situation of price down, OPEC reacted by cutting down their targets at two events in the history to stabilize the market and remain powerful. Firstly at the start of 21st century and second during the global financial crisis in 2009-10 but this resulted in OPEC loosing influence and drowning economy. OPEC’s condition became worse when Russia gradually increased their market share by increasing production.
So, learning from such past experiences OPEC is increasing their daily production rate instead of decreasing to apply more pressure on the U.S. and other major oil producers so that they can maintain their global market share and also try to keep their economy as stable as possible, though it’s very difficult because their economy is fully based on oil and gas trading. On the other hand, some global events like slowing of Chinese economy day by day which is increasing strain on stock market, removal of export ban on Iran, are contributing to further decrease in oil prices. On the other hand, we have seen the common trend that West Texas Intermediate (WTI) crude is always cheaper than Brent crude despite of former being lighter and sweeter than the later one. This is entirely due to the ban on WTI export after the Arab oil embargo in 1973. Last year this ban is lifted on U.S. so, it is expected that, despite of WTI being more expensive to transport, it will exceed the Brent index by around $5 in few months.

Total Proven Reserves and R/P Ratio

Proved reservesBasically there are three categories of reserves- proven reserves, probable reserves and possible reserves. Proven reserves has 90% certainty of production at given economical, technical, and political conditions. But if we have a look at oil industry’s fascinating history, we will come to know that only amount of proven reserves did not really matter but political stability and economic growth backed up by availability of advanced technology is all that mattered.

From the above pie chart we can see that there is a significant change in distribution of proved reserves over a period of 20 years. South and Central America has gained a significant share in world’s total reserves due to advancement of technology and attractive fiscal regimes. OPEC still possess the maximum share of world’s proven reserves, accounting for 71.6% of the global total. The largest addition to reserves came from Saudi Arabia, adding 1.1 billion barrels. The largest decline came from Russia, where reserves fell by 1.9 billion barrels. Reserves to production ratio is the ratio of the reserves remaining at the end of any year to the production in that year. It basically gives the length of time that those remaining reserves would last if production were to continue at the same rate. South and Central America continues to have highest R/P ratio of more than 100 years. Whereas over a decade the ratio has not changed significantly for other regions.

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3 thoughts on “Analysis: Who Controls The World’s Oil

  1. This article will definitely give a insight on how the crude price are affected by various small and big events occurring in the world. Great work man 👍

  2. We got an insight about the Geopolitical aspects that affect the Oil pricing! Such articles are indeed important for a budding Petroleum Engineer. Nice work!

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