The oil industry

At the end of 2011, world proven crude oil reserves stood at 1,481,526 million barrels, of which 1,199,707 million barrels, or 81 per cent, was in OPEC Member Countries.

There is no standard answer to this question, but as a rule of thumb it can take 3-10 years from the decision to explore, through to discovery, testing, development and the delivery of oil from a new field.

The time required depends on where the oil is and thus how difficult it is to discover, test and develop.

For instance, an offshore oil field in deep water can take much longer to discover and test, due to the challenging technical requirements. Drilling in deep water is also difficult and can be very expensive, so the explorers need time to raise the necessary money as well as meet the new technical challenges.

No. The 1970s oil crisis was a complex affair reflecting issues particular to that time and it is unlikely to be repeated.

Indeed, we all learned a lot from that experience. We know that if oil prices go too high or too low it will be harmful both to oil producers and oil consumers, both in the short- and long-term.

OPEC is dedicated to providing a stable oil market, with reasonable prices and steady supplies to consumers.

Consider the example of the Gulf Crisis in 1990, when production of several million barrels per day of oil from Iraq and Kuwait was suddenly halted, leading to a rapid rise in world oil prices. Those Member Countries not involved decided to increase their oil supplies in order to make up for the shortfall. As a result, oil prices stabilised and came down again to reasonable levels. However, there is always potential for instability in the oil market.

OPEC continues to seek co-operation among all oil producers and consumers. Such co-operation is necessary to ensure stability

Low prices of crude oil can be caused by a number of factors. Basically, it could be due to an imbalance between supply and demand - too much supply or too little demand.

OPEC Member Countries have always tried to adjust their crude oil supplies to improve the balance between supply and demand. OPEC's aim at all times is to maintain steady supplies of oil to consumers, while securing a reasonable return for its Member Countries. However, OPEC cannot be expected to achieve this on its own.

Most non-OPEC oil producers supply as much oil as they can. This makes it difficult for OPEC to maintain stability in the oil market and results in losing market share and potential revenue for the organization.

If oil production rises faster than demand, then prices can fall and all oil producers will suffer. In the long run, consumers will also suffer if the oil industry is unprofitable and unattractive to investors.

High crude oil prices could be due to a shortage of oil supplies. High prices for oil products - as purchased by end consumers such as motorists - are more likely to reflect other factors, such as taxation.

Crude oil prices react to the balance of demand and supply in the short term, and the rate of investment in the longer term. If investment is not made far enough in advance, oil supplies could be limited in the longer term, thus raising prices. Sentiment is also an important factor: if traders in the oil market believe there will be a shortage of oil supplies, they may raise prices before a shortage actually occurs. Other factors influencing the price of crude oil include accidents, bad weather, increasing demand, halting transport of oil from producers, labour disputes (strikes) as well as other disruptions to production including war and natural disasters.

Crude oil now represents less than a quarter of the price of oil products in many countries. Therefore, taxes have more influence over the price of oil products. When oil taxes are raised, end consumers often mistakenly blame the oil producers, but it is really their own governments that are responsible.

OPEC seeks a stable oil market, without sudden price changes or excessively high or low prices. OPEC regularly meets with other oil producers and with consumers in an effort to improve understanding and trust in the oil industry and to seek policies and measures that do not create unnecessary economic hardship for oil producers or consumers.

The world lives on oil. Oil is the foundation for the plastics and petrochemical industries. Oil is fundamental to the welfare of the industrialised world and it is a major component of the farming industry.

The price of oil is reflected in most of the things we do. It impacts on the price of transport, the cost of goods and services, and the availability of many products, including food, water and shelter.

If oil prices are too high, then these goods and services become more expensive and economies experience inflation. Alternative forms of energy would also become more cost-competitive, but oil producers would eventually increase their supplies and prices would come back down.

If oil prices are too low, consumers would waste this non-renewable resource, investors would not be attracted to the industry and oil producers would suffer - especially the developing countries that produce oil, such as the OPEC Member Countries. If prices were too low, supplies would eventually fall until there was a price shock - leading back to inflation.

Oil prices that are too high or too low are clearly unhelpful for oil producers, oil consumers and the world at large. That is why OPEC makes quite sure that the market is not under-supplied with oil, forcing prices to go excessively high, and also that the market is not over-supplied so that prices go too low. It also speaks to other oil producers to encourage them to avoid over-supplying the market. It is also why OPEC talks to oil consumers to encourage them to adopt fair and equitable policies that do not discriminate against oil.

We would all suffer without steady supplies of oil at stable, reasonable prices.

According to the reference case of OPEC's World Energy Model (OWEM), total world oil demand in 2006 was put at 84.7 million barrels per day. As world economic growth continues, crude oil demand will also rise to 96.1m b/d in 2015, 102.2m b/d by 2020, and 113,3 mb/d by 2030, according to OPEC's "World Oil Outlook 2008" (page 33) reference case figures.

Source: "OPEC Annual Statistical Bulletin 2012"

* Including share of production from Neutral Zone.

Source: "OPEC Annual Statistical Bulletin 2012"

Historically, most non-OPEC producers have taken advantage of OPEC's voluntary production restraint by increasing their own production whenever possible. As a result, the market share of non-OPEC producers rose for a number of years, but oil prices remained at relatively low levels and the markets were less stable than they could have been.

However, the oil price slump of 1998 and early 1999 reinforced OPEC's constant message that oil market stability can only be achieved through co-operation between OPEC and non-OPEC oil producers. In support of OPEC's efforts to restore stability to the oil market by restraining output, several non-OPEC oil producers also cut their production, thus helping prices recover from the slump. These countries included Mexico, Norway, Oman, and Russia.

Historically Yes, OPEC believes that oil demand will continue to grow strongly and oil will remain the world's single most important source of energy for the foreseeable future. The OWEM reference case sees oil's share of the world fuel mix falling slightly from over 41 per cent today to just over 39 per cent in 2020. However, oil will still be the world's single largest source of energy. The reduction in oil's market share is largely due to the stronger growth enjoyed by other forms of energy, particularly natural gas (see the table below).

Source: OWEM Scenarios Report, March 2000

Oil is a limited resource, so it may eventually run out, although not for many years to come.

At the rate of production in 2011, OPEC's oil reserves are sufficient to last for more than 109 years, while non-OPEC oil producers' reserves might last less than 19 years. The worldwide demand for oil is rising and OPEC is expected to be an increasingly important source of that oil.

If we manage our resources well, use oil efficiently and develop new fields, then our oil reserves should last for generations to come.

The economics of industry depends, in part, on its costs, of which a large part is represented by the cost of energy, such as gasoline or fuel oil. The cost of these oil products is affected by the price of crude oil, taxation and other factors.

The price of crude oil is influenced by the decisions taken by all oil producers, particularly the prices for which they are willing to sell and the quantities they are willing and able to supply.

If there is a shortage of oil supplies, then the price of oil will likely rise. This would have all sorts of implications for industry, such as higher transportation costs. Higher costs can lead to lower economic growth, and this will also impact on industry.

The OPEC Statute, written when OPEC was formed 1960, declares that OPEC is dedicated to providing a stable petroleum market, with steady supplies to consumers, reasonable prices and fair returns to investors in the oil industry. In pursuit of these aims, OPEC has for many years maintained a limit on the oil produced by its Member Countries. This has provided for a relatively stable oil industry, with reasonable prices. But OPEC is concerned that factors outside of its control may disrupt this stability. This includes taxation, which now constitutes the largest part of the price of oil products in some countries.

Oil exploration can cost tens or hundreds of billions of dollars.

The actual costs depend on such factors as the location of possible oil reserves (i.e. on land or in deep water), how large the oil field is expected to be, how detailed the exploration information must be, and the type and structure of the rock below the ground. Exploration requires careful mapping of the surface in order to locate suitable sites (ie, types of geological structures), deep formation surveys (eg, with two and three-dimensional seismic techniques), and test-drilling. It is not easy to determine a typical cost of such activities.

OPEC has the lowest average production costs in the oil industry. This is partly because some OPEC Member Countries have large amounts of oil in reasonably accessible locations. Yet OPEC Members will still need to spend tens of billions of dollars in future to meet the growing need for oil.