Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS.

NL

Contents Chapter 3
Chapter 3: The structure of the oil industry and institutional significance for an
alternative oil price trend explanation .................................................................................. 2
3.1. Introduction .............................................................................................................. 2
3.2. The structure and functioning global oil market .................................................. 2
3.2.1. Spot prices denomination................................................................................. 2
3.2.2. Production, consumption, exporters and importers ..................................... 3
3.2.3. Demand .............................................................................................................. 4
a. Oil demand, financial market and oil price fluctuations ...................................... 9
3.2.4. Supply ............................................................................................................... 12
a. The supply side and the oil companies ................................................................ 14
b. Proved reserves ....................................................................................................... 15
c. Scarcity Oil rents and Fiscal Regimes .................................................................. 16
d. Shale Oil .................................................................................................................. 19
e. Shale Oil and oil exporting economies ................................................................ 22
3.3. Energy transition and constraints for the oil business....................................... 23
3.4. Conclusion: Epochs and structure of the global oil market ............................. 27
List of Acronyms ................................................................................................................. 29

1
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

3. Chapter 3
Chapter 3: The structure of the oil industry and institutional
significance for an alternative oil price trend explanation
3.1. Introduction
This chapter refers both to the historical structure of the oil market since 1960 and to the recent
changes observed in the last years. Specifically, the chapter begins by looking at the social condition
of the oil markets, including the primary sources of demand and and demand as well as the institutional
setting in which prices are determined. The chapter presents the two significant changes observed in
the structure of the world market during the last twenty years: on the one hand, the sustained growth
of consumption towards the Asia Pacific region. On the other hand, the change in production cycles
observed with the emergence of Shale Oil in the United States since 2014. The chapter also provide
an insight into the emerging lively alternative energy market, focusing on the extent and structure of
this market, and the conditions imposed by the energy transition as growing pressure to decarbonise
transport trough the international agreements on climate change (Tokyo, 2010; Paris 2015; Madrid
2020).

It is understood that the institutional structure of the oil market defines epochs that in turn, determine
the oil price trend. In the case studied, the history of the dominant institutions shows four distinct
periods that will be exposed at the end of the chapter.

3.2. The structure and functioning global oil market

3.2.1. Spot prices denomination

It can be taken for granted that in nowadays there are four well-known types of crudes markers in the
international reference to set up the oil price: The West Texas Intermediate-Cushing (WTI), from
United States, the Brent (from the European North Sea) and the Dubai oil prices, all these references
valued in U.S. dollar (Smith and Meza, 1998). The Organization of Petroleum Exporting Countries
(OPEC) also has a reference price called “OPEC Reference Basket” (ORB) composed by a weighted
average of the oil prices of all OPEC members with its markers. Figure 3.1. depicts all four prices

2
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

from 1972 to 2018 moving together, although each price represents a non-homogeneous oil quality
composition1.

3.2.2. Production, consumption, exporters and importers

The oil market comprises producers, consumers, exporters and importers. The table below provides
information on the countries making up the four groupings, comparing the situations in 2008 and
2018. It may be seen that there are notable differences, although there is some overlap between the
clusters of countries. Some countries (e.g., United States and China) have been historically large
producers, consumers and importers, while others are either producers (e.g., Saudi Arabia and Iran)
or net importers (e.g., Japan and Germany). The significant dependency structure is created between
exporting and importing countries in order to sustain economy mainly due to the geographical
locations of oil production, with, at its time, shows different historical productivity and business
developments.

1The price of oil changes depending on the API gravity, a standard measure of viscosity and sulphur content in the crude. The
American Petroleum Institute gravity, or API gravity, measures of how heavy or light a petroleum liquid is compared to water. API
gravity values of most petroleum liquids fall between 10 and 70 degrees, affecting the refining process of crude. Light Crude Oil
corresponds to an API gravity higher than 31.1° with a “sweet/sour” characterization defined by <= 0.42% Sulphur. The Medium
Crude Oil corresponds to an API gravity between 22.3 and 31.1°. The Heavy Crude Oil has an API gravity below 22.3° and the Extra
Heavy Oil has an API gravity below 10.0° (2014: Pag. 19).

3
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Table 3.1. Ranking in oil market - Producers, consumers, importers and exporters, 2008 – 2018
Rank Production Consumption Imports Exports
Years 2008 2018 2008 2018 2008 2018 2008 2018
1 Saudi Arabia US US US US China s Saudi Arabia Saudi Arabia
2 Russian F Saudi Arabia China China Japan US Russian F Russian F
3 US Russia Japan India China India UAE Iraq
4 Iran Canada Russia Japan Germany Japan Norway Canada
5 China Iran India Saudi Arabia South Korea South Korea Iran UAE
6 Mexico Iraq Germany Russian F India Germany Kuwait Kuwait
7 Canada UAE Brazil Brazil BR France Spain Nigeria US
8 UAE China s Canada South Korea Spain Italy Venezuela Nigeria
9 Venezuela Kuwait South Korea Canada Italy Netherlands Algeria Iran
10 Kuwait Brazil Saudi Arabia Germany Taiwan France Angola Kazakhstan
Data Source: Country Energy Profile, Energy Information Administration 2008-2019/ BP, 2019/ OPEC 2019.

From 2008 until 2018, the oil market has observed essential changes in the conformation of new issues
associated with the demand and the supply of crude. One of the elements that stand out is the
emergence of the Shale Oil as alternative fossil energy, changing the configuration of the United States
production within the world oil market. Indeed, the United States has ceased to be a net importer
economy, to become one of the world's leading oil producers, as it was before 1973. As one can verify
in Table 3.1., the U.S. is placed in 2018 within the first consumers and in the oil exports list2. The
second relevant issue is related to the emergence of China as a key factor in the importing crude oil
market, in competition for the world oil supply. In 2018 China, India, US and Japan account for nearly
all the imports.

3.2.3. Demand

The world absolute oil demand has seen a steady increase since the early 1960s, with an exceptionally
period of total decrease from 1978 to 1984. Despite this fall, the general trend in the absolute demand
grows with a slow slope from 2008 onwards. Figure 3.2 shows both the relationship between the
demand for crude oil and the world GDP growth and how the global oil demand has slowed
significantly since the late 1980s. Indeed, Figure 3.2. depicts the straightforward relationship between
demand and global GDP, verifying what the organization and authors such as World Bank (1997),

2
The increase in the US oil production has forced national authorities to lift the export ban that had been put into
effect on December 22, 1975, with Public Law 94-163, which responded to the energy crisis caused by the embargo
in 1973 of the countries of the Middle East.

4
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Pirog (2005), Ikeda (2009), van de Ven and Fouquet (2017) and Dale and Fattouh (2019) have been
stating with redundancy during the last forty years. According to Ikeda (2009), Fattouh (2017) and
Dale (2015) the fall in real oil demand in the last decade could be attributed to the growing efficiency
of energy. However, as one can see later in this chapter, many other arguments come up from the
most diverse authors, overall related to the energy transition.

Historically, the most significant proportion of global oil demand came from the advanced economies
grouped in the Organisation for Economic Co-operation and Development (OECD). However, as
shown in Figure 3.3, this proportion has changed observing its critical point in 2014 when demand
from non-OECD countries exceeds demand from OECD countries. This crucial shift in the structure
of demand by country is mainly due to the change observed in the growth of demand in China and
India. Indeed, ratios in demand from emerging countries (namely, China, India, Russia and Brazil),
represent a significant increase of 134% altogether in 2018 compare to 1998.

5
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

It is especially remarkable the average consumption growth rate between 1998 and 2018, representing
for China 226,8%, for India 163,2%, Russia 30,0% and Brazil with 49,9%. It is also important to
observe the decrease in their average consumption rate of both Japan with 31% and Western Europe
with 10,2% (see the Table 3.2 below).

In contrast, the United States still represents the most consuming oil economy in the world, remaining
by far with the historical 20 to 21% of world consumption since 2011. Although in the 2000s, the US
consumption seemed to fall, reaching maximum demand in 2007, it increases 8% from 1998 to 2018.
Indeed, in relative terms, the rise of production in the US since 2014 due to new technologies in
horizontal drilling devoted to the shale oil postpones the expected peak oil.

6
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Table 3.2 Countries and Regions Ranking by Oil Consumption and

Average Consumption Growth Rate of Oil 1998/2018
(1.000 barrels a day)
Rank Countries 1998 2008 2018 Share ACGR
2018 1998 to 2018
1 US 18.917 19.498 20.452 20.7 % 8,1%
2 China 3.776 7.971 12.712 13,6% 236,7%
3 India 1.850 3.072 4.761 4,8% 157,4%
4 Japan 5.507 4.666 3.544 3,8% -31,4%
5 Russia 2.613 3.029 3.780 3,6% 52,1%
6 Brazil 2.127 2.518 3.235 3,3% 52,1%
Rank Regions
1 Western Europa 15.013 14.783 13.486 13,7% -10,17%
2 Latin America 7.096 8.281 9.237 9,4% 30,17%
3 Eastern Europe and Eurasia 5.013 5.449 6.401 6,5% 27,69%
4 Africa 2.290 3.262 4.292 4,2% 87,42%
Data Source: BP Annual Statistical 2019; 2020. Average Consumption Growth Rate (ACGR) calculated by the author.

Figure 3.4. shows the volume of oil imports per region. In this chart is remarkable the importance of
the U.S. as the main importing since 1980, close to 10 Million barrel per day. In relative terms, the rise
of importing in other regions like China and India seems to compensate the decrease of imports from
Japan and Europe during the last ten years.

7
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

There are no agreements between authors, organisations and financial advisors on predicting the peak
of global oil demand. Sources like OPEC, International Energy Agency (IEA), Energy Information
Administration (US EIA), all of them associated with oil production and the energy sector, postulate
a fall in demand sometime between 2020 and 2030 (Dale and Fattouh, 2019). However, peak oil
demand is very difficult to predict, among other reasons, because one cannot predict the effect in the
demand of the technological innovations. For instance, the latest events in the increase of oil supply
in the US has caused an unexpected increase of demand in this country, postponing the expected peak
of oil demand.

Thus, that is why it is essential to follow the trend of the demand relative to the GDP and avoid
postulating the end of the oil era. Figure 3.4 below shows how the global demand for oil has fallen
relative to world GDP.

8
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

a. Oil demand, financial market and oil price fluctuations

Let's begin saying that this research does not consider the financial market as a main determinant of
the trends in oil prices. However, there are anecdotal and indirectly statistical reasons to perceive a
relationship between the oil financial market and the spot oil price, overall during the 2000s.

Although the first financial operations of oil formally launched in 1987 (Al Shereidah, 2013), oil begins
to be relevant in the financial market since 2003 when the stock market shows the effects of the
deregulation initiated in 1999 by a law that aims to modernize financial services in the US. The
“Financial Services Modernization Act” (or the Gramm-Leach-Bliley Act of November 1999 and
enacted in 2000) repeals large parts of the Glass-Steagall Act 1933 (from the time of depression), and
the “Bank Holding Company Act” (1956 ) that prevented the entry of crude into the stock market. By
deregulating the barrier between commercial and investment, financial portfolio companies, insurance
firms and banks merge to create non-traditional financial products, such as the multiples choices
designed for crude oil.3 These transactions are carried out through the so-called futures markets, which
are financial instruments derived from an obligation, which requires participants to deliver taking
agreed barrels on a specific date in the future. These operations are effective with the West Texas
Intermediate (WTI) in the New York financial market (NYMEX) and with the Brent crude in the
Intercontinental Exchange (ICE) Commodity trading in London. The main participants in these
markets are usually companies that need oil as a raw material for their productive activity (for instance
airlines companies). These companies buy future papers to counteract the volatility of prices. For this,
they look for so-called financial hedges through the so-called hedgers, whose activity is a kind of
controlled speculation for industrial companies using oil as a part of their industrial processes. On
the other hand, since 2000, it has been observed that there are economic agents who participate in the
oil futures market, who are increasingly acting speculatively. These are banks and financial institutions
that seek profitability betting on a direction of the rise in prices.

3 The Commodity Futures Modernization Act of 2000 (CFMA) enounced three financial category instruments with several regulation

degrees according to the commodity: The financier, with few regulations; the agricultural, fully forbidden; The CFMA established
three categories of commodities and made them subject to varying degrees of regulation: financial commodities (such as interest
rates, currency prices, or stock indexes) were defined as excluded commodities. Excluded commodities can be traded in the OTC
market with minimal CFTC oversight, provided that small public investors are not allowed to trade. A second category is agricultural
commodities; here, because of concerns about price manipulation, the law specifies that all derivatives based on farm commodities
must be traded on a CFTC-regulated exchange, unless the CFTC issues a specific exemption after finding that a proposed OTC
agricultural contract would be consistent with the public interest.1 Finally, there is a third “all-other” category — exempt
commodities — which includes whatever is neither financial nor agricultural. In today’s markets, this means primarily metals and
energy commodities. The statutory exemption from regulation provided by the CFMA for exempt commodities is commonly known
as the “Enron loophole.” (Mark Jickling, 2008).

9
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

In 2004, the relationship between physical demand and financial demand for oil is reversed. The
financial goes from being a fraction close to 1% of the physical demand in 1994, to represent almost
16 times the amount of physical crude demanded in 2017. “The index of financialization of oil reveals
the growing importance of financial elements in this market, particularly since 2002” (Pérez, Hermes.
2019).

At the same time, in 2004, international oil prices rose dramatically. For instance, Saudi Light's oil
progressively increased from 27.08 at the beginning of 2004, then 31.86 in 2005, 50.86 in 2006, 55.94
in 2007, hitting a maximum of USD 136.02 USD barrel/day for the first week of July 2008. Then,
there are good reasons to perceive that the increase of financial demand is the cause of the hike in oil
prices4.

Hence the fundamental question is how extended the speculative oil demand in future markets (“paper
barrels”) affects the magnitude and fluctuations of the price of crude during the decade of 2000. In
this respect, there is no agreement.

The International Energy Agency published in 2009 a report positing that the rising prices are difficult
to explain by fundamentals. According to this Agency, there are other elements such as capital market
trends, currency fluctuations, expectations about future supply weakness and futures market entry that
explain the swings during the last decade. In the same tendency, the U.S.

Some studies suggest that the behaviour of OPEC and the so-called peak-oil from producer countries
is a favourable environment for the speculator and this situation allows these authors to posit a causal
relationship between the supply and demand behaviour and the futures market demand. But test
theoretical disagreement, authors like Almeida and Silva (2009) and Stevens (2008) suggest that it is
not possible to compare the two markets as a growing gap is systematically observed in both
behaviours.

However, some authors contest the relationship because there is no empirical evidence that test this
relationship (Fattouh, 2011; Killian, 2012). Indeed, for Fattouh “discussions and analyses of
“financialization” of oil markets have partly been subsumed within studies of the relation between
finance and commodity indices which include crude oil. The elements that have attracted most
attention have been outcomes: correlations between levels, returns, and volatility of commodity and
financial index”. According to Fattouh “a full understanding of the degree of interaction between oil

10
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

and finance requires, besides, an analysis of interactions, causations and processes such as the
investment and trading strategies of distinct types of financial participants; the financing mechanisms
and the degree of leverage supporting those strategies; the structure of oil derivatives markets; and
most importantly the mechanisms that link the financial and physical layers of the oil market.”
(Fattouh, 2011: 68-70). For Fattouh, the behaviour of oil prices should be explained in terms of their
physical market, linked to derivatives markets and the interaction between them. For Turner et al.
(2011), a simple visual inspection suggests that there is no clear correlation between prices and
financial positions. Even though the existence of a long relationship, for these authors, the crucial
aspect in the direction of causality. The increase in prices may be attributable to peak oil theory,
fundamentals and speculation. However, there is no evidence for the former.

Authors like Arsenau (2010) from the US Federal Reserve argues that the fundamentals of the market
can explain the tendency of prices, but extreme volatility can be interpreted by speculation, although
it is not clear in the empirical studies how speculation is transmitted to the spot price.

Since there is no agreement within the sphere of authors, in this part was intended a brief summary
of the discussion and to contribute with the empirical evidence, re-joining a Figure made by Eri Ikeda
in 2009 on this topic. Indeed, Figure 3.5. depicts the future/spot price differential for the period from
May 1987 to December 2019. For the most part, futures prices fluctuate around spot prices such that
the moving average differential fluctuates around zero. From 2004 to 2019 the differential between
spot and futures prices is positive (exception 2014) and has been increasing over time, as can be
verified in the trendline of the chart. This figure confirms what for many authors is a suspicion: the
futures market is the smoke of the oil spot market revolver (Ikeda, 2009).

11
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

3.2.4. Supply

Oil supply typically follows demand. Accordingly, the rate of growth in oil supply relative to world
GDP has fallen along with demand. As corroborated in Figure 3.5. depicts the World Oil Supply over
the Global GDP from 1960 to 2018, observing and increase from 60’s to 1984, and a historical
decrease.

The main suppliers of oil are reunited in the so-called Organization of the Petroleum Exporting
Countries (OPEC). OPEC was founded in 1960 by five major oil exporting countries and now
comprises 13 countries. OPEC accounts from about 46% of world production and 54% of total oil
exports in international trade in 2018 (see Table 3.3). Although the non-OPEC share of global oil
production in absolute term has risen largely due to increases in Eurasian production, this has now
levelled off, mostly as a result of the fall in European production.

Table 3.3: OPEC/Non-OPEC production and export share.

Production Export
Years
OPEC Non-OPEC OPEC Non-OPEC
1990 38.5% 61.5% 60.9% 39.1%
2000 43.8% 56.2% 55.5% 44.5%
2010 42.1% 57.9% 55.8% 44.2%
2018 41.9% 58.1% 53.9% 46.1%
Data Source: Annual Statistical Bulletin 2019, Organization of the Petroleum Exporting Countries, Table by the author

12
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Oil exports (crude oil and refined products) have been the leading commodity in the world,
representing 7.9% of total commodity trade in 2013 (United Nation, 2016). In the world, 47 countries
produce crude oil; and two third of this production is exported. Countries in the Middle East, the
former Soviet Union countries, Africa and one in Latin America account for the bulk of exports. The
importance of the Middle East as an oil exporting region to the industrialized countries in the oil
market for the last forty years. It is also important to point out the increase of exports from the former
Soviet Union Countries (Caspian Sea) and of the US exports since 2013.
Figure 3.7. depicts the Crude oil production share from 1960 to 2018. As can be seen, since 1960, the
year of OPEC's founding, until 1975, the organization of producing countries keeps its production
rising from the world total. However, since 1976 it is the countries not associated with this
organization who own more than 50% of the share. However, OPEC is a key player in the global
supply of crude, so that every six months, or if necessary, before, meetings are held in which the
production quotas5 of each member are ratified. Despite being below 50% of world production, the
OPEC is an association of oil-producing states that homogeneously decides quotas with an important
impact on the world production.

5The quota system started or the so-called “production allocation” started by the OPEC in 1982, after the increased of the oil
production in the Non-OPEC countries.

13
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

As Figure 3.8. depicts, an element to consider in the historical production share, is the role played by
the Former Soviet Union countries FSU also called the Caspian Sea producers. Until the emergence
of Shale Oil in 2014, these countries concentrated part of the attention as important production
balance between OPEC and the consuming countries. However, from 2014 with the emerge of Shale
Oil production in the US, the FSU countries have been approaching to OPEC in their export policies.

a. The supply side and the oil companies

Oil companies can be divided in three types: those belonging to sovereign states (equally, OPEC or
Non-OPEC companies), those usually called the “major companies” (oil companies such BP, Shell,
Exxon-Mobil, the ex-seven sisters), and the "independent" companies, normally operating in the US
and now devoted to the shale oil business (for instance, Continental). The main role of these
companies is always associated with the extraction, transport and refining activities. However, in the
case of “state-owned” companies also represent the fiscal interests of countries.

From 1928 to 1970, the oil industry has been a well-controlled business, vertically integrated, due to
the so-called seven-sisters cartel, integrated by five US oil companies and the Anglo-Dutch Shell, plus
Britain’s BP; and later joined by France’s Elf and Italian ENI. According to Al-Shereidah (2013) and
Roncaglia (2015), the seven-sisters cartel was created as a result of the Achnacarry Agreement (signed

14
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

in Scotland on 17 September) and the Red Line Agreement both dating from 1928 as an early attempt
to restrict petroleum production and control the Indian market, and to seek collaboration during
1950’s in the Middle East oilfields.

The emergence of OPEC in 1960 as a union of producer countries (often catalogued as a cartel) and
the wave of nationalization of companies and reserves during the 1970s by OPEC countries represent
perhaps the most common milestone in the history of the crude supply after the Seven Sisters Cartel.
It is true that the nationalization wave during 1970’s started a new phase with high prices and a more
diversified type of companies, causing significant portion of the decrease in OPEC countries supply
after 1976 resulted in a rapidly escalating of Non-OPEC production. Production in most oil producing
countries is undertaken by national oil companies. The largest of these are the national oil companies
(NOCs) of Saudi Arabia, Russia, China, Iran, Venezuela, Brazil and Malaysia. They are often
positioned as “the instrument for achieving a broad range of national, social and political objectives
that go well beyond their original purpose of maximizing revenues for their governments” (World
Bank 2008:3).

b. Proved reserves

In the oil market structure is also important the reference to the proved oil reserves in the world,
which refers to the amount of oil that can be economically recovered from the deposit with a
reasonable level of certainty. For instance, in 2015 the proved oil reserves in the world represent
1,492.7 billion barrels. The world's total oil reserves belonging to the OPEC represent 81.2 % of
proven reserves6. The three countries with the largest amount of reserves are OPEC countries.

There are three different conventional ways by which additional reserves of oil can be developed and
brought up to the surface: conventional oil new discoveries, extending the old discoveries
conventional oil, and recovering additional oil from the existing oil conventional fields. It goes without
saying that these methods differ in the conditions of capital investment and the resultant capital
intensity.

6 “Proven crude oil reserves: the estimated quantities of all liquids statistically defined as crude oil. They consist of those
quantities of crude oil which by analysis of geoscience and engineering data can be estimated with reasonable certainty to be
commercially recoverable, from a given date forward, from known reservoirs and under defined economic conditions, operating
methods and government regulations” (Source: SPE — Petroleum Resources Management System). The reserves estimation
varies from one source to another. In this case, we have chosen from OPEC, but BP says that the total proved reserves in OPEC
countries is 78%

15
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

During the last fifteen years unconventional oil reserves have been developed, starting by the
horizontal drilling for the Shale Gas and applied more recently in the US Oil sector.

c. Scarcity Oil rents and Fiscal Regimes

The rationale behind the proved reserves accounting is associated with the preservation of the
resources for future sales, inspired by the Hotelling rules (see Chapter 2). This proved reserves
accounting is closely followed by companies and state-owners. It is the way to manage the expected
depletion of wells by the landlord. Basically, the owner of the oil field (whether in OPEC, or Non-
OPEC, from a public or private company, located in Texas or in Nigeria) try to effectively ration their
supplies in terms of quality and productivity – implying that wells could continue producing oil at the
same rate for until hundred years. This is considered a “sign of both strength and intergenerational
fairness”, especially in developing oil countries (Dale, Fattouh. 2018).

During the first hundred years of the global oil market, the differential production costs related to the
natural conditions of wells and the techniques applied defined part of the institutional structures of
the oil market. For instance, OPEC countries are the owners of vast low-cost resources, determining
that the enormous differences between regional productivities, allowing OPEC countries to take
advantage of their low production costs in the form of rents. This is what economic theory has called
Differential or Ricardian rents. Indeed, the extraordinary profit observed in the global oil sector is due
to the presence of very significant rents in the international oil market. These rents reflect fundamental
differences in the geological endowment of each oil producer, showing substantial and systematic
divergence from the average cost of production between countries. For instance, in 2016 (see Table
3.4. below) the productivity of 463,305 wells located in the USA was 18.9 barrels per day. This was
significantly less than the productivity in Saudi Arabia of 2,876.3 barrels per day.

16
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Table 3.4.
Oil Extraction OPEC and Non-OPEC Countries, US and World. 2016

Daily Production (Million Active Oil Oil rate per Well

Country Barrels/Day) Wells Barrels/Day
Algeria 1.146 1.936 592,09
Angola 1.722 1.572 1095,18
Ecuador 549 3.496 157,04
Gabon 220 396 556,18
IR Iran 3.651 2.886 1265,18
Iraq 4.648 2.629 1767,89
Kuwait1 2.954 1.780 1659,70
Libya 390 521 748,93
Nigeria 1.427 1.668 855,67
Qatar 652 460 1416,31
Saudi Arabia1 10.460 3.648 2867,38
United Arab Emirates 3.088 1.835 1682,99
Venezuela 2.373 13.395 177,12
OPEC 33.280 36.222 918,79
USA 8.740 463.305 18,86
Non-OPEC 33.456 602.584 55,52
Total World 75.477 1.102.111
Data Source: OPEC 2016, The US Energy Information Administration (EIA, 2017). Oil rate calculation by the author.

Thus, oil rent is widely accepted as an inevitable and specific remuneration from any oil business. In
historical terms, national oil companies, major oil companies, national states and private owners have
struggled for control of oil rents. Whether in Texas, Alaska, Saudi Arabia, Kuwait, Norway, UK,
Nigeria or Venezuela, the property rights regime represents the main legal tool used to keep part of
the rent (Mommer, 1986; 2002; Bina, 1986).

The expression of these rents is present in the initial contracts for access to the mine but also the
agreement to share the mark-ups between the investors and the landowners. One of these rents is
related to the control on the access and flow of investment (Marx called Absolute Rent). The sharing
by agreement of the mark-ups is what Marx and Ricardo called Differential Rents. In addition, the
global distribution of capital based on the productivity of oil wells can cause other differential rents.

Given the property relations at stake, the institutional structure in the oil market involves this double
process of rents. Indeed, the extent of this differential of productivities causes the value transfers from
one individual capital to another as differential rent in the US context. However, the

17
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

internationalization of oil production is also an important part of this rent formation process, because
the productivity originates differential oil rents associated with the global competition between capitals
in the oil-bearing land market. At the empirical level, it is obvious that US as the least productive
region (oil fields are also the most explored oil region of the globe - Bina, 1983; Bina, 2013; Baptista
2012), the first consumer and an important importer in the world, leads the production costs
worldwide, causing differential rents between owners. These rents go to both the holders (represented
by the states in oil-exporting economies and the private owners in the US) and the major oil
companies.

In the oil exporting economies, the oil rents are represented by Royalties and Taxes imputed to the
oil companies. These legal frameworks compose the tax systems or the fiscal regimes in oil-producing
countries, whether exporters. Two types of fiscal regimes emerge in the global oil business: the liberal
and the proprietorial. The table 3.5 illustrates the main fiscal regimes dimensions in the global oil
business.
Table 3.5: Liberal and Proprietorial Fiscal Regimes
Fiscal regimes Liberal Proprietorial
Objective • Economic Rents • Ground rent
• Free flow of investment • Investment flow and production subject to
• Regulatory framework payment of compensation natural resource owner
• Business relationship
Supply of new lands Ex-ante reservation profit Ex-ante reservation profit and reservation ground-
rent
Bonuses Signature bonus as decision Decision-making and ground rent- collecting
making device only device

Relinquishment Discretionary Recovering appreciated lands

Development and Ex-post reservation profit Ex-post reservation profit and reservation ground-
production rent
Principal form of Excess profit levy Royalties
collection
Duration of contract Indefinite, or renewable as a Shorter, offering opportunity to increase ground-
matter of course rent taking advantage of reversion of producing
facilities
National oil company Not applicable Expertise to specify and control variables above Joint
ventures
Production sharing agreements
Production services contracts
Nationalisation
Source: Bernard Mommer (1999). Fiscal regimes and oil prices. Oxford. Institute of Energy.

18
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Hence, fiscal regimes are one of the institutional factors that shapes mark-up and defines the oil rents,
affecting then oil price trends. This chain of events is not clear in the literature: it is obvious that the
owners of the oil will evaluate the development of the oil-bearing land market to define the level of
control on investment and production. However, the weight of that control is always related to what
the development of global oil market indicates. For instance, in OPEC countries one can find two
kinds of legislations regulating the oil business: usually the hydrocarbon laws and the special taxes for
oil companies (Jones Loung and Weinthal, 2010; Mommer, 2002). However, OPEC has also control
on the production and this is used to be a consensual decision within their members. The modelling
of these decisions is one of the biggest difficulties in economic theory. As reported Fattouh (2007),
modelling oil prices by OPEC decisions is not predictable.

d. Shale Oil

A veritable transformation of the rationale based on the scarcity seems to be setting up in the global
oil market, leads by the so-called Shale Oil. Indeed, the Shale Oil (known also as tight oil) is the crude
oil extracted from relatively impermeable reservoir rock (source rock or oil shale formations). The
production of shale oil exploits three technological advances: horizontal drilling, micro-seismic
imaging, and the hydraulic fracturing (or fracking) of underground rock formations containing
deposits of crude oil that are trapped within the rock. Production of tight oil comes from very low
permeability rock that must be stimulated using hydraulic fracturing to create enough permeability to
allow the mature oil and/or natural gas liquids to flow at economic rates. (Killian, 2016).
The hydraulic fracturing causes cracks and fissures in the rock formation that allow the crude oil to
escape and to flow into the borehole, where it then can be recovered. This process is used to extract
crude oil that would be impossible to release through conventional drilling methods which are
designed to extract oil from permeable rock formations.
The Shale Oil reversed the long-standing decline in the US crude oil production. The high price of
conventional crude oil after 2003 made the technology cost-competitive when it was first introduced.
Since then, the cost of producing shale oil has declined substantially, as shale oil producers have
become more efficient.
It is not unreasonable to assert that a new epoch just started in 2014 (some authors like Dale (2018)
positive “new abundance oil era”), with the inclusion of shale oil and low cost of production in the
US oil market. According to the US Energy Information Administration the wellhead breakeven oil

19
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

prices of the main basins devoted to the shale production is decreasing since 2013. Figure 3.10 depicts
the growth of unconventional oil production in the US from January 2000 (less than 1 Million barrels
a day) to December 2019 (close to 8 Million barrels/day), reaching production levels only seen before
1970.

In the same way, thanks to the data accumulated by public energy information agencies, such as the
EIA, through the companies in charge of drilling. Figures 3.11 and 3.12 clearly show the change in
the drilling technology and the influence of technological change from vertical to horizontal in the
productivity pattern.

20
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

In this chapter Shale Oil has been placed as part of one of the institutional structures that the world
oil market will have to deal with in the next years. Although so far, the development of shale oil has
occurred for oil only in the United States, there is talk today of the development of other shale basins,
such as Vaca Muerta in Argentina and the basin in plains of Colombia. Now, Shale Oil is applied in
technically high cost regions areas.

The Shale Oil comes up with two important changes in the global oil market: The first one is related
to the business cycles and duration of the business itself which are significantly shorter than those of
conventional oil7. The second one is related to the finance situation of the business. Shale companies
do not count as the majors with a big amount of cash-flow, that is why the US shale business created
a new shorter and specific credit channel that tends to be more sensitive of the financial shocks than
the conventional oil business.

“In macroeconomic context, US shale has introduced a credit channel to the oil
market. And it is well known from the misery of the financial crisis how
destabilising credit and banking flows can be in transmitting and amplifying
shocks. Until now, the financial resources of the national oil companies and the
large supermajors mean that the oil market has been largely insulated from the
vagaries of the banking system. But the small, heavily indebted, independent
producers that characterise the shale industry change all that. The emergence of

7
“In the past, large-scale developments required seven years+ from FID to peak production, giving OPEC long-term
control over oil prices. US shale oil currently offers large-scale development opportunities with 6-9 months to peak
production. This short-cycle opportunity has structurally changed the cost dynamics, eliminating the need for high
cost frontier developments and instigating a competition for capital amongst oil producing countries that is lowering
and flattening the cost curve through improved contract terms and taxes.”

21
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

US shale oil has altered the nature of global oil supply. The production
characteristics of shale oil should increase the price responsiveness of supply,
dampening price volatility. But the greater exposure of shale producers to the
financial system means the oil market is more exposed to financial shocks.”
Spencer Dale (2015. Pag. 3)
e. Shale Oil and oil exporting economies

The high productivity and short cycles of Shale Oil are transforming the distribution of oil rents, likely
to decline. In other words, oil-exporting countries whose economy is directly connected to the
fluctuation of oil rents due to the low-costs producing wells must re-think their fiscal and their
producing quota policies. This fast change brings a necessary decrease in public expenses with
significant social consequences for the inhabitants of those economies

What will be at stake in the coming years in the oil-exporting countries is the paradigm model of
production associated with low costs and control of quota production. Since the arrival of Shale Oil,
a tendency has been established to provide for an increase in barrel volumes instead of the logic
associated with quotas. It is an undoubtedly a change that has been latent since the 1990s (especially
in the United Kingdom and Venezuela) and that did not take place given the necessary conservation
of wells and the importance that productivity differences still had. Indeed, at the end of 1990s the
United Kingdom and Venezuela eliminated this “volumetric”8 orientation of their oil fiscal regime
because of the effects upon the exhaustion of wells and the declining of potential oil rent capture for
the state as owner during that period.

8One of the most emblematic policies associated with this conception of oil as a produced commodity is represented by the well-
known liberal North Sea Fiscal regime in UK related to the oil fields. The main orientation of this perspective is associated with the
bulk extraction of oil. Indeed, liberalisation of oil policies in the UK has been inspired by this conventional idea from mid-80 until
2001.

22
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

3.3. Energy transition and constraints for the oil business

In this section, it is proposed to review some facts related to greenhouse gas emissions, and with the
real probability that there is a global change in the energy consumption matrix (or energy transition).

As in the relationship between economic growth and demand growth, economic growth has,
therefore, led to an increase in CO2 emissions. As shown in Figure 3.13, the emissions the percentage
of emissions from OECD countries has fallen below 50% since 2004.

The same trend is observed in the CO2 emission by region, the growth of the percentage of China
being particularly interesting, which since 2005 occupies the first place in the ranking of countries
that emit CO2. (Figure 3.14).

23
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

However, the US is the country that emits the most greenhouse gases per capita, as shows Figure
3.15.

The international agreements of the last twenty years have increased the pressure towards the
reduction of greenhouse gas emissions. Figure 3.16 shows the timeline of the agreements reached
from 1995 to 2015.

24
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Despite the impositions and pressures imposed by the agreements of the COP, the facts tell us that
CO2 emissions are in relative increase (2019 United Nations Environment Programme Report) that
there is a significant investment in Europe and in China of solar renewable energy and that The
fulfilment of the agreements will depend on the profitability of the energy at stake.

they have been positioning themselves in the world energy market as part of the structures that they
have no doubt that one of them since 1995

Non-environmentally friendly energy consumption, excluding oil, still accounts for about 70%
compared to other forms of renewable energy.9

Oil and coal are rather similar and have the first places in CO2 emission (Figure 3.18). However,
Lignite (or brown coal) and conventional coal emit more of Greenhouse gases than Oil. He three of
the Fossil energies emit high level of Greenhouse gases compare to the level of emission of Solar,
Biomass, Nuclear, Hydroelectric and Wind.

9
It is to note that in the classification made of energy sources as friendly and non-friendly to the environment refers
only to the emission of greenhouse gases. That is why nuclear energy is among the friendly ones. Academics and
environmental activists consider the existence of nuclear waste as not friendly to the environment.

25
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

Within the renewable energies for global electricity production, hydropower represents 60% of total
(Figure 3.19). In global terms, the share of renewable energy production and consumption has not
been rising,

26
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

3.4. Conclusion: Epochs and structure of the global oil market

The institutional structure of the oil market is represented
4 epochs define by the institutional structure of the oil market
1. The vertically When the US oil production peaked in 1970 and markets tightened, the
scarcity rents took place to deliver the control to other factors
2. The OPEC era starts with the embargo and the consolidation of OPEC as an oil market
factor
3. High price with innovation supply side epoch
4. Abundance oil epoch

Other remarks
Demand side:
- Importing China, with an important change in the oil consumption in Asia
- The environmental international agreements do not represent now a serious decrease in the
demand of oil
- European Union is shifting its demand to the more environmentally friendly sources.

Supply side

- Market shifting to the US strong production position

27
Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

28
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

List of Acronyms
CERA Cambridge Energy Research
Associates CO2 Carbon
Dioxide
CPI Consumer Price Index
EIA Energy Information Administration, Official Energy
Statistics from the U.S. Government
EU European Union
GDP Gross Domestic Product
GHG Greenhouse gas
IAEA International Atomic Energy
Agency
IEA International Energy Agency
IMF International Monetary Fund
IPCC Intergovernmental Panel on Climate
Change
IRENA International Renewable Energy Agency
ITPOES UK Industry Taskforce on Peak Oil and Energy
Security
NOC National Oil Company
OECD Organisation for Economic Co-operation and
Development
OPEC Organization of the Petroleum Exporting Countries
st
REN21 Renewable Energy Policy Network for the 21 Century
SA Saudi Arabia
UN United Nations
UNDESA United Nations Department of Economic and Social
Affairs
UNDP United Nations Development Programme
UNEP United Nations Environment Programme
UNFCCC United Nations Framework Convention on Climate
Change
UAE United Arab Emirates
US United States
USDA United States Department of
Agriculture
WB World Bank

29
 Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

SOME OTHER GRAPHS

30
Blas Regnault. 2020. Oil Price trends determinants. EUR/ISS. NL

31