# Presentation: 763465

## Important Issuesin Modeling the Oil Transition:What can we expect from OPEC? Dermot GatelyNew York UniversityDermot.Gately@NYU.eduApril 21, 2006ORNL Conference on Modeling the Oil Transition

## What can we expect from OPEC?

- What can we expect from OPEC and its key producers over the next 25 years?  What are the implications for crude oil prices and quantities, especially if the peaking of Non-OPEC supplies or OPEC reserve depletion become greater concerns?
- OPEC is likely to do what’s in _***OPEC’s***_ own interest, not ours.
- Is DOE NEMS of any use for analysis of OPEC behavior?  Short answer: No.
- DOE NEMS has been unable to analyze what is in OPEC’s interest.  Thus, NEMS has almost nothing to tell us about what to expect regarding OPEC output and world oil prices.

## What are important issues that DOE NEMS ignores ?  
What oil output path makes OPEC best off under given assumptions about the world oil market ?
What OPEC strategy is robustly optimal, so that it will serve OPEC well – relative to other strategies – regardless of the underlying assumptions about the world oil market ?
Given an expected output path for OPEC, what will be the effect on OPEC behavior 
if the peaking of non-OPEC oil supplies become a greater concern than at present ?
if oil reserve depletion within OPEC becomes a greater concern than at present ?
How easily can these issues be addressed by models ?

- What oil output path makes OPEC best off under given assumptions about the world oil market ?
- What OPEC strategy is _robustly optimal_, so that it will serve OPEC well – relative to other strategies – regardless of the underlying assumptions about the world oil market ?
- Given an expected output path for OPEC, what will be the effect on OPEC behavior
- if the peaking of non-OPEC oil supplies become a greater concern than at present ?
- if oil reserve depletion within OPEC becomes a greater concern than at present ?
- How easily can these issues be addressed by models ?

**What can we expect from OPEC?**

## Reference Case projections by DOE and IEAin 2000 and 2001: oil price stays below $25and OPEC produces 60 mbd by 2020

**Gately, Energy Journal (2001): “How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?”**

## DOE Reference Case projections to 2025:in recent Annual Energy Outlooks (until AEO 2006), output from OPEC, or at least Persian Gulf,will double by 2025

**AEO 2006: **
**there is no longer a need for OPEC to double its output by 2025**

## Recent Projections to 2030 by DOE, IEA, & OPEC

**Peak Oil?**

## Inadequacy of DOE NEMS

- DOE NEMS modeling system does not analyze OPEC output or OPEC price behavior
- DOE NEMS “analysis” of OPEC output:
- 		We Call on OPEC.  They Answer.
- So simple that it could fit on a postcard.

## DOE NEMS “analysis” of OPEC Output:So simple that it fits on a postcard

## DOE NEMS “analysis” of OPEC Output:So simple that it fits on a postcard

**1.  **_**Assume**_** a price-path (P)**
**2.  Calculate world oil demand (D) & non-OPEC supply (S),    ****	****then subtract to find the Call on OPEC = D – S**
**Take one **_**giant**_** leap: **
**	**_**assume**_** that OPEC output = Call on OPEC**

**We Call on OPEC.  **
**They Answer.**

## DOE NEMS “analysis” of OPEC Output:So simple that it fits on a postcard

**1.  **_**Assume**_** a price-path (P)**
**2.  Calculate world oil demand (D) & non-OPEC supply (S),    ****	****then subtract to find the Call on OPEC = D – S**
**Take one **_**giant**_** leap: **
**	**_**assume**_** that OPEC output = Call on OPEC**

**We Call on OPEC.  **
**They Answer.**

- But there is no analysis of whether _this_ OPEC output path might be better or worse for OPEC than some other output path.  Why should OPEC prefer this output path?

## Inadequacy of DOE NEMS

- There is no analysis of which OPEC output-path (or other OPEC strategy) might best serve the interests of OPEC and its key producers.
- There is little analysis of the impact on OPEC behavior of market conditions different from the Reference Case:
- Low Oil Resources (High Price) Case – Peak Oil?
- High Oil Resources (Low Price) Case
- There is no analysis of how these different oil resource conditions might affect OPEC’s behavior.  Should OPEC hasten or slow its output growth if non-OPEC supplies have peaked?  Which would make OPEC better off?

## DOE NEMS: one behavior assumed for OPEC 

**DOE NEMS: one behavior assumed for OPEC **
**(given an assumed price path, OPEC produces the Call on OPEC),**
**under 3 alternative assumptions about market conditions**

## What’s the alternative?  What can models do?

- Important to analyze alternative behaviors for OPEC and its key producers and to determine what best serves _their_ interests.
- Important to find a _robustly optimal_ strategy that will serve them well – relative to other strategies – regardless of the uncertainty about underlying conditions for world oil demand and non-OPEC supply
- How fast will world oil demand grow and non-OPEC supply grow or decline?
- How price-responsive is world demand and non-OPEC supply?

## Analyze alternative behaviors for OPEC

- Evaluate 3 simple strategies for OPEC: different target shares of world oil market, starting from 38% in 2005:  maintain 38% share to 2030; let share grow slowly to 43% by 2030; or let share decline slowly to 33% by 2030.

-    Examine oil market implications under various assumptions about how fast the Call on OPEC grows, and how price-responsive it is.

**Find the **_**robustly optimal**_** strategy for OPEC that serves it best under a variety of different market conditions.**

## Effects on world oil price and OPEC output, 2005-2030,      from 3 target market-share strategies for OPEC, under various growth rates and price-elasticities for the Call on OPEC

**Calculations: Gately,**
**Energy Journal (2004)**

## Effects on demand, non-OPEC & OPEC output, 2005-2030, from 3 target market-share strategies for OPEC, under various growth rates and price-elasticities for the Call on OPEC

**Calculations: Gately,**
**Energy Journal (2004)**

## Effects on OPEC export profits, 2005-2030,from 3 target market-share strategies for OPEC, under various growth rates and price-elasticities for the Call on OPEC

**Calculations: Gately,**
**Energy Journal (2004)**

**What incentive to increase OPEC share faster? Export profits grow faster, but only after 2015.**

## Effects on NPV of discounted OPEC export profits, 2005-30     from 3 target market-share strategies for OPEC, under various growth rates and price-elasticities for the Call on OPEC

**What incentive to increase OPEC share faster? Slightly higher NPV Profits, especially if Non-OPEC supply peaks.**

**Calculations: Gately,**
**Energy Journal (2004)**

## What’s the alternative?  What can models do?

- Important to analyze alternative behaviors for OPEC and to determine what best serves _OPEC’s_ interests.
- Important to find a _robustly optimal_ strategy that will serve them well – relative to other strategies – regardless of the uncertainty about underlying conditions for world oil demand and non-OPEC supply
- DOE needs the modeling capability to _solve for world oil price given OPEC output or share_ – in a “reduced form” version of NEMS, in order to solve NEMS “backward”.

## References

- Gately, *Energy Journal* (2001):
- “How Plausible is the Consensus Projection of Oil Below $25 and Persian Gulf Oil Capacity and Output Doubling by 2020?”
- Such projections by IEA and DOE are implausible because they rely on supply behavior by Gulf producers that is not in their own self-interest.
- Gately, *Energy Journal* (2004):
- “OPEC’s Incentives for Faster Output Growth”
- The payoffs to OPEC are relatively insensitive to faster output growth; aggressive output expansion yields slightly lower payoffs than just maintaining current market share.