HOW GEOPOLITICS HAVE MANIPULATED THE OIL INDUSTRY

1. GEOPOLITICS IN OIL AND GAS MARKET
Stephen Adjei
(14MT000605)

2. OUTLINE
• INTRODUCTION
• OIL AND GAS PRICING
• GEOPOLITICS
• ANALYSING GEOPOLITICAL COMPONENTS
• VARIOUS GEOPOLITICAL FACTORS
• IMPACT OF GEOPOLITICS

3. INTRODUCTION
 The Oil and Gas industry
forms the engine of the
world’s economy
 Oil and gas are used as fuels in
vehicles or home for heating.
And in industrial processes
and products for the
operation of machine
technology.
 Gas plays a fundamental role
in economic growth and
development, with a greater
contribution to the generation
of electricity.
 Main source of energy for the
military hence a key role in
national security

4. CONTINUATION
• Huge petroleum revenue generated are used for developmental
projects such as the construction of schools, hospitals and roads.
• Because of the diverse uses of oil and gas and their direct links to
economic and social wellbeing, the demand for these commodities
continues to grow as incomes rise and populations expand in most
developing countries.
• It has been observed that whenever the oil prices increase the price
of various products also increases.

5. OIL AND GAS PRICING
• There are numerous factors that determine the price of oil and gas. These factors include
 oil benchmarks
supply and demand
 the role of The Organization of Petroleum Exporting Countries (OPEC)
 financial markets
 legislation
Weather
Geopolitics
• Gas pricing is often affected by demand and supply and price of oil.

6. CRUDE BENCHMARKS
• Benchmarks are reference price for
buyers and sellers. The three mainly
used are
• Western Texas Intermediate (WTI)
which has an API gravity of about
39.6, hencce light and with a sulfur
content around 0.24%, making it very
sweet. It is used primarily in the
United States of America.
• Another type, the Brent, essentially
draws its oil from more than a dozen
oil fields located in the North Sea. It's
also still considered a sweet crude,
despite having a higher sulfur content
than WTI.

7. continuation
• Thirdly, the Oman Blend comes
from the Middle East region and
is a medium-sour crude grade
considered less sweet as
compared to WTI and Brent
The geographical location of these oil markers which affects the
transportation cost to refinery plus their different properties
affect their pricing.

8. OPEC (The Organization of Petroleum
Exporting Countries
• OPEC, a consortium of 13 countries:
Algeria, Angola, Ecuador, Indonesia,
Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab
Emirates and Venezuela. OPEC is
responsible for 40% of the world’s oil
production, and sets policies among
member countries to meet global
consumption.
• OPEC can affect the price of crude oil,
by increasing or reducing
production among member countries.

9. SUPPLY AND DEMAND
• As population tend to increase as the years goes by, the demand for
oil and gas increase and hence price increases.
• In some seasons, demand decreases and this brings about a
reduction in prices.

10. WEATHER
 Seasonal changes in
weather affects the
demand for oil.
 Extreme weather
conditions (hurricanes,
tornadoes, thunderstorms)
can physically affect
production facilities and
infrastructure disrupting
the supply of oil and
induce pricing spikes.
 In 2005 Hurricane Katrina
halted oil production along
the Southern Gulf Coast of
the United States

11. POLITICAL INSTABILITY
Political instability in the Middle East has caused great concern about
access to oil given that this region accounts for a large amount of the
world’s oil supply. In July of 2008 oil prices reached over $136 a barrel
due to global concerns about the wars in both Iraq and Afghanistan.
One of the main reasons that oil prices rose so precipitously during
this time period was due to the fact risk of delivering oil was high
hence high cost.
When oil prices rise to these levels the consumer then cuts back on
consumption rate in order to save money. This in turn decreases
demand, which begins to drive the price of oil down.

12. RESTRICTIVE LEGISLATION
• Majority of the world’s oil reserves and production are controlled by
government-run companies
• Energy policies and taxes in oil-rich countries also affect the price of
oil.
• If a government bans oil exploration in a place with proven reserves,
such as the Gulf of Mexico, then commodity markets mark this as a
“loss” in crude oil supply and gas prices go up as a result

13. FINANCIAL MARKETS
• It has been noticed that the oil markets are increasingly
interconnected with other financial markets such as the exchange
rate market, stock market and futures market. Meanwhile, much of
the oil trade has been done through financial markets where many
traders participate in oil deals not for use, but for profit-making by
utilizing price fluctuations. These activities in turn exacerbate the
market's volatility

14. GEOPOLITICS
• Geopolitics refers to the study of the effect of geography; physical
features of the earth and its atmosphere such as climate, topography,
demography, natural resources and of human activity on international
politics and international relationship.
• That is, how human activities in a certain geographical location affects
the world at large and in this presentation how it affects the Oil and
Gas Market in particular.

15. ANALYSING GEOPOLITICAL COMPONENTS
GEOGRAPHY
ECONOMICS
TECHNOLOGY

16. Geography
• Geography limits what is possible in the natural world and helps to
reinforce sovereign borders. For example, the Himalayas provide a
natural barrier between India and China while absence of sea has
made countries landlocked.
• The level of air and ground pollution in a country will have an effect
on legislation, which will affect companies’ decisions to invest.
• Climate has always been associated with Geography. The various
prevailing winds and tides affect the routes ships take to navigate the
world’s oceans, which can affect the economic viability of a project.

17. Economics
• Economic constraints include the market forces that determine the
price of oil, which has a direct impact on the tax revenues and
royalties received by national governments and individuals, which in
turn limits the options available to decision makers.
• Interest rates, inflation levels and trade barriers all affect the appetite
of organizations for doing business in any given country hence effect
on decision making

18. Technology
• Technology will affect demand and supply. For example, when the US
deployed advanced drilling and recovery techniques to tap
unconventional sources of oil and gas global demand dropped
massively which affected oil prices globally.
• High Technology in the area of security during transport of produced
fluids is vital in investment. In times of war, security concerns are high
and for the safe transport of crude, one needs high level of
technology which affects the price at the long run.

19. GEOPOLITICAL FACTORS
• CONFLICTS IN THE PERSIAN GULF
( Verrastro et al, 2010) concluded in their report
that fossil fuels will continue to provide the main
source of global energy needs for many years to
comes with the Persian gulf being the marginal
supplier of oil to the world.
Unfortunately this is a region with unresolved
interstate conflicts, weapons proliferation, and
worsening domestic political conditions
key geopolitical events and factors that have affected the oil and gas markets are as follows

20. TYPES OF THREATS IN THE PERSIAN GULF
• According to (Kemp, 2000) “” There are three general categories of
threats that disrupts Persian Gulf oil supplies and hence affect global
oil prices:
• Military threats and spread of weapons
• domestic instability and terrorism within the Gulf states themselves
• Conflict over the Caspian Basin’s promising energy reserves; The
Caspian Basin could contain as much as 200 billion barrels of oil and
279 trillion cubic feet of natural gas

21. CONTINUATION
• The Persian Gulf countries contain a significant percentage of the
world's oil reserves and production capacity: it is body of water
bordering Iran, Iraq, Kuwait, Saudi Arabia, Bahrain, Qatar, United Arab
Emirates, and Oman
• Proven oil reserves of 728 billion barrels, representing 55 percent of
the world's oil reserves at the end of 2006. Oil production capacity of
25.4 million barrels per day (33 percent of the world total) at the end
of 2006 Total oil production of 23.6 million barrels per day in
2006. About 2.4 - 2.9 million barrels per day of excess oil production
capacity, as of March 2007, of which 1.9 to 2.4 million barrel per day
is located in Saudi Arabia.

22. PERSIAN GULF AND GLOBAL ENERGY

23. STRAITZ OF HORMUS
• Over 90 percent of oil exports from the Persian Gulf pass through
the Strait of Hormuz, a vital sea passage only 30 miles wide at its
narrowest point. It is commonly believed that a tanker accident, a
terrorist attack, or a military effort to close the Strait would send
energy prices skyrocketing, threatening the global economy

24. The GULF WAR
During the Gulf War that began in 1990, WTI
(West Texas Intermediate) and Brent crude oil
prices doubled in the beginning of 1990 and
dropped ~30% by the end of that year. The
United States invaded Iraq in 2003. During this
war, Brent crude oil rose by 7% and then
declined by 12% by the end of the war.
These geopolitical tensions led to supply
disruptions, which increased global crude oil
prices. In the Gulf War, supply dropped by ~7%,
and in the Iraq War, supply dropped by ~3%.
The 2013 Middle East tensions didn’t have
much impact on oil prices due to increased
production in the United States.

25. GEOPGRAPHICAL LOCATION AND GAS TRANSPORT
• In the case of gas, (Yegorov and Wirl 1056-1057) discussed that the
market structure is not dependent on pure economic aspects. Gas
market differs from other markets due to high share of transport and
infrastructure costs. Gas is transported from the field to the
consumer mostly through pipelines. Geography and politics therefore
play critical role in this situation
• Land locked countries have very few choices of transport routes, and
geopolitics more than economics governs the choice of pipelines
including projects

26. THE CASE OF TURKMENISTAN
 Land locked countries Like Turkmenistan have very
few choices of transport routes, and geopolitics
governs the choice of pipelines including projects.
 It contains several of the world's largest gas fields.
 Russia monopoly power over its gas transmission
 Turkmen natural gas became a competitor with
Gazprom, the Russian state monopoly. Since all of the
pipelines connecting the region to world markets
were owned by Gazprom and routed through Russia,
Turkmen natural gas was squeezed out of the market.
As a result, Turkmenistan's incentives for increasing
its production of natural gas disappeared.
This reduces the amount of global gas produced hence
affecting the world at large.

27. SAUDI ARABIA AND THE 2014-2015 DROP IN OIL
PRICES
Energy prices started to move downward in late-2014, when Saudi oil began to flood energy markets.
One school of thought suggests Saudi Arabia is trying to push US shale production out from the
market by making extraction unprofitable and ultimately expanding its share of the market at the
expense of US producers. This will be effective as the cost of production from US shale-based
hydrocarbons—tight oil and shale gas through hydraulic fracturing or fracking is very high.
Another school of thought suggests this is in the quest to see economic collapse of its allies as those
countries relied massively on revenue from oil and gas. If Saudi Arabia decides not to reduce
production, oil production will just continue flowing and there is not much that the other countries
can do about it.
OPEC can cut down its production to balance the total production but from the past experience of
losing its buyers it has hesitated.

28. IMPACT OF GEOPOLITICS
• Geopolitics has the capacity to exert sudden and disruptive pressure
on the operations and security of energy assets across the world,
meaning that no country or company is truly exempt from the effect
of geopolitical change.
• Oil and gas companies frequently engage with national and local
governments, local populations, subnational groups and national
organizations, and consequently they are deeply affected by political
change.
• Geopolitics has contributed price fall in many instances and this has
brought about the Laying off of workers in the Oil and Gas industry.
• Controls the economy of oil producing countries either positively or
negatively; more revenue when prices are high and less revenue
when prices fall

29. continuation
 In early 2012, relations deteriorated between then Repsol YPF and the Argentine Government, which decided
to expropriate Repsol’s 51% stake in YPF. In the months following the expropriation, Repsol saw a loss of almost
half of its market capitalization.
 In Nigeria, political instability and regional and religious sectarianism have contributed to the ongoing theft of
up to 350,000 barrels of crude oil per day, which costs the oil and gas industry approximately US$1b per month
in lost revenues.
 Strikes by oil workers enraged at perceived government corruption reduced Libyan oil production by 88% in
2013.
(EY Global limited, Navigating Geopolitics in Oil and Gas)

30. REFERENCES
The Robert S. Strauss Center for International Security and Law. the University of Texas at Austin. n.d. 14 12 2014.
Clover Global Solutions, LP. 20 04 2012. <https://c1wsolutions.wordpress.com/2012/04/30/factors-affect-price-of-oil/>.
Correlje, Aad and Van der Linde, Coby. “Energy supply security and geopolitics: a European perspective.” Energy Policy 34 (2006): 532--543.
Economides Micheal J. and David A. Wood. “The State of Natural Gas.” Journal Of Natural Gas Science and Engineering (2009): 1-13.
Fan, Ying and Xu, Jin-Hua. “What has driven oil prices since 2000? A structural change perspective.” Energy Economics 33 (2011): 1082--1094.
FESS. “Oil and Gas and Conflict, Development Challenges and Policy Approaches.” 2006.
Frank A. Verrastro, Sarah O. Ladislaw, Matthew Frank, Lisa A. Hyland. “The Geopolitics of Energy; emerging trends, changing Landscapes, uncertain times.” CSIS Energy, 2010.
Jason, KIrby. “Three wars in Iraq and their impact on oil prices.” 2014.
Kemp, Geoffrey. “The New (And Old) Geopolitics Of The Persian Gulf.” April 2000.
OIlPRICE. OILPRICE. 24 07 2009. 07 12 2014.
Verma, S. K. “Energy geopolitics and Iran–Pakistan–India gas pipeline.” Energy Policy 35 (2007): 3280–3301.
Yuri Yegorov and Franz Wirl. “Gas transportation, geopolitics and future market structure.” Futures 43.10 (2011): 1056-1068.
EY Global Limited. “Navigating Geopolitics in Oil and Gas; Business solutions for a complex world.” n.d.

31. THANK YOU