Sam Null.

The world oil market is complex. Governments as well as private companies play roles in moving oil from producers to consumers. Government-owned national oil companies (NOCs) control most of the world’s proved oil reserves (78% in 2012) and oil production (58% in 2012). International oil companies (IOCs), which are often stockholder-owned corporations, make up the balance of global oil reserves and production. Proved reserves are the amount of oil in a given area, known with reasonable certainty, that today’s technology can recover cost-effectively. Worldwide proved oil reserves are about 1.6 trillion barrels and global oil production averages roughly 90 million barrels a day.

There are three types of companies that supply crude oil to the global market. Each type has different operational strategies and production-related goals:


  1. International oil companies (IOCs): Includes companies like ExxonMobil, BP, and Royal Dutch Shell. These companies are entirely investor-owned and primarily seek to increase their shareholder value. As a result, they tend to make investment decisions based on economic factors. These companies typically move quickly to develop and produce the oil resources available to them and sell their output in the global market. Although these producers are affected by the laws of the countries in which they produce oil, all decisions are ultimately made in the interest of the company and its shareholders, not a government.
  2. National oil companies (NOCs): Operate as an extension of a government or a government agency. This category includes Saudi Aramco (Saudi Arabia), Pemex (Mexico), the China National Petroleum Corporation (CNPC) and PdVSA (Venezuela), among other examples. These companies support their governments’ programs financially and sometimes strategically. They often provide fuels to their domestic consumers at a lower price than they would provide fuels to the international market. These companies do not always have the incentive, means, or intention to develop their reserves at the same pace as international oil companies. Due to the diverse objectives of their countries’ governments, these NOCs pursue goals that are not necessarily market-oriented. The NOCs’ goals often include employing citizens, furthering a government’s domestic or foreign policies, generating long-term revenue to pay for government programs, and supplying inexpensive domestic energy. All NOCs belonging to members of the Organization of the Petroleum Exporting Countries (OPEC) fall into this category.
  3. NOCs with strategic and operational autonomy: These NOCs function as corporate entities and do not operate as an extension of the government of their country. This third category includes Petrobras (Brazil) and Statoil (Norway). These companies often balance profit-oriented concerns and the objectives of their country with the development of their corporate strategy. While these companies may support their country’s goals, they are primarily commercially driven.

In 2012, 100 companies produced 84% of the world’s oil. NOCs accounted for 58% of global oil production.

OPEC is a group that includes some of the world’s most oil-rich countries. Together, these countries controlled approximately 73% of the world’s total proved oil reserves in 2013 and they produced 40% of the world’s total oil supply that year. Each OPEC country has at least one NOC, but most also allow international oil companies to operate within their borders.

OPEC seeks to manage the oil production of its member countries by setting crude oil output targets for each member except Iraq, for which there is no current target. The track record of compliance with OPEC quotas is mixed because production decisions are ultimately in the hands of the individual member countries.

In general, there are three main factors that determine OPEC’s market power, or how effectively the organization can influence oil prices:

* How unwilling or unable consumers are to move away from using oil

* How competitive non-OPEC producers become as the price of oil increases

* How efficiently OPEC producers can supply oil compared with non-OPEC producers

OPEC’s oil exports represented about 62% of the total seaborne crude oil traded internationally in 2013, according to data from Lloyd’s List Intelligence tanker tracking service. The difference between market demand and oil supplied by non-OPEC sources is often referred to as “the call on OPEC.” Saudi Arabia, the largest oil producer within OPEC and the world’s largest oil exporter, historically has had the largest share of the world’s spare production capacity. As a whole, OPEC maintains the world’s entire spare capacity for oil production. It is generally not cost-effective for international oil companies to develop and maintain idle spare production capacity, because the IOC business model maximizes revenue by continuing to produce oil as long as the price of selling that commodity is higher than the cost of getting an additional barrel of oil to market.

EIA defines spare capacity as the volume of oil production that can be brought on line within 30 days and sustained for at least 90 days. Spare capacity can also be thought of as the difference between a country’s current oil production and its maximum oil production capacity. Should a disruption occur, oil producers can use spare capacity to moderate increases in world oil prices by boosting production to offset lost oil supplies.