Why can’t oil rich nations pump all the oil and become rich?

There are many nations around the world with huge reserves of hydrocarbons.At current production rates, for some countries, it may even take more than a century to extract these reserves. But, why don’t nations ramp up their production rates, pump all the oil and then become rich?

A cartel was formed in the year 1960 , named Organization of the Petroleum Exporting Countries(OPEC), by five oil rich nations. As on date, OPEC is an intergovernmental organization of 14 petroleum exporting countries (Algeria, Angola, Ecuador, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia,United Arab Emirates, Venezuela) , all of them rich with oil reserves, and according to current estimates, 81.5% of the world’s proven oil reserves are located in OPEC member nations, with remaining 19.5% of the proven reserves in non-OPEC nations. Some non-OPEC nations rich in oil reserves include Canada, Russia,United States etc.

Reserves by country

Fig.1.List of Top 20 Countries with Proved Oil Reserves in barrels

3P reserves

Fig.2.Recoverable Resources & Reserves by Region

From Fig.1 and Fig.2, it is clear that North America has more recoverable resources, but has considerably less Proved Oil Reserves, compared to Middle East. One factor on which proved oil reserves depends is “Oil Prices”.

Screen Shot 2017-06-28 at 1.29.49 AM

Fig.3.Crude Oil Prices

There is a sharp decline in oil prices from mid-2014 and oil prices have been hovering around $45-$55/bbl in the recent past. But, why did oil prices decline?

Because Supply > Demand (Refer Fig.4)

Supply Demand

Fig.4. World Oil Demand & Supply

Now, let’s look at the cost of producing a barrel of oil by country.

Screen Shot 2017-06-27 at 11.50.00 PM

 

Fig.5. Cost of producing a barrel of oil and gas

Clearly, Some countries earn higher profits on a barrel of oil exported than other countries.Economy of countries such as Venezuela, Libya, Russia, Saudi Arabia etc. relies significantly on the export of crude oil. So, lets say country “X” now starts aggressive drilling with a hope to extract as much amount of oil as it can or starts pumping excess oil from existing wells. This will eventually lead to oversupply and the crude oil prices will further go down, trimming profit margins and leading to loss of income to the country.Hence, Oil and Gas Companies (National Oil Companies, International Oil companies, Domestic Players etc.) very strategically extract oil and gas reserves so as to increase profits. Also, in the current scenario, where OPEC is vying to retain its market share, OPEC nations have agreed to put a cap on the oil production from member nations to restrict supply and raise oil prices.

Therefore, nations around the world maintain their oil and gas production rates in a hope to maximise their longterm gains.