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OPEC MCs' historical population trends

The population of OPEC Member Countries (MCs) stood at 495 million at the end of 2017, representing approximately 6.6 per cent of total world population. This increased almost 168 per cent as compared to 1960, with an average yearly increase of 5.5 per cent. The evolution of the share was almost linear throughout the period (Graph 1). The high coefficient of determination (R2 = 0.99) of the calculated simple linear regression empirically supports the linear development of this share. For 2017, among OPEC MCs, the highest population growth in percentage terms took place in Equatorial Guinea (3.8 per cent) followed by Angola (3.1 per cent) and Iraq (2.8 per cent).

In percentage terms, OPEC MCs' population increased substantially higher than the total world population throughout the period 1960–2017. As illustrated in Graph 2, the growth in OPEC MCs' population evolved from an average of 2.4 per cent in the 1970s to reach 3.1 per cent in the 1990s, and 2.3 per cent in the last decade. During the same period, the growth in world population followed a declining trend, dropping from an average of 2.0 per cent during the 1970s to 1.2 per cent in 2017.

Recent developments in oil supply

The year 2017 was full of surprises in regard to liquid oil supply and crude oil production with two opposite trends. On the one hand, non-OPEC supply — led by the US — increased by almost 900,000 b/d, after experiencing a decline of around 750,000 b/d in the year 2016. This recovery was much stronger than market analysts expected one year ago. On the other hand, crude oil production from OPEC Member Countries (MCs) and some other non-OPEC countries, showed substantial declines. This was mainly a result of the 'Declaration of Cooperation' of December 2016, a joint decision by OPEC in cooperation with participating non-OPEC countries, which was considered to be the necessary response to growing market imbalance — and a demonstration of the discipline necessary to conform to voluntary production adjustments.

In total, OPEC crude oil production showed a drop of more than 900,000 b/d in the year 2017 with the biggest decreases coming from Saudi Arabia, Venezuela, Kuwait, Iraq and the United Arab Emirates. Among non-OPEC countries, the biggest production reductions were observed for Mexico and China. Natural declines at mature fields have already led to Mexican production deteriorations over many years. Additionally, Mexico's own 2017 oil production was hit by earthquakes and hurricanes. As for China, output fell for the second year in a row due to aging oil fields, high production cost and investment cutbacks.

In regard to countries with increasing oil output in 2017, and with a focus on non-OPEC supply, output expansions were clearly driven by North America, notably by the US. With the recovery of oil prices and investment activities, oil supply in the US increased by more than 700,000 b/d in the year 2017, representing 83 per cent of total non- OPEC supply growth. This happened despite supply disruptions caused by the Hurricanes Harvey and Irma, the first weather disruptions to severely hit oil operations since Hurricanes Gustav and Ike in 2008. In 2017, Canada experienced the second largest oil output gains — of more than 350,000 b/d — mainly coming from the Alberta oil sands projects.

It is interesting to note that for both countries, non-crude oil supply elements play a vital role. Non-conventional oil has been the source for Canada's supply growth for various decades, whereas conventional crude production is stagnant, with a slight decreasing trend. Three-fourths of oil supply in 2017 was non-crude supply. Similarly but to a lesser extent, the share of non-crude elements (especially NGLs) in US oil supply was constantly increasing over the last several years and in 2017 stood at 35 per cent.

Finally, high output surges have been seen in Kazakhstan (+170,000 b/d) and Brazil (+130,000 b/d) on the back of, respectively, production increases from the giant Kashagan field and oil deposits in the pre-salt layer.

Downstream indicators continue to improve, as the global oil market gradually rebalances

The year 2017 proved to be a good one for the downstream industry. Key indicators, such as products demand and refinery margins, continued to improve as the global oil market was rebalancing.

Oil demand growth accelerated in 2017 and supported downstream operations. In fact, world oil demand is estimated to have grown by more than 1.7m b/d, or 1.7 per cent, y-o-y to 97m b/d in 2017, slightly higher than the 1.5m b/d y-o-y growth seen in 2016. Higher oil requirements came amid a pickup of global economic activity, which translated into rising oil products consumption in both OECD and non-OECD countries. The OECD demand increase was driven mainly by the US (+195,000 b/d y-o-y) and Germany (+94,000 b/d y-o-y), as both countries saw key economic indicators, including GDP growth and the unemployment rate, improve. China was once again in the driver's seat of non-OECD oil demand growth (+519,000 b/d y-o-y), followed by India (+78,000 b/d y-o-y).

Refining margins increased y-o-y as demand growth outpaced refinery throughput. In Europe, the Brent refining margin moved up by $1.70/b y-o-y to $7.50/b in 2017, and Asia saw its Dubai refining margin increasing (+$1/b y-o-y) to $9.20/b. US refiners saw the sharpest margins increase last year (+$3.80/b y-o-y to $10.40/b), which was supported by rising product import requirements, mainly in Latin America. The improvement of these indicators translated into higher refinery throughput: +1.35m b/d y-o-y in 2017.

Global refining capacity increased by an annual average of more than 100,000 b/cd y-o-y over 2017, with most of the additions coming online in the second half of 2017 , while the bulk of the closures occurred in early 2017. Non-OECD refining capacity expanded by around 274,000 b/cd y-o-y, while OECD refining capacity shrank by around170,000 b/d y-o-y, on the back of stricter regulations and mounting competition from non-OECD refiners. In China, two projects (the 260,000 b/d greenfield Yunnan refinery and the 200,000 b/d expansion of the Huizhou refinery) materialized in late 2017, while in India two smaller-scale expansions (the 50,000 b/d Bhatinda and 80,000 b/d Paradip upgrades) came online earlier in the year. Several refiners in Japan closed down CDU capacities in the first quarter, following a second wave of government regulations designed to further enhance the country's CDU-to- conversion ratio. In OPEC Member Countries (MCs), Iraq brought online two small-scale CDU expansions, while in Saudi Arabia and Kuwait, the Jeddah and the Shuaiba refineries suspended operations in November and March, respectively.

The development of Middle East's crude oil exports to China

In line with the strong development of the Chinese economy, the demand for petroleum products in the most populous country in the world has also increased rapidly over the last decades. In view of the fact that Chinese domestic crude oil production could not meet the huge demand of refinery throughput volumes, China has evolved as a major international crude oil importer.

According to import statistics, the US used to be the biggest importer of crude oil worldwide. However, in 2017, China outperformed the world's biggest economy, importing on average 514,000 b/d more of crude oil than the US. In 2017, Chinese imports amounted to 8.426m b/d compared to 7.912m b/d for the US.

The sources of Chinese crude oil imports are numerous and, geographically, encompass places all over the world. From a regional point of view, the Middle East represents China's biggest trading partner in regards to crude oil imports. In 2017, the region's exports to China amounted to about 3.646m b/d, implying a share of approximately43 per cent. Among Middle Eastern economies, Saudi Arabia undoubtedly represents China's most important bilateral partner. In 2017, China purchased about 1.047m b/d alone from this country. Further significant volumes of Chinese imports came from Iraq, Iran, Oman, Kuwait and the United Arab Emirates, with average volumes of739,000 b/d, 625,000 b/d, 622,000 b/d, 366,000 b/d and 204,000 b/d, respectively. More generally, over the last decade Middle Eastern crude oil exports to China were on an increasing trend with an average volume of about2.701m b/d, representing an average historical share of almost 50 per cent as of 2007. Such figures obviously indicate China's strong dependency of its economy on crude oil from the Middle East.

Comparison of Western African freight rates towards East and West

Global oil markets have undergone a major structural change as increasing quantities of light sweet crude leave North America and head for Asia. At the end of 2015, the US administration lifted the 40-year ban on crude oil exports outside the continent. A possible indicator for the impact of those changes are the freight rates for shipping crude outside of West Africa and, in particular, monthly dirty tanker freight rates in Worldscale terms for the routes to Far East Asia and US PADD3 for the years 2014–2017. Graph 1 displays the evolution of both time series.

The differences between the two routes for the periods2014–15 and 2016–17 are considered separately. The empirical densities (using a normal kernel estimation) of both time series differences are presented in Graph 2. The figure shows an apparent dissimilarity between the underlying statistical distributions in terms of the means. The Kolmogorov Smirnov test applied to both samples and the normal distributions with their empirical parameters (mean and variance) each yield p-values of 0.34 and 0.40 for the years 2014–15 and 2016–17, respectively. This means that there is no statistical evidence that they are not drawn from normal distributions. An F-test for variance equality on the two samples yields a p-value of 0.09, which does not allow rejection of the null hypothesis that the variances are equal. Finally a Student's t-test can be conducted in order to test the equality of means. The test's p-value of 0.0025 implies that the empirical hypothesis of equal means for both time series could be rejected at a risk level lower than one per cent against the one-sided hypothesis of a lower mean during the period 2016–17.

This result is in line with expectations that during the period 2016–17 and following the lifting of the US crude exports ban, freight rates to Asia and US PADD3 from West Africa moved closer on average as compared to the period immediately prior to the crude exports ban, that is, 2014–15. While average freight rates to US PADD3 had fallen from 76.6 in 2014–15 to 72.8 in 2016–17 in percentage of Worldscale terms, the respective values towards Far East grew from 56.7 to 62.1, consequently narrowing the difference from 19.9 to 10.8. A possible explanation could be that recent US crude exports reduced the number of tanker's empty routes towards the East.

The effect of Asian refining capacity improvements on crude quality spreads

The Asian petroleum industry has been progressing significantly over the past decades. At the same time, local governments have introduced higher fuel quality standards in the downstream sector amid environmental concerns. In line with cleaner corporate environmental governance, China and India have been the main drivers of secondary capacity additions in Asia over the last few years. These additions came online not only at grassroots refineries but also at existing plants as part of various modernization programmes and the consecutive need to increase complexity rates in order to be able to meet new fuel standards. Moreover, Asian refiners aimed to expand their foothold in the global product market for clean fuels, which was another reason for the industry to have invested in such upgrades.

Overall, Asia saw an addition of around 290,000 b/cd and 200,000 b/cd of conversion and desulphurization capacity, respectively, in 2017. This compares to 260,000 b/cd (conversion) and 440,000 b/cd (desulphurization added) in 2016. These additions have translated into an improvement of the conversion-to-CDU and desulphurization-to- CDU ratios in this region. Elsewhere in Asia, Indonesia and Thailand were among those countries which also saw conversion capacities coming online over the past couple of years.

Such modernization processes ultimately have allowed refiners to throughput heavier and more sulphurous crudes. Consequently, the spread between light-sweet and medium-sour grades in Asia began to decrease over the last few years, as heavier crudes became relatively more attractive. This trend is also empirically recorded by looking at the price spread between the Asian benchmark crude streams, Tapis and Dubai, which are considered to be light-sweet and medium-sour grades, respectively. While in 2015, this spread amounted to $4.81/b, this gap narrowed further to $4.30/b and $3.21/b in 2016 and 2017, respectively.

A glimpse at US gasoline taxation scheme

Approximately one in every ten barrels of oil produced globally is consumed in the form of gasoline in the United States. Local taxation schemes complicate the picture, as the federal government gives a lot of flexibility to the states in terms of taxation.

The pump price of gasoline can be disaggregated into several primary components. In principle, gasoline taxes in the US consist of federal and state taxes that can be further disaggregated based on whether they are applied in fixed terms (as in, for example, an excise tax) or in percentage terms (such as sales taxes).

Federal Taxation.

The federal tax on gasoline was introduced in 1932 at a rate of $0.01/gallon. Since then, the tax rate has been changed occasionally, with the last substantial change noted in 1993 when it increased in from$0.141/gal to $0.184/gal. The federal tax is fixed in nominal terms and is not adjusted for inflation, so in real terms, its impact has been diminishing since 1993.

Local Taxation.

The first US state to introduce a local gasoline tax was Oregon in 1919. That tax policy was then quickly adopted by other states and even by some municipalities. Given the decentralization and complexity of the taxing scheme, the American Petroleum Institute uses a weighted average of local taxes by population of each municipality to come up with an average tax for an entire state. The average taxation at the state level is estimated at around $0.333/gal, almost double the federal rate. The rate varies widely among states with Alaska having the lowest tax rate at $0.144/gal and Pennsylvania with the highest rate at $0.587/gal.

Historical trends in natural gas liquids and natural gas production

Natural gas liquids (NGLs) — which primarily consist of ethane, propane, butane, natural gasoline and other lighter liquid hydrocarbons — account for roughly 22 per cent of non-OPEC oil supply in 2017, with OPEC Member Countries (MCs) taking around 43 per cent of the overall share. The extraction of NGLs components from natural gas has become increasingly profitable during the past decade, as a result of increased usage in the industrial sector. Consequently, and in line with increasing world natural gas production, the ratio of world NGLs to natural gas production is on a rising trend — from approximately ten per cent in 1975 to 15 per cent in 2017, marking an increase on average by b ≈ 0.1 per cent yearly. Furthermore, it is not surprising that world production of NGLs is highly correlated with the production of natural gas throughout this historical period.

Historical natural gas and NGLs production patterns during the same time period were different for OPEC MCs, regardless of the very degree of co-evolution between the two time series. The fact that some OPEC MCs are main natural gas exporters has influenced the evolution of the ratio between NGLs and natural gas production, despite significant usage of NGLs in the industrial sector of some OPEC MCs. This ratio rose from slightly lower than 40 per cent in 1975 to slightly higher than 72 per cent in 1982 and followed a slightly declining trend thereafter to stand at a mere 30 per cent during 2017. The reasons for the decrease in the share of natural gas can be found in the rise of OPEC natural exports, as a result of improvements in the infrastructure and the continuously higher world demand for natural gas. These developments can be illustrated with the ratios of OPEC NGLs to OPEC natural gas production and OPEC natural gas exports to OPEC natural gas production. These ratios show, as expected, opposite historical developments. The declining production ratio of NGLs and natural gas co-moves with the increasing ratio of natural gas exports to natural gas production.