Submitted to Prof.
Prepared by Lisa
Fernandes: 3152 (SY C)
Date of submission: 24th
Edward Feigenbaum of Stanford University has defined expert
system as “an intelligent computer program that uses knowledge and inference procedures
to solve problems that are difficult enough to require significant human
expertise for their solutions.”
Table of contents:
Motivated for choosing the study
scholarly work – Literature Review
situation (time period 2010 to now)
related literatures with proper in text citation and references)
We would like to thank
Prof. Jaysing Bhosale for designing this project and enabling us to gather
information, analyze and break it down to understand the topic “Expert System”
and its application in Information Systems. This assignment made us look beyond
what meets the eye in Computer Systems. The elements, processing and
application of Expert Systems in IT has been engrained in our minds due to the
structure of this project.
We thank the IT Business
Management course organizers for giving us this opportunity to understand the
depth of Information Technology systems in Business and put the concepts to use
on entering the corporate world.
Issues Motivated for
choosing the study:
The Organisation of Petroleum Exporting Countries, OPEC, has
managed to come to agreement on cuts in production quotas among the various
members. Those who are not formal members of OPEC, such as Russia, are also
joining in the cuts. The aim, of course as with any cartel, is to agree to
restrain production so that prices rise. If they can manage to get that price
production level equation right they can thereby gain higher income for less
production. And that is, again of course, what we expect of monopolists. A
cartel is an attempt to create a monopoly among a number of different
producers–or at least gain something close to monopoly power so that that
monopolists’ trick of lower production and yet higher revenue can be pulled
Consumers should and do hate such behavior – it makes them poorer,
they have less oil to use and yet must give up more of their incomes to have
it. This is why most countries have anti-monopoly and anti-trust laws and
enforcement. For the artificial creation of such monopolies is known to be
something that harms consumers. In fact, if one tries that sort of action
inside the European Union you can be fined up to 10% of your global turnover
for trying it on. Sadly, OPEC, being a governmental organization, doesn’t get
dinged with those same laws. But this still leaves them with the basic economic
problem faced by all cartels. A true monopoly has it easier – everyone, all
production, is under the same control. A cartel is by definition a number of
individual actors who have joined together to achieve their goal.
And the problem with such a cartel is that every single member has
an incentive to cheat all the other members. The production restraints push up
the price – so, why not produce a little bit more, you know, just a leetle bit, to take advantage of those higher
prices? And if only one person does it just a little, a leetle, bit, then usually no
problem. But if everyone starts to cheat just a bit then the production
restrictions are breached and all lose. It’s a nice example of the standard
collective action problem. If everyone does what they’re supposed to then it
works nicely. And the more cheaters there are the more it falls apart.
OPEC’s problem is that the organization itself doesn’t control
enough of the world’s supply to really control the oil price. And while it’s got
some help from some other producers that’s still not quite enough. For in the
background there is America’s fracking industry. And that is so split into
myriad parts that it’s simply never going to happen that it will constrain
production for any other reason than price. And that’s really OPEC’s problem
writ large, the more successful they are at raising the price then the more
they’re going to call into that competition which will undermine that price.
Origin & nature:
is the Organization of Petroleum Exporting Countries. It was founded in Bagdad
in 1960 and currently has 11 members. OPEC’s aim is to regulate the
amount of oil
that member nations produce and to keep prices at a steady rate. The countries
get together twice a year and agree on how much oil each country is allowed to
produce. OPEC’s headquarters are in Vienna, the capital of Austria. Before OPEC
was created, there were large oil companies that controlled the world’s oil
production. They wanted to sell as much oil as possible and did not let
governments influence their decisions. Oil-rich countries, especially in
the Middle East, wanted more control over the oil that they produce. As a
result, Iran, Iraq,
Saudi Arabia, Kuwait and Venezuela founded OPEC. In the following years Qatar,
Indonesia, Libya, Algeria, Nigeria, Ecuador, Angola and the United Arab
Emirates also become members.
OPEC did not have much power. This changed in 1973 when the third Arab-Israeli
war started. The United States and a few European countries
supported Israel. As a form of punishment, OPEC nations, influenced by
the Arab countries, stopped selling oil to the West. Within the next six years
oil prices rose to ten times the price of the early 1970s. OPEC countries
became rich with so-called petrodollars; the West sank into deep recession
because they needed OPEC’s oil.
the aftermath of the energy crisis of the 1970s, western countries started
looking for alternative
forms of energy in order to become more independent from OPEC and
the oil-producing nations. In 1986, oil prices dropped to the lowest rate in
history. Oil-producing nations lost much of their income. In the 80s and
90s OPEC’s power diminished, often because of conflicts and internal arguments
and because member states could not agree on production quotas. Some OPEC
countries did not keep agreements and produced more oil, thus lowering prices.
After 2000, oil prices began to rise again and reached an all-time high in
2007. The financial
crisis of 2007 and 2008 hit world economy hard and oil prices fell
once again. Since the Arab Spring
of 2011, prices have gone up and down several times. Today OPEC
still controls about 60% of the world’s oil reserves and produces 40% of the
world’s oil. Saudi Arabia is the most powerful member of the group, because it
has the largest reserves. Even though there have been quarrels in the cartel in
the last 5 decades it remains a powerful organization.
was created based on principles which are as valid today as they were then in
1960 — despite the vast number of changes they have since experienced in
technology, economics, politics and many other aspects of their lives. These
principles revolve around the coordination of their Member Countries’ oil
policies, so as: to ensure price stability in the world oil market; to obtain a
stable revenue for oil-producing nations; and to provide a regular, reliable,
efficient and economic supply to consuming countries and a fair return to
investors in the oil industry. Their commitment to these principles was
reaffirmed as recently as the year 2000, in the Solemn Declaration that
concluded the Second Summit of Heads of State and Government of OPEC Member
Countries, which was held in Caracas, Venezuela.
OPEC’s activities are focused on oil, a commodity that
has contributed more than any other form of energy to economic development
around the world, over the past century and a half. Analysts agree that
hydrocarbons will remain the most important source of energy for decades to
Moreover, they are dedicated to the ideals of 2002’s World Summit in
Johannesburg, to ensure that energy reaches all people and all nations, rich
and poor alike, as an essential element in the sustainable development of
OPEC’s mission is not restricted by time or circumstance, however. It is,
instead, a permanent one, which is centered around petroleum, but broadens out
into the energy industry generally. It involves close cooperation and exchanges
with other leading, influential parties in the sector at national and
The obvious conclusion is that OPEC is not a cartel, as some people still
insist on calling them. Instead, it is an international organization of
sovereign states, with a legitimate, permanent and essential mission for both its Member Countries and mankind
Existing scholarly work
– Literature Review (5 related literatures with proper in text citation and
Current situation (time
period 2010 to now)
oil prices on the slide, members of the once-dominant Organization of the
Petroleum Exporting Countries (OPEC)
decided in 2014 not to
attempt to rally them by cutting production, leaving the Brent Crude
price hovering at about US$70 (A$83) per barrel. A curious decision, perhaps,
by a 12-nation bloc that has previously kept an iron grip on the world’s oil
trade. But not so curious when you consider that OPEC is no longer an
all-powerful cartel – now it has plenty of competition.
the first time since its formation in 1960, two of the top three oil-producing
countries (the United States and Russia) are outside OPEC. While OPEC controls
low-cost oil, it has lost supply control at higher prices and cannot push
prices up like it could in the 1970s – or at least, not without stimulating a
lot more supply from elsewhere. According to
the US Energy Information Agency, the United States now produces
11.1 million barrels of oil per day – about the same as Saudi Arabia (11.7
million barrels) and Russia (10.4 million barrels).
new situation is a free-for-all between the three major players: OPEC (led by
Saudi Arabia), US-based private oil companies, and Russian state-controlled oil
firms. All three groups have the same reason for wanting to produce more – they
need or want more money in the short-medium term to satisfy their current
spending, shareholder and salary expectations. Amid this competition, cutting
production on purpose isn’t such an attractive move.
drop in oil prices over the past year is the result of years of over-investment
in oil production. Companies and governments, expecting sustained high prices,
have made investment decisions at break-even prices of US$60-80 a barrel and
above. With oil prices over the past decade averaging more than US$100 a
barrel, even a US$80 break-even sounds conservative, especially for projects
with a quick return. But the sustained high prices had another effect: they
encouraged the development of new technologies such as deep and ultra-deep
water oil drilling, and the recovery of shale oil through improved horizontal
drilling and fracking. These technologies have been advanced due to high prices,
but ironically, once deployed they drive the price down again as more supply
comes online. A good example is the Bakken
Formation in the US state of North Dakota. Discovered in the 1950s
and estimated to hold more than 200 billion barrels of shale oil, it became a
very attractive prospect at US$100 a barrel. With US$20 trillion in untapped
oil, there was a strong incentive to develop the technology to extract it,
which is happening now.
the past decade, oil companies have invested trillions of dollars in new
projects based on high oil price assumptions, in ever more remote locations and
with consequently higher production costs. There are now deep-water oil
projects in the Black Sea off Romania, and off Brazil’s coast, and oil sands
projects in Canada.
Shell’s planned spending on oil projects, divided up by
break-even price per barrel of oil (boe). (Carbon Tracker)
firm McMoRan spent US$1.2 billion to drill six wells in ultra-deep waters in
the Gulf of Mexico – US$200m per well. At US$70 a barrel, it would take more
than 17 million barrels (nearly an entire day of US demand) to recover the cost
of drilling these wells. Once oil is found and under production, the tap is not
going to be turned off until the cost of marginal production is greater than
the oil price. Multiply this by oil basins all around the world (see below),
and all of this sunk capital needs to generate a return on investment, even if
less profitable. Given that the extra cost of producing oil from these
unconventional assets is US$10-20 barrel, oil companies are putting these
assets to work as hard and as fast as the reservoir allows. This improves their
cashflows in the short term, but reduces their return on investment and profitability.
These financial issues will reveal themselves more over time.
curve for new oil projects. (Carbon Tracker/JPM/Goldman Sachs)
would think that global population growth would drive prices higher, but high
energy costs and concern for the environment has also driven improvements in
energy efficiency, especially for planes and cars. Even with the rise of the
middle class in China, global oil consumption has actually gone down relative
to population growth over the past decade (global population has grown by 11.3% while oil
demand has increased by
9.3%). Car use has also peaked in most countries around the world as
commuter speeds have hit the wall due to higher populations and workers
gravitate back to dense urban centres.
This is causing a massive amount of passenger rail to be installed around the
world. China has installed 8,500 km of intercity fast rail and 86 metro systems
in cities in the past decade. These are all powered by electricity rather than
assets may continue to produce at current oil prices, but there will come a
point if they decline further where they become unviable to continue producing.
Oil-based transport assets are at a greater risk of becoming stranded. Given
that 97% of oil production is used for transport,
and the majority of this is for passenger and commercial vehicles, oil demand
could fall significantly as people choose to drive lower-emission
vehicles. Of the 18 million barrels per day used in the United
States, 9.7 million barrels is for vehicle transport. Extrapolating that
globally means that for every 10% of petrol cars that are replaced with
electric ones, global oil demand would drop by more than 5%. Improvements to
car efficiency would have a similar effect, with a 10% improvement in overall
average vehicle efficiency causing a 5% drop in oil demand. At US$70 a barrel,
this 5% reduction in annual oil demand would wipe US$116 billion off annual
global oil sales.
2020, hybrid and electric vehicles are expected to account for more than 5%
of the global new car market. The United States has more than
240,000 electric vehicles (a small but fast-growing fraction of the 250 million
US cars in total), and in Norway, the world leader in electric vehicles per
capita, 12.9% of new cars sold in the first half of 2014 were electric.
does this leave OPEC?
members know that cutting their own production would no longer have a big
effect on the global supply of oil. Even if they could drive up the oil price,
this would only invite more competition that would hurt their revenue, by
making expensive projects such as
Canadian oil sands more viable.
also knows that private oil firms won’t be scaling back production either.
After more than a decade of high-cost investments, it’s in the private players’
interests to keep working existing assets to claw back capital. Cash flow at a
lower oil price is better than no cash flow at all. Given these assets have a
typical life span of at least 10 years, this situation is likely to endure for
some time. We have probably seen a step change in oil prices, which are likely
to stay low.
is why it’s off the mark to suggest that OPEC has deliberately chosen to keep
the price low to compete with renewable energy. The far less sinister reality
is that OPEC no longer has much choice at all.
been a tumultuous year for the oil and gas industry, with crude oil prices
falling from over $100 per barrel in 2014 to a low of just over $40 in late
August. This decline is largely due to decreased demand from China and OPEC’s
strategic refusal to cut production in the face of a supply glut. Despite the
sharp fall in prices, some companies have been able to remain profitable by
taking advantage of new technologies and niche markets.
of the most important lessons the industry has learned in the past twelve
growth of new technologies doesn’t always increase hydrocarbon demand: Much of
the recent decrease in demand for hydrocarbons can be linked to a slowdown in
the global economy. However, some of the lost demand is associated with
structural changes related to the adoption of technologies that make more
efficient use of fuels and feedstocks. Ironically, many of these technologies
were developed to cope with the high hydrocarbon prices that prevailed until
isn’t as unified as it once was: Some cracks have begun to appear in the
foundations of the once-unstoppable cartel. The gulf members, led by Saudi
Arabia, have maintained production in the face of a supply glut and prices that
have consistently been below $50/bbl. The Gulf States might be able to hold out
for a while at such prices, but poorer OPEC members are hurting. Recent diplomatic
attempts by Iran and Venezuela to convince OPEC to cut
production are a sign of internal dissent and may portend future weakening of
technologies don’t always require high prices to flourish: Low prices have
spurred investment in cost-reducing technologies and techniques. Most prominent
this year are zipper fracking, in which two parallel wells are fractured
simultaneously, and stacked laterals, in which many parallel wells are drilled
to different depths from the same pad.
is money to be made (and lost) in water: A prolonged drought in North America
combined with an attentive public and increasingly tough regulations have
brought water to the forefront. The cost of obtaining, storing, treating, and
getting rid of the billions of liters of water used for drilling and
stimulating wells in Canada and the US is measured in tens of billions of
dollars, which is a boon for servicing companies. Producers will need to manage
water-related costs efficiently in the coming years to remain lean.
worth giving tight oil wells a second lease on life (and a third, and a
fourth): Refracking – stimulating declining wells that have already been
fracked once – is on the
rise. The fact that refracking is typically carried out on
horizontal wells less than ten years old shows just how quickly our knowledge
of fracking in tight oil shales has improved. Refracking makes even more
sense given today’s low prices – companies can increase production on existing
wells for a fraction of the cost of drilling and fracking a new well.
pipelines are a tough sell: The vast majority of oil consumed in North America
has spent some time flowing through a pipeline. Despite the importance of these
critical conduits, they have become a tough sell in Canada in recent years.
Projects stymied by public opposition in 2015 include TransCanada’s Keystone XL
and Energy East pipelines, as well as Enbridge Inc.’s Northern Gateway
pipeline. Companies will need to work with the public if they hope to win
support for the projects by the end of the decade, when production is expected
to exceed existing pipeline capacity.
oil prices wallow near multi-year lows, it’s becoming increasingly clear that
the new cartel controlling oil prices is not OPEC but world credit markets.
From Saudi Arabia’s record $100 billion deficit
to shale oil’s
continuing reliance on cheap credit funding, it’s clear that no
major oil producer or company in the world right now is economically
self-sufficient based on oil revenues alone. This situation has left the flow
of oil and the decision on when to stop pumping the increasingly tarnished
black gold in the hands of banks rather than oil men.
idea that bank loans to oil companies may be in trouble is not new but there
are increasing signs of
late that these distress energy loans could end up defaulting and leaving banks
with a mess to deal with. At the national level, countries like Saudi Arabia
won’t forfeit their assets to creditors of course, but their ability to keep
running deficit funding is going to increasingly depend on bond market appetite
for energy related debt. That could be problematic in 2016. With the Federal
Reserve starting to raise interest rates, bond investors may find that they
don’t need to invest in energy debt to garner yield as they have in 2015, and
this in turn could start to crimp oil production.
often like to cite cartels as having the power to control production, but at
this point it looks like the only group with any ability to actually curtail
(or expand) production are the major banks that direct capital market flows. Of
course that production power is indirect, but it is real nonetheless.
are not required to disclose the loans they hold to investors and Federal
regulators don’t disclose this data either as it would potentially risk a run
on certain banks, but regulators are definitely taking note of
energy related loans in bank portfolios. That attention may start to change the
lending game in 2016 as banks look to pull back from energy production. For
some banks that are large enough, it is even possible that a broad pull
backin lending could lead to markedly lower production levels across
many U.S. firms in particular which in turn might help boost marginally prices.
To the extent that banks act in concert to do this, the effects on prices might
be more than marginal.
big banks have acted preemptively to dispel investor concerns over the size of
their loans to banks. According to third quarter data, Citigroup holds $22
billion in energy loans compared to a total loan portfolio at the bank of $632
billion. JP Morgan Chase holds $44 billion in energy loans against a portfolio
of $791 billion in total loans. Bank of America has $22 billion in oil &
gas loans against a total portfolio of $886 billion in loans. Wells Fargo has
$17 billion in oil & gas loans against a total portfolio of $888 billion.
total amount of loans outstanding to the energy sector is a little under $4
trillion, so these banks make up only a small 3 percent of the total
outstanding loan market. In fact, U.S. banks are currently only holding about
45 percent of the total U.S. loans to energy companies, with around 30 percent
held by foreign banks operating in the U.S., and 25 percent held by non-bank
entities like hedge funds.
the banking market is very much an oligopoly and where the likes of Citi and
Wells Fargo lead, smaller banks will follow. So far, banks have not been acting
in a cartel like fashion and are more worried about their individual loans than
they are coordinating credit decisions to try and help salvage loan recovery
rates across the industry. But with the increasing chaos in the energy sector, 2016
could force banks to change their tunes as they did in the housing industry in
2009 which in turn would lead to a very interesting 2016 for energy prices.