Transcript The Economics of Crude Oil

The Economics of
Oil
Rishabh Sahu
About the Project
This project examines the various factors responsible for changes
in oil prices. The project reviews the statistical behavior of oil
prices, relates these to the historical data, and looks into at key
features of petroleum demand and supply. Topics discussed
include the determination of oil price, and the strategic importance
of crude oil. The project also take insight in the recent fall in oil
prices.
Rishabh Sahu,
Undergraduate Student,
IIT Kanpur.
[email protected]
Rishabh Sahu
1
Why Crude Oil plays significant role in
the Global Economy
Rishabh Sahu
“
A century ago, petroleum - what we call
oil - was just an obscure commodity,
today it is almost as vital to human
existence as water.
- James Buchan
Rishabh Sahu
Significance of Crude Oil in the Global Economy
International Crude oil prices may effect:
◦ The manufacturing growth of an Economy.
◦ It can be seen as a trigger for inflation and
recession.
◦ As Crude Oil is major source of energy, Lower
oil prices reduce energy costs generally, as
prices of competing energy materials are forced
down too.
◦ Oil price declines generate changes in real
income benefiting oil-importers and hurting
benefit for oil-exporters.
Rishabh Sahu
Detrmination of
Crude Oil price
Rishabh Sahu
Factors affecting Crude Oil price
◦
◦
◦
◦
◦
◦
The current supply and demand.
The demand from Energy and manufacturing
sector.
The market sentiment in Oil futures market.
Exploration of new fields or addition of huge
supply in market like from United States
Shale fields.
Disturbances from Geopolitical upsets, like in
recent the Middle East crisis.
Increasing efficiency of alternative energy
sources.
Rishabh Sahu
Lets’s explore the factors
◦
◦
◦
◦
Supply and demand
Exploration of new fields
Regional or Geopolitical crisis
Alternative energy sources
Rishabh Sahu
Supply and demand
The concept of supply and demand is fairly straightforward.
As demand increases (or supply decreases) the price
should go up. As demand decreases (or supply increases)
the price should go down.
But, it’s a bit different story.
The price of oil as we know it is actually set in the
oil futures market. An oil futures contract is a binding
agreement that gives one the right to purchase oil by the
barrel at a predefined price on a predefined date in the
future. Under a futures contract, both the buyer and the
seller are obligated to fulfill their side of the transaction on
the specified date.
Rishabh Sahu
Relation of net oil demand with price
Rishabh Sahu
Exploration of new fields
Exploration of new fields does have quite a impact on Oil
price in future, this promises the addition of significant
supply to the existing supply. Sometimes new explorations
play a game changing role in pricing.
Like in recent past, America has become the world’s
largest oil producer. Though it does not export crude oil, it
now imports much less, creating a lot of spare supply in the
Global Oil market.
All thanks to the US Shale Boom! ;)
Rishabh Sahu
Annual forecasts of increasing production from non-OPEC countries
Rishabh Sahu
Economic or Geopolitical crisis
If there is any war, geopolitical threat or any act involving
an oil producers, buyers would refrain to buy from the
particular producer.
This will result in market suffering from the nervousness of
the buyer but it would not result in decreased demand as
buyer may approach other producers.
That would mean demand will exceed the suffered supply
and prices would surge. Some of these include Nigeria
attacks, Iran war threats, etc.
Rishabh Sahu
Oil price reaction to various geopolitical and economic events.
Rishabh Sahu
Alternative energy sources
Increasing efficiency of improved alternative energy
sources, and world moving towards green energy affects
the demand of crude oil.
In recent past the solar, fuel cell and other disruptive
energy source have came, which slightly decreased the
dependency of energy sector on crude oil.
For now, this is not a major trend impacting the market but
in the future it potentially could.
Rishabh Sahu
Future scenario may snatch a significant share from oil in energy sector.
Rishabh Sahu
Oil price
and it’s effect on
Global Economy
Rishabh Sahu
Future scenario may snatch a significant share from oil in energy sector.
Rishabh Sahu
Effect of Oil Price
Fall in Price:
◦
◦
◦
◦
◦
Slower economic development in regions with oil
based economies, including layoffs in the oil industry,
layoffs in the service industry, and a decline in real
estate value.
Shakeups in the oil industry in which small and
medium sized companies with a lot of debt get bought
out by enormous companies like Exxon.
Higher taxes or reduced services to account for lost
revenue in regions with a lot of oil production
especially so for regions that have not diversified.
Slower development of alternative energy sources
which rely on expensive oil to be competitive.
Faster economic development in regions without oil
based economies due to the lower oil prices.
Rishabh Sahu
Effect of Oil Price
Rise in Price:
◦
◦
◦
◦
Rise in Oil Prices are generally thought to increase
inflation.
Increase in Oil price can also stifle the growth of the
economy through their effect on the supply and
demand for goods other than oil.
High oil prices also can reduce demand for other
goods because they reduce wealth, as well as induce
uncertainty about the future especially so for regions
that have not diversified.
Slower economic development in regions without oil
based economies due to the Higher oil prices.
Rishabh Sahu
The Recent Fall
Rishabh Sahu
Why Oil Price dropped?
◦
◦
◦
◦
◦
Global supply of oil has surpassed the global demand,
which has resulted in the fall of prices.
Oil Production in the US has increased as Shale oil
production has gone up to 4 million barrels per day. As
such, US import of oil from OPEC has reduced by half.
There is a disagreement among OPEC member for
lowering prices to maintain their market share.
A slowdown is expected in Eurozone economies in
2015. The growth forecast has been cut down by IMF
to 0.8% in 2014 and 1.3% in 2015.
Countries in Asia are reducing oil subsidies, as a result
of which oil demand has fallen, which in turn has
resulted in increased oil prices, thereby, reducing
demand.
Rishabh Sahu
OPEC’s outlook towards falling oil prices
◦ On November 27, a big meeting was held by the Cartel,
and countries, like Venezuela and Iran, proposed that the
Cartel (mainly Saudi Arabia) decreases oil production in
order to maintain stability in the oil prices.
◦ Just to ensure it maintains its market share, Saudi Arabia,
the world's largest oil producer, did not agree to reducing
oil production and was willing to let prices fall.
Rishabh Sahu
Global Consequences
Increase in global demand
for goods and services
Reduced OPEC’s global power
Benefit to Western and
European economies
Decline in oil and natural-gas
undertakings
Reduction in Commodity price
The devalue of Oman
Rishabh Sahu
Thanks!
ANY Queries or Suggestions?
You can contact me at :
[email protected]
[email protected]
[email protected]
Rishabh Sahu