The Economics of Oil Rishabh Sahu

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. About the Project Rishabh Sahu

Why Crude Oil plays significant role in the Global Economy 1 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 The growth forecast has been cut down by IMF to 0.8% in 2014 and 1.3% in ◦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

Reduced OPEC’s global power Benefit to Western and European economies The devalue of Oman Increase in global demand for goods and services Global Consequences Decline in oil and natural-gas undertakings Reduction in Commodity price Rishabh Sahu

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