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Oil EconomicsOil Economics

Shalu Agrawal (070259)Prachi Agrawal

(070245)


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Topics to be coveredTopics to be covered

n DefinitionDefinitionn Economic Importance of OilEconomic Importance of Oiln OPECOPECn Oil PricesOil Pricesn Effect on EconomyEffect on Economyn ConclusionConclusionn ReferencesReferences


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OIL ECONOMICSOIL ECONOMICS

Oil ecOil economicsonomics is a scientific subject areais a scientific subject area

which includes topics related to supply andwhich includes topics related to supply anduse of oil in societies along with predictionsuse of oil in societies along with predictionsand assessment of factors affecting theand assessment of factors affecting the


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Some statisticsSome statistics

Oil and Gas Industry Size isestimated at USD 110 bn (about

15% of Indian GDP)

Contributes to about 64% of gross

revenues of Government (bothCentral and State together) through

Taxes and Duties

Total Contribution to Government

exchequer in 2004-05 = USD 27 bn

Contributes to about 45% of Indias

primary energy consumption

oGlobal Oil consumption

: 85.22 million bpd

(2007)

oGlobal Oil production :

: 85.57 million bpd

(2007)

qUSA is the biggest

consumer of Oil

followed by China.


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Indias GDP would fall by 1.5% for every USD 10 increase in the price of oil per barrel

Constitutes 30.87% of Indias imports in2005-06

Accounts for 11.21% of Indias exports in

2005-06

India is the Sixth largest crude consumer

in the world India is the Ninth largest crude importer

in the world

Indias has the sixth largest refining

capacity - 2.56 million barrels per day

representing 2.99% of world capacity

oCompounded Annual

Growth rate of Energy

Consumption (1996-

2005) 3.62%oEnergy-GDP Elasticity

= 0.58


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Consumption

Production

Production vs consumption 2006 (thousand million barrels)

SurplusDeficit


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DefinitionDefinitionThe OPEC or Organization of the PetroleumExporting countries is a permanent, inter-governmental organisation, created at the Baghdad

Conference on September 1014, 1960, by Iran,Iraq, Kuwait, Saudi Arabia and Venezuela.Presently its a group of twelve countries madeup of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait,

Libya, Nigeria, Qatar, Saudi Arabia, the United ArabEmirates, and Venezuela.


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ROLE OF OPECROLE OF OPECAccording to its statutes, one of the principal goals is thedetermination of the best means for safeguarding andmonitoring the Organization's interests, individually andcollectively. Various roles of OPEC are:

Pursuing several ways and means of ensuring thestabilization of prices.

Giving due regard at all times to the interests of theproducing and consuming countries.


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OPEC members own 69% of the worlds proven oilOPEC members own 69% of the worlds proven oilreserves and more than half of ultimate resourcesreserves and more than half of ultimate resources

Source: U.S. Energy Information Administration,


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Monopoly of OPECMonopoly of OPECOPEC decisions have had considerable influence oninternational oil prices. For example, in the 1973 energycrisis OPEC refused to ship oil to western countries that hadsupported Israel in the Yom Kippur War or October War, which

they fought against Egypt and Syria. This refusal caused afourfold increase in the price of oil, which lasted five months.OPEC nations then agreed, on January 7, 1975, toraise crude oil prices by 10%.More recently, OPEC decided to hold the surplus, leading to

the 3 fold increase in crude oil prices to a whopping $149.3which later declined due to political pressures.


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Production quota set by OPEC.Oil Reserves.Oil Demand.Commodity traders: hedgers and speculators.

Process involving money:

Crude production

Crude transportation

Refining

Distribution


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Production-Discovery Vs oilProduction-Discovery Vs oil


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Oil Price FluctuationsOil Price Fluctuations


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Reasons for rise in Oil pricesReasons for rise in Oil prices2006-20082006-2008

n Oil -more of a financial asset.

n Weak Dollar.

n

Lower returns on other assets.n Increase of the economic growth and

industrialization.

n The lack of surplus production capacity .

n Geopolitical uncertainties :Situation of Iraq.

Internal conflicts in Middle East.

Nuclear case of Iran.


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Uncertainties about the monetary, fiscal, energy,

investment, trade andenvironmental policies of countries.

Terrorism results in:Damage to oil facilities and transportation routes.

Creation of instability in concerned countries.


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There are direct monetary costs andThere are direct monetary costs andimportant indirect costs of oil dependenceimportant indirect costs of oil dependence

--

n Wealth transfern Long-run GDP lossesn Disruption costsn Military costsn

Strategic stockpile costs(SPR)


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The cartelized, volatile oil market producesThe cartelized, volatile oil market producesthree direct costs to the Non-OPECthree direct costs to the Non-OPEC

1. Loss of potential GDPdue to greater economicscarcity of oil.

2. Transfer of wealth due to monopoly pricing andprice shocks.

3. Dislocation losses of GDP due to oil priceshocks.


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The economic costs of oil dependence haveThe economic costs of oil dependence havebeen substantial, over $4 trillion since 1970.been substantial, over $4 trillion since 1970.

Costs of Oil Dependence to the U.S. Economy, 1970-2006

Competitive World Oil Price Constant at $13/bbl

$0

$50

$100

$150

$200

$250

$300

$350

1970 1975 1980 1985 1990 1995 2000 2005

B

illions

of2000

$

Wealth Transfer

Macroeconomic AdjustmentPotential GDP Loss


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Rise in the price of oil leads toRise in the price of oil leads to

1.Inflation

4.Unemployment

3. Lower Exchange Rates

4. Lower Real Output


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Present ScenarioPresent Scenario

n Fall in demand for Oil. As a result crude prices have fallenbelow $40 a barrel from a record high near $150 last year.

n A reduction of 2.2 million bpd, took effect on Jan. 1, adding

to previous cuts of 2 million bpd by OPEC.

n OPEC surplus production capacity could average 4.3 millionbbl/d in 2009, eventually exceeding 5 million bbl/d by theend of 2010.

n EIA predicts world oil demand for 2009 would fall by 1.17

million bpd from last year to 84.70 million bpd.


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Suggestions for efficient operationSuggestions for efficient operationof Oil market :of Oil market :

n Enhancing the transparency and regulationof financial markets.

n Examine cross interactions in crudemarkets.

n

Mutual cooperation among globaleconomies in investment, technology andhuman resource development.


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REFERENCESREFERENCES

n Wikipedia.orgWikipedia.org

n OPEC.orgOPEC.org

n IBEF.orgIBEF.orgn MOLMOL((Magyar Olaj- s Gzipari Nyrt))

n IOC.orgIOC.org

n Wrtg.comWrtg.com


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