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Assignment On

Reasons of Rise in oil prices and its affects

Course title: Business EconomicsLevel: BBA IIISection: BSubmitted by: Fahd zafar

Submitted to: Ma’am Farrah khuram

Date : -10-2011Quaid-i-Azam University Islamabad

History1990-1993

The price of crude oil spiked in 1990 with the lower production and uncertaintyassociated with the Iraqi invasion of Kuwait and the ensuing Gulf War. The world andparticularly the Middle East had a much harsher view of Saddam Hussein invading Arab Kuwaitthan they did Persian Iran.

1994-1995

Following what became known as the Gulf War to liberate Kuwait crude oil pricesentered a period of steady decline until in 1994 inflation adjusted prices attained their lowestlevel since 1973.

1996-1997

The price cycle then turned up. The United States economy was strong and theAsian Pacific region was booming. From 1990 to 1997 world oil consumption increased 6.2million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of thatgain and contributed to a price recovery that extended into 1997. Declining Russian productioncontributed to the price recovery. Between 1990 and 1996 Russian production declined over 5million barrels per day.OPEC continued to have mixed success incontrolling prices. There were mistakes in timing of quota changes as well as the usualproblems in maintaining production discipline among its member countries.

1997-1998

The price increases came to a rapid end in 1997 and 1998 when the impact of theeconomic crisis in Asia was either ignored or severely underestimated by OPEC. In December,1997 OPEC increased its quota by 2.5 million barrels per day to 27.5 MMBPD effective January1, 1998. The combination of lower consumption and higher OPEC production sent prices into adownward spiral. In response, OPEC cut quotas by 1.25 million b/d in April and another 1.335million in July.

1999-2000

Prices began to recover in early 1999 and OPEC reduced production another1.719 million barrels in April. Early 1998 and the middle of 1999 OPEC production dropped byabout 3 million barrels per day and was sufficient to move prices above $25 per barrel.Between April and October, 2000 three successive OPEC quota increases totaling 3.2 millionbarrels per day were not able to stem the price increases. Prices finally started down followinganother quota increase of 500,000 effective November 1, 2000.

2007-2008

The price of oil is driven by much, much more than supply and demand. Global demand in 2008was actually down and global supply was up! Oil consumption decreased from 86.66 millionbarrels per day (bpd) in the fourth quarter 2007 to 85.73 million bpd in the first quarter of 2008. At the same time, supply increased from 85.49 to 86.17 million bpd.According to the laws of supply and demand, prices should have decreased. Instead, theyincreased almost 25% in that time - from $87.79 to $110.21 a barrel.

2009-2011

Crude oil price rose by nearly 13.8% from January to December of 2010;

despite it’s not as near

as the yearly price hike in 2009 of over 78%, 2010 still showed strength.The OPEC Reference Basket fell $5.30 or 4.7% in August, the sharpest decline in percentageterms since May 2010. The Basket remained volatile, fluctuating between $101.20/b and$113.17/b.

Reasons:

Following are the main reasons of Rise in oil prices

Weak dollar:

International oil companies sell most of their oil in dollars Any change in the value of the dollartherefore affects their cost structure and profitability. In turn, it affects reinvestment inexploration, development, and maintenance. The relationship between the value of the dollar andoil prices is very complex.