Oil Economics &

Shalu Agrawal (070259) Prachi Agrawal (070245)

Topics to be covered
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Definition Economic Importance of Oil OPEC Oil Prices Effect on Economy Conclusion References

OIL ECONOMICS
Oil economics is a scientific subject area which includes topics related to supply and use of oil in societies along with predictions and assessment of factors affecting the pricing of the “Black Gold”

Some statistics
¨Oil and Gas Industry Size is estimated at USD 110 bn (about 15% of Indian GDP) ¨Contributes to about 64% of gross revenues of Government (both Central and State together) through Taxes and Duties ¨Total Contribution to Government exchequer in 2004-05 = USD 27 bn ¨Contributes to about 45% of India’s primary energy consumption
o Global Oil consumption : 85.22 million bpd (2007) o Global Oil production : : 85.57 million bpd (2007) q USA is the of biggest Oil

consumer

followed by China.

¨ Constitutes 30.87% of India’s imports in 2005-06 ¨ Accounts for 11.21% of India’s exports in 2005-06 ¨ India is the Sixth largest crude consumer in the world ¨ India is the Ninth largest crude importer in the world ¨ India’s has the sixth largest refining capacity - 2.56 million barrels per day representing 2.99% of world capacity

o Compounded Annual Growth rate of Energy Consumption (19962005) – 3.62% o Energy-GDP Elasticity = 0.58

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

Production vs consumption 2006 (thousand million barrels)

Production Consumption

„Deficit”

„Surplus”

OPEC

Definition
The OPEC or Organization of the Petroleum Exporting countries is a permanent, intergovernmental organisation, created at the Baghdad Conference on September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Presently it’s a group of twelve countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela.

ROLE OF OPEC
According to its statutes, one of the principal goals is the determination of the best means for safeguarding and monitoring the Organization's interests, individually and collectively. Various roles of OPEC are: •Pursuing several ways and means of ensuring the stabilization of prices. •Giving due regard at all times to the interests of the producing and consuming countries.

OPEC members own 69% of the world’s proven oil reserves and more than half of ultimate resources of conventional oil.

Source: U.S. Energy Information Administration,

Monopoly of OPEC
OPEC decisions have had considerable influence on international oil prices. For example, in the 1973 energy crisis OPEC refused to ship oil to western countries that had supported Israel in the Yom Kippur War or October War, which they fought against Egypt and Syria. This refusal caused a fourfold increase in the price of oil, which lasted five months. OPEC nations then agreed, on January 7, 1975, to raise 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 $149.3 which later declined due to political pressures.

Oil

Factors affecting Oil prices
Production quota set by OPEC. Oil Reserves. Oil Demand. Commodity traders: hedgers and speculators. Process involving money: §Crude production §Crude transportation §Refining §Distribution

Production-Discovery Vs oil Curve

Oil Price Fluctuations

Reasons for rise in Oil prices (2006-2008)
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Oil -more of a financial asset. Weak Dollar. Lower returns on other assets. Increase of the economic growth and industrialization. The lack of surplus production capacity . Geopolitical uncertainties : Situation of Iraq. Internal conflicts in Middle East. Nuclear case of Iran.

§Uncertainties about the monetary, fiscal, energy, investment, trade and environmental policies of countries. §Terrorism results in: Damage to oil facilities and transportation routes. Creation of instability in concerned countries.

Effect on

There are direct monetary costs and important indirect costs of oil dependence in a non-competitive market.
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Wealth transfer Long-run GDP losses Disruption costs Military costs Strategic stockpile costs (SPR)

1. Loss of potential GDP due to greater economic scarcity of oil. 2. Transfer of wealth due to monopoly pricing and price shocks. 3. Dislocation losses of GDP due to oil price shocks.

The cartelized, volatile oil market produces three direct costs to the Non-OPEC economy.

The economic costs of oil dependence have 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 $350 $300 Billions of 2000 $ $250 $200 $150 $100 $50 $0 1970 Wealth Transfer Macroeconomic Adjustment Potential GDP Loss

1975

1980

1985

1990

1995

2000

2005

Rise in the price of oil leads to…
1.Inflation 4.Unemployment 3. Lower Exchange Rates 4. Lower Real Output

Present Scenario
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Fall in demand for Oil. As a result crude prices have fallen below $40 a barrel from a record high near $150 last year. A reduction of 2.2 million bpd, took effect on Jan. 1, adding to previous cuts of 2 million bpd by OPEC. OPEC surplus production capacity could average 4.3 million bbl/d in 2009, eventually exceeding 5 million bbl/d by the end of 2010. 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 operation of Oil market :
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Enhancing the transparency and regulation of financial markets. Examine cross interactions in crude markets. Mutual cooperation among global economies in investment, technology and human resource development.

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REFERENCES
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Wikipedia.org OPEC.org IBEF.org MOL(Magyar Olaj- és Gázipari Nyrt ) IOC.org Wrtg.com

Thank

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