Factors Affecting OIL Prices

• Economic Growth
• Exchange Rates
• Inventories
• Marginal Producers
• Lack of Investment
• Violence in the Middle east
 Emerging Concepts

The Oil Gauge Model

• To assess the response of activity and inflation to higher oil prices

• This model examines the impact of oil prices on inflation by looking both at
the long-run positive correlation between inflation and growth, as well as on
the asymmetric impact of oil prices on activity.
• net oil price Increase is used which is real (inflation-
adjusted)
• With the use of a VAR methodology, impulse response functions of
real activity and inflation to a 10% increase in the price of oil is
derived.
• Our Oil gauge Model finds that a 10% increase in the price of oil
shaves G7 real GDP by 0.15% in the first year and 0.30% over two
years. The response of inflation to an oil price increase of 10% is
0.26% in the first year and 0.45% over two years. These estimates
suggest that the developed economies have become better
1979-81: IRANIAN REVOLUTION
AND IRAN-IRAQ WAR

In 1981 recession was caused by the

Volker credit squeeze, when interest
rates were increased sharply, with the
objective of ending an inflationary
spiral of which rising oil prices were a
symptom rather than a cause.
1990-91 IRAQ INVADES KUWAIT AND
FIRST GULF WAR

“The impact of oil prices was

negligible, not least because Saudi
Arabia and other Arab nations were
allied with U.S. forces and made
efforts to counteract the price
increase”
1996-99: DEMAND-INDUCED PRICE
SURGE

“Global demand began to swell as the

high-tech bubble encouraged a big
investment boom in North America
and Europe and as the Asian
economies began to recover.”
2002-05: IRAQ II AND SURGING DIL
DEMAND

“The tripling of crude oil prices since

2002 has had generally more muted
and often paradoxical effects on the
financial markets”
 Emerging Concepts

The Oil Gauge Model

• To assess the response of activity and inflation to higher oil prices

• This model examines the impact of oil prices on inflation by looking both at
the long-run positive correlation between inflation and growth, as well as on
the asymmetric impact of oil prices on activity.
• net oil price Increase is used which is real (inflation-
adjusted)
• With the use of a VAR methodology, impulse response functions of
real activity and inflation to a 10% increase in the price of oil is
derived.
• Our Oil gauge Model finds that a 10% increase in the price of oil
shaves G7 real GDP by 0.15% in the first year and 0.30% over two
years. The response of inflation to an oil price increase of 10% is
0.26% in the first year and 0.45% over two years. These estimates
suggest that the developed economies have become better
 Emerging Concepts

The Oil Gauge Model

• To assess the response of activity and inflation to higher oil prices

• This model examines the impact of oil prices on inflation by looking both at
the long-run positive correlation between inflation and growth, as well as on
the asymmetric impact of oil prices on activity.
• net oil price Increase is used which is real (inflation-
adjusted)
• With the use of a VAR methodology, impulse response functions of
real activity and inflation to a 10% increase in the price of oil is
derived.
• Our Oil gauge Model finds that a 10% increase in the price of oil
shaves G7 real GDP by 0.15% in the first year and 0.30% over two
years. The response of inflation to an oil price increase of 10% is
0.26% in the first year and 0.45% over two years. These estimates
suggest that the developed economies have become better
 Emerging Concepts

The Oil Gauge Model

• To assess the response of activity and inflation to higher oil prices

• This model examines the impact of oil prices on inflation by looking both at
the long-run positive correlation between inflation and growth, as well as on
the asymmetric impact of oil prices on activity.
• net oil price Increase is used which is real (inflation-
adjusted)
• With the use of a VAR methodology, impulse response functions of
real activity and inflation to a 10% increase in the price of oil is
derived.
• Our Oil gauge Model finds that a 10% increase in the price of oil
shaves G7 real GDP by 0.15% in the first year and 0.30% over two
years. The response of inflation to an oil price increase of 10% is
0.26% in the first year and 0.45% over two years. These estimates
suggest that the developed economies have become better
 IVANHOES PROJECTION

• According to Ivanhoe (a renowned Economist), the critical date is

when global Oil demand will substantially exceed the available
supply from the few Persian Gulf Moslem oil exporters.

• The permanent global oil shortage will begin when the world's oil
demand exceeds global production( around 2010) if normal oil-fields
decline occurs & the world's key oil producer, Saudi Arabia, has
serious political problems that curtail its exports.

• World oil production will thereafter continue to decline at a

dwindling rate.

• The major discoveries of oil is nearly over and even in future if some
discoveries happens it would be not as huge as earlier ones. Hence the
production would increase due to some technological advances but
ultimately the supply would come down and there would be huge increase
price of oil.
 PAPER BARRELS
"What About So Called 'Reserve Growth'"?

In recent years, the USGS and other agencies have estimated

US domestic oil production would not peak until well into the 21st
century, and possibly not until the 22nd century. This was despite
the fact US production had already peaked in 1970, just as
Hubbert had predicted. Unfortunately, these upwards revisions
are best classified as "paper barrels", meaning they exist on
paper only, not in the real world.

• This concept of paper barrel actually means that the oil is only
present in the paper not physically.
• This makes the oil trading in the derivative market very volatile .
• The basic reason for the investor would be if there is lot of oil then
price would come down which would bring down the cost of
production for the manufacturing companies which would make
greater profits.
IVANHOES PROJECTION