Oil Economics

&
Shalu Agrawal (070259)
Prachi Agrawal
(070245)
 Topics to be covered
n Definition
n Economic Importance of Oil
n OPEC
n Oil Prices
n Effect on Economy
n Conclusion
n 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 o Global Oil consumption
15% of Indian GDP) : 85.22 million bpd
¨Contributes to about 64% of gross (2007)
revenues of Government (both
o Global Oil production :
Central and State together) through
: 85.57 million bpd
Taxes and Duties
(2007)
¨Total Contribution to Government
exchequer in 2004-05 = USD 27 bn q USA is the biggest
¨Contributes to about 45% of India’s consumer of Oil
followed by China.
primary energy consumption
¨ Constitutes 30.87% of India’s imports in
2005-06
¨ Accounts for 11.21% of India’s exports in o Compounded Annual
2005-06 Growth rate of Energy
¨ India is the Sixth largest crude consumer Consumption (1996-
in the world 2005) – 3.62%
¨ India is the Ninth largest crude importer o Energy-GDP Elasticity
in the world = 0.58
¨ India’s has the sixth largest refining
capacity - 2.56 million barrels per day
representing 2.99% of world capacity

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, inter-
governmental 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)
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.
§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.

n Wealth transfer
n Long-run GDP losses
n Disruption costs
n Military costs
n Strategic stockpile costs
(SPR)
 The cartelized, volatile oil market produces
three direct costs to the Non-OPEC
economy.
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 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 Wealth Transfer

Macroeconomic Adjustment
$250
Billions of 2000 $

Potential GDP Loss

$200

$150

$100

$50

$0
1970 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
n Fall in demand for Oil. As a result crude prices have fallen
below $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 million

bbl/d in 2009, eventually exceeding 5 million bbl/d by the
end 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.
Suggestions for efficient operation
of Oil market :
n Enhancing the transparency and regulation
of financial markets.

n Examine cross interactions in crude

markets.

n Mutual cooperation among global

economies in investment, technology and
human resource development.
 REFERENCES
n Wikipedia.org
n OPEC.org
n IBEF.org
n MOL(Magyar Olaj- és Gázipari Nyrt )
n IOC.org
n Wrtg.com
Thank