SEMINAR ON OIL SLIPSEMINAR ON OIL SLIP

• Done by:Done by:44thth semester BBA students semester BBA students

ORIGINORIGIN

• The generally accepted origin of crude oil is from plant and animal remains The generally accepted origin of crude oil is from plant and animal remains upto 3 billion years ago, but predominantly from 100 to 600 million years upto 3 billion years ago, but predominantly from 100 to 600 million years ago.ago.

• Science behind this Science behind this Crude oil is derived from methane from the earth’s interior and established Crude oil is derived from methane from the earth’s interior and established that petroleum is a primordial material erupted from great depth.that petroleum is a primordial material erupted from great depth.

BEGINNING OF THE CRISISBEGINNING OF THE CRISIS

• 19201920Oil production reached 450 million barrels- prompting fear that the nation was Oil production reached 450 million barrels- prompting fear that the nation was

about to run out of oil. US Government officials predicted that the nation’s oil about to run out of oil. US Government officials predicted that the nation’s oil reserves would last just 10 years.reserves would last just 10 years.

• 19601960Iran, Venezuela and Arab oil producers banded together into negotiate for Iran, Venezuela and Arab oil producers banded together into negotiate for

higher oil prices (Beginning of OPEC )higher oil prices (Beginning of OPEC )

• 1985-961985-96The Oil price slump was the episode most closely associated with changing The Oil price slump was the episode most closely associated with changing

supply conditions as OPEC reverted to its production target despite rising supply conditions as OPEC reverted to its production target despite rising unconventional oil supply from North Sea and Mexico.unconventional oil supply from North Sea and Mexico.

• 1990-911990-91The oil price decline reversed an earlier spike triggered by the first Gulf WarThe oil price decline reversed an earlier spike triggered by the first Gulf War

• 19981998The reason for crisis was the 1997 Asian crisis and also the expansion of OPEC The reason for crisis was the 1997 Asian crisis and also the expansion of OPEC

production.production.

• 20012001 because of terrorist attack on Sept 11 in US, the disruptions caused a growth because of terrorist attack on Sept 11 in US, the disruptions caused a growth slowdown slowdown

• 2008-09 2008-09 global demand tumbled during the great recession of 2008 and 2009global demand tumbled during the great recession of 2008 and 2009

OPEC:OPEC:ORGANIZATION OF ORGANIZATION OF

PETROLEUM EXPORTING PETROLEUM EXPORTING COUNTRIESCOUNTRIES

WHAT IS OPEC?WHAT IS OPEC?• OPEC is a permanent intergovernmental organization OPEC is a permanent intergovernmental organization

consisting currently of 1consisting currently of 133 Member Countries located Member Countries located across the continents of Asia, Africa, and America.across the continents of Asia, Africa, and America.

OPEC FOUNDED IN 1960OPEC FOUNDED IN 1960

• The Organization of the The Organization of the Petroleum Exporting Petroleum Exporting Countries (OPEC) is a Countries (OPEC) is a permanent, permanent, intergovernmental intergovernmental Organization, created at the Organization, created at the Baghdad Conference on Baghdad Conference on September 10–14, 1960, by September 10–14, 1960, by Iran, Iraq, Kuwait, Saudi Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Arabia and Venezuela.

MEMBER COUNTRIESMEMBER COUNTRIES• 1960: Founding Members: 1960: Founding Members:

Iran, Iraq, Kuwait, Saudi Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.Arabia and Venezuela.

• Qatar (1961); Qatar (1961); • Indonesia (1962) – Indonesia (1962) –

suspended its suspended its membership from January membership from January 2009 2009

• Socialist Peoples Libyan Socialist Peoples Libyan Arab Jamahiriya (1962)Arab Jamahiriya (1962)

• United Arab Emirates United Arab Emirates (1967)(1967)

• Algeria (1969) Algeria (1969) • Nigeria (1971)Nigeria (1971)• Ecuador (1973) – Ecuador (1973) –

suspended its suspended its membership from membership from December 1992-October December 1992-October 20072007

• Angola (2007) Angola (2007) • Gabon (1975–1994).Gabon (1975–1994).

OPEC HEADQUARTERSOPEC HEADQUARTERS

• OPEC had its headquarters OPEC had its headquarters in Geneva, Switzerland, in in Geneva, Switzerland, in the first five years of its the first five years of its existence. This was moved existence. This was moved to Vienna, Austria, on to Vienna, Austria, on September 1, 1965. September 1, 1965.

OPEC Headquarters in Vienna, Austria

GOAL # 1: OPEC SEEKS TO ENSURE THE STABILIZATION GOAL # 1: OPEC SEEKS TO ENSURE THE STABILIZATION OF OIL PRICES IN INTERNATIONAL OIL MARKETS, WITH A OF OIL PRICES IN INTERNATIONAL OIL MARKETS, WITH A

VIEW TO ELIMINATING HARMFUL AND UNNECESSARY VIEW TO ELIMINATING HARMFUL AND UNNECESSARY FLUCTUATIONSFLUCTUATIONS

GOAL #2: TO SECURE A STEADY INCOME GOAL #2: TO SECURE A STEADY INCOME FOR THE OIL-PRODUCING MEMBER FOR THE OIL-PRODUCING MEMBER

NATIONS.NATIONS.

GOAL # 3: OPEC’S ROLE IN GOAL # 3: OPEC’S ROLE IN OVERSEEING AN EFFICIENT, OVERSEEING AN EFFICIENT,

ECONOMIC AND REGULAR SUPPLY OF ECONOMIC AND REGULAR SUPPLY OF PETROLEUM TO CONSUMING PETROLEUM TO CONSUMING

NATIONS.NATIONS.

THE CURRENT THE CURRENT SITUATIONSITUATION

Saudi production policySaudi production policy

OPEC – POLITICS OR ECONOMICS ?OPEC – POLITICS OR ECONOMICS ?

  •The real driver of 2014 price collapse is Saudi Arabia The real driver of 2014 price collapse is Saudi Arabia production policyproduction policy•Saudis could have played it’s another side of swing Saudis could have played it’s another side of swing •Saudis can’t do so because it is hurting geo-political rival Iran Saudis can’t do so because it is hurting geo-political rival Iran and Russiaand Russia•Riyadh with over $ 700 billion in than bank can face the Riyadh with over $ 700 billion in than bank can face the futurefuture but Saudi can’t do it alone….but Saudi can’t do it alone….

•The rise of north America production and the slowing growth The rise of north America production and the slowing growth rate of Chinese oil consumption in years (American production rate of Chinese oil consumption in years (American production increased by 1 million barrels per day)increased by 1 million barrels per day)

Brookings Doha center

IMPORTANCE OF OIL & IMPORTANCE OF OIL & ALTERNATIVESALTERNATIVES

• oil:used as the most important source of energy across the world since 1950soil:used as the most important source of energy across the world since 1950s

• OPEC countries hold over three- quarters of the world’s proven oil reservesOPEC countries hold over three- quarters of the world’s proven oil reserves

• The top two oil producing countries are Venezuela and Saudi ArabiaThe top two oil producing countries are Venezuela and Saudi Arabia

• The combined source of petrol ,diesel and jet fuel acoount for around 72% of The combined source of petrol ,diesel and jet fuel acoount for around 72% of oil consumptionoil consumption

TOP OIL CONSUMING NATIONSTOP OIL CONSUMING NATIONS

• As a fuel and a raw material for a wide range of products.As a fuel and a raw material for a wide range of products.• Chemical, pharmaceutical, textileChemical, pharmaceutical, textile• Transportation, industrial power, light and heat, petro-chemicals, and other Transportation, industrial power, light and heat, petro-chemicals, and other

uses.uses.• Petrol (gasoline) and diesel oil are used to drive cars, buses, trucks etc. Petrol (gasoline) and diesel oil are used to drive cars, buses, trucks etc. • Aviation fuel is used by jet planes, heavy fuel by locomotives and steamshipsAviation fuel is used by jet planes, heavy fuel by locomotives and steamships• Thermal electricity.Thermal electricity.• Other uses: Asphalt, bitumen, pitch or tar are used for road making and Other uses: Asphalt, bitumen, pitch or tar are used for road making and

roofing roofing • and paraffin and wax for making polishes and candles.and paraffin and wax for making polishes and candles.

Uses of oil in India

ALTERNATIVES ALTERNATIVES TO OILTO OIL

• BiofuelsBiofuels• BiomassBiomass• Solar PowerSolar Power• Wind PowerWind Power• HydropowerHydropower• Hydrogen FuelHydrogen Fuel• Nuclear EnergyNuclear Energy

FORECAST OF FORECAST OF FUTURE ENERGY FUTURE ENERGY CONSUMPTIONCONSUMPTION

CAUSES OF RECENT OIL PRICE DECLINECAUSES OF RECENT OIL PRICE DECLINE

• Trends in supply and demandTrends in supply and demand

• Changes in OPEC objectiveChanges in OPEC objective

• Receding geopolitical concerns Receding geopolitical concerns

• Us dollar appreciationUs dollar appreciation

CHINA RELATION WITH OIL CRISISCHINA RELATION WITH OIL CRISIS

• History - World War 2History - World War 2• Self sufficiencySelf sufficiency• Economic reform(1978)Economic reform(1978)• Accession to WTO(2001)Accession to WTO(2001)

OIL SOURCESOIL SOURCES TIGHT REGULATIONSTIGHT REGULATIONS

FISCAL IMPACTFISCAL IMPACT

OIL IMPORT AND CURRENT ACCOUNT SURPLUS- 0.5%-0.9%OIL IMPORT AND CURRENT ACCOUNT SURPLUS- 0.5%-0.9%OF GDPOF GDP

IMPLICATIONSIMPLICATIONS

TOPICS TO BE COVERED:TOPICS TO BE COVERED:

1)1)Global activityGlobal activity2)2)National activity National activity a)oil exporting countriesa)oil exporting countries b)oil importing countriesb)oil importing countries c) spillovers effectc) spillovers effect3) Inflation3) Inflation4) Fiscal balances4) Fiscal balances5) Financial market5) Financial market6) poverty6) poverty

GLOBAL ACTIVITYGLOBAL ACTIVITY

• In USA, empirical suggests that, there is a net positive effect of declining oil prices .In USA, empirical suggests that, there is a net positive effect of declining oil prices .• It states a 45% drop in oil can could lift U.S real GDP by more than 1.25%It states a 45% drop in oil can could lift U.S real GDP by more than 1.25%• In European union ,historical data suggests that 45 % drop in oil prices could In European union ,historical data suggests that 45 % drop in oil prices could

improve European area GDP by more than 1 %improve European area GDP by more than 1 %• In japan ,in 2013 imported oil amounted to 4% of GDP, with contracts indexed to oil In japan ,in 2013 imported oil amounted to 4% of GDP, with contracts indexed to oil

prices. Real income will be growing more significantly (John Baffes,PRN,2015)prices. Real income will be growing more significantly (John Baffes,PRN,2015)• In china, the lower oil prices on growth is expected to boost activity by 0.1% to 0.2% In china, the lower oil prices on growth is expected to boost activity by 0.1% to 0.2%

(world bank 2015) because oil account for only 18% of energy consumption.(world bank 2015) because oil account for only 18% of energy consumption.

NATIONAL ACTIVITY NATIONAL ACTIVITY

• Oil Importing countries Oil Importing countries • activity in oil importer should benefit from lower oil prices since drop activity in oil importer should benefit from lower oil prices since drop

in oil in oil prices raises household and corporate real incomesprices raises household and corporate real incomes• 10% decrease in oil prices could raise growth in oil importing countries 10% decrease in oil prices could raise growth in oil importing countries

by by 0.1% to 0.5% (World bank 2013). Example: Turkey0.1% to 0.5% (World bank 2013). Example: Turkey

Oil exporting countries Oil exporting countries • Oil exporter in MENA REGION, oil base revenue account for more than Oil exporter in MENA REGION, oil base revenue account for more than half of half of the overall fiscal revenue (World Bank 2015)the overall fiscal revenue (World Bank 2015)• Problem of elevated debt to asset ratios has already come into the Problem of elevated debt to asset ratios has already come into the picture picture (Smith 2009)(Smith 2009)• Lack of buffer deteriorates the current account and cause currency Lack of buffer deteriorates the current account and cause currency depreciation. Example : Russiadepreciation. Example : Russia

SPILLOVERS SPILLOVERS

• Such sustains oil prices we can activity in exporting countries with Such sustains oil prices we can activity in exporting countries with adverse implication for trade tourism and remittancesadverse implication for trade tourism and remittances

• Russian and GCC tourist who account for bulk of tourist arrival in Russian and GCC tourist who account for bulk of tourist arrival in Egypt would slow down ( World Bank 2015)Egypt would slow down ( World Bank 2015)

INFLATIONINFLATION

• Result indicated that the pass through headline inflation in most cases is modest Result indicated that the pass through headline inflation in most cases is modest with the 10% decline in oil prices reducing inflation by up to 0.3% which is speedy with the 10% decline in oil prices reducing inflation by up to 0.3% which is speedy impact (John Baffes,PRN,2015 )impact (John Baffes,PRN,2015 )

• History shows in 1980 to 2005 10% decrease in oil prices would lower inflation by History shows in 1980 to 2005 10% decrease in oil prices would lower inflation by 0.2% ( De Gregorio, Nielson 2007)0.2% ( De Gregorio, Nielson 2007)

• The pass through from declined oil prices to headline inflation appears to have The pass through from declined oil prices to headline inflation appears to have declined due less role in consumption and production. ( De Gregorio, Nielson 2007)declined due less role in consumption and production. ( De Gregorio, Nielson 2007)

• Inflation has been only temporarily affectedInflation has been only temporarily affected

FINANCIAL MARKETFINANCIAL MARKET

• A reassessment of growth prospects of oil exporting countries A reassessment of growth prospects of oil exporting countries already contributed capital outflow sharp depreciation and already contributed capital outflow sharp depreciation and negative impact from sovereign CDS(rising spreads), in several negative impact from sovereign CDS(rising spreads), in several countries like Russia, and Nigeriacountries like Russia, and Nigeria

• Rising of non performing loans those of bank is a great effectsRising of non performing loans those of bank is a great effects

FISCAL BALANCESFISCAL BALANCES

• Oil exporters – In oil exporters the middle East and Africa, oil related Oil exporters – In oil exporters the middle East and Africa, oil related revenue account for more than half of the government income (World Bank revenue account for more than half of the government income (World Bank 2015)2015)Fiscal break even prices for every export countries are rising Fiscal break even prices for every export countries are rising

• Oil Importers – In Oil importing countries saving from oil import bills can Oil Importers – In Oil importing countries saving from oil import bills can

relax government budget relax government budget

POVERTYPOVERTY

• Direct impact of falling oil prices and poverty are limited.Direct impact of falling oil prices and poverty are limited.

• More than 70% of world poor people live in oil importing countries More than 70% of world poor people live in oil importing countries will support growth and real income.will support growth and real income.

• Poorest household tend to be food producer and allied product Poorest household tend to be food producer and allied product producers, thus the poorest may see net real income losses (Ilsik-producers, thus the poorest may see net real income losses (Ilsik-Dikmelik 2008)Dikmelik 2008)

IMPACT ON INDIAIMPACT ON INDIA

• Current account balance,Current account balance,

• InflationInflation

• Oil SubsidyOil Subsidy

• Rupee Exchange rateRupee Exchange rate

CURRENT ACCOUNT IN BALANCECURRENT ACCOUNT IN BALANCE

• A fall in oil prices by 10$ per barrel help reduces current account A fall in oil prices by 10$ per barrel help reduces current account deficit by 9.2 billion.(Kotak securities, 2014)deficit by 9.2 billion.(Kotak securities, 2014)

• A fall in price would drive down the value of its imports. This helps A fall in price would drive down the value of its imports. This helps narrow India's current account deficit narrow India's current account deficit

INFLATIONINFLATION

• Oil prices effect any countries through use of it in transportationOil prices effect any countries through use of it in transportation

• The fall in oil prices global crude prices come as a boon to IndiaThe fall in oil prices global crude prices come as a boon to India

• Every 10% barrel fall in crude oil prices help to reduces retail Every 10% barrel fall in crude oil prices help to reduces retail inflation by 0.2% (money control,2014)inflation by 0.2% (money control,2014)

OIL SUBSIDY AND FISCAL DEFICITOIL SUBSIDY AND FISCAL DEFICIT

• The government fixes the prices of fuel at a subsidized rates.The government fixes the prices of fuel at a subsidized rates.

• It then compensates companies for any loss from selling fuel It then compensates companies for any loss from selling fuel product at lower prices.product at lower prices.

• A fall in oil prices reduces company losses and oil subsidy.A fall in oil prices reduces company losses and oil subsidy.

RUPEE EXCHANGE RATERUPEE EXCHANGE RATE

• The value of free currency like rupee depend on demand in The value of free currency like rupee depend on demand in currency marketcurrency market

• A high deficit mean the country has to sell rupee and buy dollar to A high deficit mean the country has to sell rupee and buy dollar to pay its bills, this reduces the value of rupeepay its bills, this reduces the value of rupee

• Indian rupee will be stronger as being a net importer(live mint)Indian rupee will be stronger as being a net importer(live mint)