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OIL PRICE AND IT’S IMPACT

Sharoni Roy Roll # 7Mandar Lalit Roll # 10

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AGENDA

IMPORTANCE OF OIL

THE ECONOMICS OF OIL

QUALITY DETERMINATION

MAJOR OIL PRICE BENCHMARKS

OIL PRODUCERS AND CONSUMERS

OIL PRICE VOLATILITY

IMPACT OF OIL PRICES ON GLOBAL AND INDIAN ECONOMY

INDIA – HYDROCARBON VISION 2025

FUTURE TRENDS IN OIL PRICES

ALTERNATIVE ENERGY SOURCES

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OI

IMPORTANCE OF OIL

Uses Of Crude OilGasolineDieselHeating oilJet fuelBunker fuel

FibersRubberPlasticsDyesPaints

FertilizersPesticidesMedicinesFood additivesMake-up

DetergentCandlesPhotographic filmThere are more than 4000 petrochemical products

So can you imagine life without oil?

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THE ECONOMICS OF OILPr

ice

Quantity

Demand Demand Demand

Supply Supply

Quantity Quantity

Pric

e

Pric

e

Oil Supply and Demand

Both demand and supply are highly inelastic. Small changes to supply or demand curve cause large changes to the price.

Supply

The Oil shocks

Drastic reduction in supply. Rapid rise in price. Oil shocks of 1970s , oil shocks of gulf war.

Ever Increasing Demand

Rise of emerging markets. Increase in demand for oil in China and India.

Politics , Expectation , Risks and Speculation effect demand and supply of oil.

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QUALITY DETERMINATION

API gravity

Sulphur Content

Indicates how heavy or light a petroleum liquid is compared to water. API gravity greater than 10 indicates lighter oil otherwise it is considered heavier.API gravity between 40 and 45 commands the highest prices. Light crude oil is more desirable since it produces a higher yield of gasoline.

Crude oil is referred as sweet if it contains relatively low Sulphur. Crude oil is referred as sour if it contains relatively high Sulphur. While sweet oil commands a higher price because it has fewer environmental problems and requires less refining.

The Best QualityAPI Gravity - 40 to 45

Sulphur – Low (Sweet Oil)

Best quality oil demands the highest price.

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MAJOR OIL PRICE BENCHMARKS

West Texas Intermediate

North Sea Brent

DubaiFateh

It is the underlying commodity of the NYMEX oil futures contracts. It is of very high quality with an API gravity of 39.6 degrees and contains only about 0.24 per cent of sulphur. It is primarily used as a benchmark for much of the Western Hemisphere.

It is a benchmark for oil from Europe, Africa and West Asia and is traded on the ICE exchange (London). Its API gravity is 38.3 degrees, while it contains about 0.37 per cent of sulphur Brent blend is ideal for making gasoline and middle distillates.

It is a light sour crude oil extracted from Dubai. It is generally used for pricing Persian Gulf crude oil exports to Asia.

India uses NYMEX WTI as oil benchmark.

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OIL PRICE VOLATILITY

Strong demand

OPEC output Attacks in Mexico Tensions in Turkey , Iran USD depreciation

Jan 2 ,2008 - $ 100 May 09 , 2008 - $125 June 26 ,2008 - $ 140 July 11 ,2008 - $147.27

Recession

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In contrast, India consumes two-thirds more oil than its produces.America consumes a third more than domestic oil production.Although rich in natural resources, Brazil’s oil consumption outpaces its fuel production by almost 25%.

OIL PRODUCERS AND CONSUMERS

Russia produces about 240% more oil than it consumes.Mexico’s oil production was 39% greater than domestic consumptionCanada output 35% more oil than it used.China generated about 16% more oil than it consumed.

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IMPACT OF OIL PRICES ON GLOBAL ECONOMY

Impact variables : 1. Import dependency 2. Oil Intensity

Macro economic factors indicating impact - 1. GDP [ Decreases ] 2. Inflation [ Increases ] 3. Un-employment rate [ Increases ]

International capital market valuations of equity and debt in oil-importing countries would be revised downwards and those in oil-exporting countries upwards.

Importing countries creditworthiness [ Decrease ] leads to large current account deficits.

Upward pressure on interest rates due to tighter monetary policies for inflation Rise in value of USD. Stronger dollar <-> greater economic damage to developing countries.

Higher subsidies pressure government budgets, increasing political and social tensions.

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IMPACT OF OIL PRICES ON GLOBAL ECONOMY : ADVANCED COUNTRIES

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TRENDS IN IMPORT DEPENDENCY OF INDIA : OIL IMPORT DEPENDENCY

Expected to rise to 94% levels by 2030 !

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SHARE OF FUTURE ENERGY SUPPLY IN INDIA : OIL INTENSITY

Year Coal Oil Gas Hydel Nuclear

2006-07 50 32 15 2 1

2010-11 53 30 14 2 1

2024-25 50 25 20 2 3

Source: India – Hydrocarbon Vision 2025 –Ministry of Petroleum and Natural Gas, IndiaUpto 2011 from Technical Note on Energy, Planning Commission, Govt. of India (1998-99). Beyond this period the figures have been extrapolated.

Share of Future Energy Supply In India (% )

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IMPACT OF OIL PRICES ON INDIAN ECONOMY

When Oil Prices Move Up : GDP is effected negatively. Inflation increases. Government spending on subsidy increases. Exports become weak. Foreign currency reserve deplete. Share market crumbles. Investment decreases.

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INDIA HYDROCARBON VISION 2025

Focus on oil security through 100% coverage of domestic oil and gas.

Secure foreign sources sustainable long term supplies.

Meet deficit of oil by increasing Natural Gas supply and availability.

Maintain adequate levels of self-sufficiency in refining.

Establish adequate strategic storage of crude and petroleum products in different

locations.

Open up the hydrocarbon market so that there is free and fair competition.

Create a policy framework for cleaner and greener fuels.

Have a fair pricing policy.

Source : India Hydrocarbon Vision 2025, Ministry of Petroleum and Natural Gas

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FUTURE TRENDS IN OIL PRICES

Price to stabilize around $90 per barrel.

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ALTERNATE ENERGY SOURCES

Solar Energy

Wind Energy

Tidal Energy

Geothermal Energy

Nuclear Energy

Hybrid and battery electric

vehicles

Helioculture

Biomass

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THANK YOU