Chapter

Topic

PAGE No

1.

Summary of political risk

3

2.

How the prices are set

4

3.

Role of OPEC in setting oil price

5,6

4.

Analysis of prices 2003 to 2015

7

5.

Impact of political risk on oil prices

9,10

6.

5 year forecasting price

10

7.

Bibliography

13

Political Risks

As according to business point of view, for international business firm,political riskare those risks which a host nation/county will take some political turns or decisions those put directly and indirectly impact on companies profits and goals or business. we can divide these political risks in further two parts as follows

Micro risk:- it refers to unfavorable events that affects only a specific business , and industrial sector, e.g some actions towards firms from the side of other nations and corruption.

Macro risk:- It refers to all those unfavorable events which directly affects all international businesses. e.g. revolution or expropriation.

Because of these types of political risks mostly all firms have to face lose of money an assists. if the companies are not ready for these unexpected loses then at the end companies has to close their businesses. e.g. after Fidel Castro's government took control of Cuba in 1959, thousand million of dollars of American-owned properties and businesses were expropriated. unluckily, maximum American firms had no any option for receiving that lose back or money back. (Albert Phung, 2013)

Some other type of political risks are in given table as follow

Risks Types

Examples

Bribery

- Forced hiring of third party consultants for contract bids

- Unforeseen Borders 'Taxes'

Capital Control

- Limit on profit repatriation

- Administrative delay to transfer capital

Control Default

- politically- driven debt default

- politically- driven collapse to deliver on a agreement

Nationalization

- forced sale of assets to government agents on below market price

- politically- driven in state ownership of joint venture

License Cancelation

- Change to organization license to operate ahead of an election

- failure of community license to operate from lack or loss of local society

Protests/ Strikes

- industrial action and work stoppage at key suppliers

- anti-government or anti-company protest and road blocks

Regulatory Change

- composite new atmosphere or labor standards

- regularity enforcement authority handed to state owned company

Taxation

- windfall taxes levied over 'excessively high' profits

- duplicate tax claim between state and central government

War/Terrorism

- border and road closures due to interstate fights

- political motive against terrorist attacks against foreign investors

(Peter Beardshaw, 2015)

How oil price are set ?

(Alexander Cornwell, 2015)

The world's major oil producer countries meet and set the price of oil in the coming year, on the other side we also know that the price is always set by the demand and supply of oil. In past decades, the supply of oil and gas directly controlled by OPEC (Organization of Petroleum Exporting Countries) which meet and decide the production and price of oil once a year. And before that the world's advanced economies countries buy the petrol and sell further to other countries on high price. Buying and selling of crude oil to make petrol directly affects the price of petrol.

In the year of 1970 OPEC stopped sending the oil to USA and other Western because they support to Israel to rise up the oil prices.

stopped supplying oil to the US and other Western nations over their support for Israel - forcing prices up. Ever since, USA has been captivating hard work to develop into more energy self-determining. They have be converted into the world's 2nd prime oil exporter and grow their industry. One time the supply will run out completely, for the time being forcing prices too high and then building any justification of how the value was always decided completely superfluous.

(How the oil prices set? show in video and its link is below)

http://www.telegraph.co.uk/finance/oilprices/11259365/How-Opec-sets-oil-prices.html

(Oliver Duggan, 2014)

Role of OPEC in oil price setting

AS we all know that, the OPEC (Organization of the petroleum Exporting countries) was established a long time ago in 1960. OPEC is an global association with 1 oil-exporting developing nations members. these nations implements enduring independence over their restricted natural capital/ assets primarily oil, as outlined in UN resolution. they are dedicated to ensuing that these natural assets are browbeaten in levelheaded and answerable way.

In reality, the oil market circumstances based on three fundamental elements. 1st one is steady, the predictable demand of oil. 2nd is the problem or troubles on supply side of oil e.g. shortage of oil, uncertainty etc. and the last and third one is stable price range. In these market elements OPEC plays an important role to maintain the stability in oil market. OPEC has dedicated itself enthusiastically to further causes, for which logically flow of oil can make a major variation to the well being mankind and the worldwide market.

Protuberance from the suggestion of OPEC's world energy model. recommend only a minor dip to 38 % in oil market share in the year of 2020. in other words, world petroleum demand is predict to go higher from 76 million barrels per day in 2000 to 107 million barrels in 2020 and that is approximately 41%.

(Dr Alvaro Silva-Caldern, 2012)

(Tom Eizember, 2015)

Role of OPEC in oil market stability

As we all know, the unpredictability, it still affect us today, was earliest extensively apparent in 2004. and this followed a number of years of comparatively high constancy, very much optimistic by OPEC manufacture agreement of the time-period. OPEC is not relaxed with high oil prices at present. if the prices are too high or too low they are not sustainable and hold them the seeds of volatility. OPEC has been demanding to reasonable petroleum prices, even through association's authority is restricted for the reason that the high level has been due predominantly the factors away from its control. On other side, the market has remained well-supplied with crude all through the present hard stage.

The consequence come out after of all that is, with OPEC upstream capability on course to go up to around 33 million barrels per day by the end of year, next to and predictable output of 29.1 million barrels per day for the year, our additional ability should be at stage that are comfortable for the market. OPEC strategy has, certainly ensured that the movement of sufficient production and sufficient additional capacity will carry on for year to come, benefiting producers and clients similar ornamental constancy.

(Dr. Edmund M. Daukoru, 2006)

Analysis of Price from 2003 to 2015

Crude oil pricesformulate up 71% of the cost of gasoline. The remaining of what we are paying at the fuel station depends on plant and delivery costs, business earnings andfederal taxes. Generally, these overheads remain equal, so that the on a daily basis change in the value of fuel exactly reflectsoil price fluctuations.

It generally takes concerning six weeks for fuel price changes to effort their mode throughout the supply structure to the gas pump.Fuel pricesare a slightly morevolatilethan gas prices. This meansoil pricesmay go up fast and drop farther than gas prices.

Oil prices have been particularly volatile after the financial crash of 2008.

Year

Price per barrel ($)

Change in price/B

Status

2008

143.98

131.19

2009

39.41

52.60

2010

70-80

90

2011

126.31

110.25

2012

124.14

128.14

2013

115.05

118.90

2014

78

62

2015

49

67

(Kimberly Amadeo, 2015)

2015 - value of oil will drop to $49/barrel before going up to $67/barrel by the end of year.

2014 - Prices of fuel dropped to $62/barrel by the year end. The reason that the USA produced ample ofshale fuel, andOPECdidn't lower supply quotas.

2013 - Oil went up quickly to $118.90/barrel on February 8, 2013, Prices had ongoing up in advance than normal.

2012 - once more, Iran endangered to close the Straits, oil price their peak of $128.14/barrel. but again in september the price fell down and reached on $117.48 on September 14, 2012.

2011 - The oil price was unable to reach on its peak in its peak time of $126.64/barrel.

2010 - price of oil remains same within the range of $70-$80/barrel in December 2010, when they breached $90/barrel.

2009 - This time, because of gas price fell down the Oil price also fell to $39.41/barrel in February 2009.

2008 - In July 2008 the price of petroleum was on $143.68/barrel. At the same time teh price of gas was at $131.19/barrel.

(Kimberly Amadeo, 2015)

The EIA provides theaverage annual pricefor a barrel of WTI crude oil since 2000.

2003 -- $31.08

2004 -- $41.51

2005 -- $56.64

2006 -- $66.05

2007 -- $72.34

2008 -- $99.67

2009 -- $61.95

2010 -- $79.48

2011 -- $94.88

2012 -- $94.05

2013 --$97.91

2014 -- $95.60

2014 -- $89.75(Kimberly Amadeo, 2015)

(Gregory Rehmke, 2015)

Impact of Political risk on oil prices

The most important way that politics can influence price of oil is in the authoritarian logic, but it's not essentially the only technique. Characteristically, an oil and gas businesses are covered by a variety of rules and set of laws that make boundary where, when and how removal is done. This explanation of laws and policies can also vary from state to state or nation to nation. That called,political risk,usually increases when oil and gas corporations are working on deposits abroad.

Oil and gas corporations be inclined to have a preference nations with constant political systems and a the past of surrendering and enforcing continuing leases. On the other hand, few companies just go where the oil and gas is, even if a meticulous nation doesn't relatively match their preferences. Several problems might be arise from these, including unexpected nationalization or broken up political winds that vary the regulatory surroundings. It depends on what nation the oil is being extract from, the contract a firm starts with is not forever the deal it ends up with, as the government of country might change its mentality after themoneyis invested, in order to gain more revenue for itself.

Political risk can be understandable, such as in developing countries with an unbalanced authoritarianism and a history of unexpected nationalization or more slight as establish in nations that regulate foreign ownership system to assurance that domestic firms take an interest. A significant strategy that a business takes in extenuating this risk iscareful investigationand building sustainable dealings with its worldwide oil and gas associates.

(Andrew Beattie, 2014)

Traditional relationship between oil companies and host government of country

The past record of private foreign dealing on petroleum dates back to the turn of the country. European interest, particularly British interest and German interest were anxious to gain access to the promising oil reserved of the middle East.

Resource and development

Development is less than specific concept for describing the growth process and goal of states the difference between developing and developed nations comprise an array relative and absolutely measure. In contrast to develop world. Developing countries as a group tend to have less diversified, largely preindustrial economies. subsistence agriculture and single export offense are the backbone of countries economies. some other characteristics of growing economies are low per capital income, corruption, low GDP, illiteracy and high unemployment. we can say the developing is adjective for poor countries. but on the other hand developed countries are totally opposite from developing countries.

The changing relationship

the dispensation relationship largely insulated by the oil firms from political crossing point by the host government selectors. Since the inventive contract was signed, however the firms have been under stable stress to present better, more satisfying terms to the host nations.

(Howard L. Lax, n.d.)

5 Year Forecast of oil price

Oil futures, orfutures agreements, are contract to buy or sell oil at a exact date in the future at a detailed cost. Traders inoil future proposal on the value of oil based on what they think the future price will be. They look at predictable supply and demand to decide the price. If traders think demand will raise because the worldwide economy is rising, they will drive up the price of oil. This can generatehigh oil priceseven when there is abundance of supply on hand.

Oil Price Forecast 2020 and 2040 by EIA

The EIA prediction that the standard cost of a barrel of Brent crude oil might be anyplace from $69 billion per barrel to $150 billion per barrel, with the largest part probable price around $96.6 billion per barrel. That's a outcome of a considerable raise in shale oil manufacture, whichwill leisurely after 2021, contributing to a drop in total U.S. oil production through 2040.

After 2020, world requirement will start drivingoil pricesto the corresponding of $141.5 billion per barrel in 2030. The variety is between a low of $74.9 billion per barrel to $204.2 billion per barrel. By then, all the contemptible source of petroleum will have been worn out, making it more costly to extract oil.

The OECD (Organization for Economic Cooperation and Development) forecast only two years ago that the cost of Brent oil might go as high as $270 billion per barrel by 2020. It attributed this to skyrocketing requirement from China and other rising markets.

It surprised us by the idea of fuel at more than $200 billion per barrel, remember that EU clients have been paying the corresponding of concerning $250 per barrel for years, because of very high taxes. This hasn't congested the EU from being the world's 3rd largest oil consumer. As long as public have time to regulate, they will discover method to live with higher prices.

In addition, 2020 is five years away from now. Look how much cost have changed in the last 11 years. In March 2006, a barrel of Brent Crude sold for around $60 a barrel. It's skyrocketed to $145 a barrel, leveled out to around $100 a barrel, before plummeting to its current levels. If a lot of hale oil producers go out of dealing, it might be simply come back to past value levels.

(Energy Information Administration, 2015)

Bibliography

Albert Phung, 2013. What is political risk and what can a multinational company do to minimize exposure? [WWW Document]. URL http://www.investopedia.com/ask/answers/06/politicalrisk.asp (Accessed: 22 February, 2015)

Alexander Cornwell, 2015. Oil prices set for another dive, former White House adviser says | GulfNews.com [WWW Document]. URL http://gulfnews.com/business/oil-gas/oil-prices-set-for-another-dive-former-white-house-adviser-says-1.1460830 Accessed: 22 February, 2015)

Andrew Beattie, 2014. 5 Biggest Risks Faced By Oil And Gas Companies [WWW Document]. URL http://www.investopedia.com/articles/fundamental-analysis/12/5-biggest-risks-faced-by-gas-and-oil-companies.asp Accessed: 22 February, 2015)

Dr Alvaro Silva-Caldern, 2012. OPEC: OPECs role and the challenges we face in the petroleum industry [WWW Document]. URL http://www.opec.org/opec_web/en/913.htm Accessed: 22 February, 2015)

Dr. Edmund M. Daukoru, 2006. OPEC: Oil market stability: the role of OPEC [WWW Document]. URL http://www.opec.org/opec_web/en/994.htm Accessed: 22 February, 2015)

Energy Information Administration, 2015. Forecast of Crude Oil Prices [WWW Document]. URL http://useconomy.about.com/od/supply/f/crude_oil_price.htm Accessed: 22 February, 2015)

Gregory Rehmke, 2015. Astounding Ideas: Economics of U.S. Middle East Policy: Bad News for Saudis: Shale Oil Industry Is Just a Few Years Old [WWW Document]. URL http://astoundingideasmiddleeast.blogspot.ie/2015/01/shale-oil-industry-is-just-few-years-old.html Accessed: 22 February, 2015)

Howard L. Lax, n.d. Political Risk in the International Oil and Gas Industry - H.L. Lax - Google Books [WWW Document]. URL https://books.google.ie/books?id=0Vk1dETDVWkC&printsec=frontcover#v=onepage&q&f=false Accessed: 22 February, 2015)

Kimberly Amadeo, 2015. How Crude Oil Prices Affect Gas Prices [WWW Document]. URL http://useconomy.about.com/od/supply/p/oil_gas_prices.htm Accessed: 22 February, 2015)

Oliver Duggan, 2014. Video: How the price of oil is set - video explainer - Telegraph [WWW Document]. URL http://www.telegraph.co.uk/finance/oilprices/11259365/How-Opec-sets-oil-prices.html Accessed: 22 February, 2015)

Tom Eizember, 2015. An Analysis of Exxon's 2015 Energy Outlook Princeton Energy Advisors [WWW Document]. URL http://www.prienga.com/blog/2014/12/10/exxon-calls-peak-conventional-oil Accessed: 22 February, 2015)