Crude oil is a naturally-occurring substance found in

certain rock formations in the earth.

It is a dark, sticky liquid classified as a hydrocarbon. This

means, it is a compound containing mainly carbon and

hydrogen.

Crude oil is highly flammable and can be burned to

create energy.

Petroleum= Petra (Rock) + Oleum (Oil) (Latin)

Oil was formed from the remains of animals and plants

that lived millions of years ago in a marine (water)

environment before the dinosaurs. Over the years, the

remains were covered by layers of mud. Heat and pressure

from these layers helped the remains turn into what we

today call crude oil . The word "petroleum" means "rock

oil" or "oil from the earth."

Crude Oil and Commodity PricesMarch, Wednesday 11 2015 - 13:50:46

WTI Crude Oil Brent Crude Oil

$48.29 ▼-1.71 -3.54% $56.39 ▼-2.14 -3.79%

Price of oilThe price of oil, or the oil price, generally refers to the spot price of a barrel of benchmark crude oil.

The demand for oil is highly dependent on global macroeconomic conditions. According to the International Energy Agency, high oil prices generally have a large negative impact on global economic growth.

Organization of the Petroleum Exporting Countries (OPEC)

The Organization of the Petroleum Exporting Countries(OPEC) was formed in 1960 to try to counter the oil companies cartel, which had been controlling posted prices since the so-called 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972.

Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela

Benchmark pricingAfter the collapse of the OPEC-administered

pricing system in 1985, and a short lived experiment

with netback pricing, oil-exporting countries adopted

a market-linked pricing mechanism. First adopted by

PEMEX in 1986, market-linked pricing received

wide acceptance and by 1988 became and still is the

main method for pricing crude oil in international

trade. The current reference, or pricing markers, are

Brent, WTI, and Dubai/Oman.

Brent Crude is a major trading classification of

sweet light crude oil that serves as a major

benchmark price for purchases of oil worldwide. This

grade is described as light because of its relatively

low density, and sweet because of its low sulfur

content. Brent Crude is extracted from the North Sea.

The other well-known classifications (also called

references or benchmarks) are the OPEC Reference

Basket, Dubai Crude, Oman Crude, Urals oil and

West Texas Intermediate (WTI).

There have been successive price regimes since the beginnings of the 20th Century:Between 1930 and 1970, it was the so called “seven sisters pricing regime”, where the prices where controlled and posted by oil companies.

Then, until 1985, the prices were controlled by the producing countries, a period known as the Organization of Petroleum Exporting Countries (OPEC) pricing regime.

After a short period of netback pricing regime (crude oil price was tied to the price of refined products), the reference pricing regime was adopted, this is the system that we still use today.

In 2014, a number of events will go down in history as

major, market-moving events. From an economic viewpoint,

though, perhaps no other event will have a more significant

and long-lasting impact than the collapse of oil prices.

At this time last year, oil was trading well above $100 per

barrel. Last week, the price of a barrel of West Texas

Intermediate oil traded at less than $50.

Over the years, oil prices have fluctuated. The last two

major oil price declines were driven by central bank policy

errors – monetary contractions which led to global economic

recessions.

During an economic recession, the world economic activity

contracts and demand for oil declines.

When demand for any commodity contracts, prices decline. The

current oil price decline is not accompanied by an economic growth

contraction.

It’s the first of this type of decline the world has seen in many

decades. The current oil price decline isn’t being driven by a decline

in demand, instead it’s being driven by an increase in supply.

With technological advancements, oil can now be coaxed out of the

ground. The amount of oil which can be squeezed from rock shale

deposits is stunning.

Oil production in the United States and Canada is now

outstripping production in Saudi Arabia. Last year, when the Saudi’s

announced they were not cutting production to “defend” prices,

market activity moved oil prices downward.

Technological changes tend to be long-lasting and ongoing.

“Moore’s Law” refers to the computer industry and states that

the number of transistors in an integrated circuit doubles very

two years. We’ve seen massive efficiency and productivity

improvements in the computers we use. Once made, changes

driven by technological advancements –irrespective of the

industry — tend to continue.

These changes are nothing new. They represent the latest

cyclical “bust” in oil prices, continuing the long-wave cycle of

booms and busts the industry experienced in the past.

The world’s annual Global Economic Output (GDP) was $69

trillion as of last summer. According to the Oil Market Intelligence

report, the world’s consumers of oil bought $3.8 trillion (when prices

were at $100 per barrel) of oil to produce that $75 trillion of

economic output. With oil at $50 per barrel, that same production

can occur with an energy “cost” of $1.9 trillion. This represents a

production “savings” of $1.9 trillion, or 2.73 percent of global GDP.

Now, this isn’t to say that global GDP will be 2.73 percent higher

due to the oil price decline, but rather the economic growth of nations

consuming oil will benefit mightily at the expense of oil-producing

nations.

In June 2014, the price of Brent crude was up around $115 per

barrel. As of January 23, 2015, it had fallen by more than half, down

to $49 per.

For much of the past decade, oil prices have been high — bouncing

around $100 per barrel since 2010 — because of soaring oil

consumption in countries like China and conflicts in key oil nations

like Iraq. Oil production in conventional fields couldn't keep up with

demand, so prices spiked.

High prices spurred companies in the US and Canada to start drilling

for new, hard-to-extract crude in North Dakota's shale formations and

Alberta's oil sands. Then, over the last year, demand for oil in places

like Europe, Asia, and the US began tapering off, thanks to weakening

economies and new efficiency measures.

By late 2014, world oil supply was on track to rise much

higher than actual demand.A lot of unused oil was simply

being stockpiled away for later. So, in September, prices

started falling sharply.

As prices slid, many observers waited to see whether

OPEC, the world's largest oil cartel, would cut back on

production to push prices back up. (Many OPEC states,

like Saudi Arabia and Iran, need higher prices to balance

their budgets.) But at its big meeting last November,

OPEC did nothing. Saudi Arabia didn't want to give up

market share and refused to cut production — in the hopes

that lower prices would help throttle the US shale boom.

That was a surprise. So oil went into free-fall.

Crude oil price move up or down, inflation

follows in the same direction.

Crude oil price increases, it’s directly

affects the rate inflation. When the prices

went to high of more than $100/barrel in

2008, the inflation also went up to 12.27%

which was highest for India in previous two

decade.

Effects on Transportation

61%

5%

14%

7%13%

Transport Non-Energy

Other sector Electricity and Heating

The transport sector is clearly dominant in

petroleum product consumption.

Transport sector consumes 60% of total

petroleum products.

Road transport accounts for an even higher

percentage of energy consumption

Oil is not only a physical commodity bought, sold and traded on

global markets; it has also become an important financial asset since

the USA and the world began liberalized trading of oil commodity

futures (i.e. a financial security) in the late 1990s on a global scale.

Just as declines in oil spills over to declines of other physical

commodities (e.g. copper, iron ore, gold, etc.), oil financial securities

(i.e. oil commodity futures) price deflation can also ‘spill over’ to

other financial assets, causing their decline as well, in a ‘chain like’

effect.

‘financial asset chain effect’ could arise if oil prices continued to

decline below USD$60 a barrel.

That would represent a nearly 50 percent deflation in oil prices

that could potentially set in motion a more generalized global

financial instability event, possibly associated with a collapse of the

corporate junk bond market in the USA that has fueled much of USA

shale production.

Saudi Arabia and its neocon friends in the USA are targeting both

Iran and Russia with their new policy of driving down the price of

oil. The impact of oil deflation is already severely affecting the

Russian and Iranian economies.

In other words, this policy or promoting global oil price deflation

finds favor with significant political interests in the USA, who want

to generate a deeper disruption of Russian and Iranian economies for

reasons of global political objectives. It will not be the first time that

oil is used as a global political weapon, nor the last.

Oil consumption in India

Imports and domestic oil production in India

Market Share of Oil and Gas Companies

28%

22%20%

18%

11%

1%

Market Share of Oil and Gas Companies

IOCL

ONGC

Reliance

HPCL

BPCL

The Petroleum Act to control issues relating to

import, transport, storage, production, refining

and blending of petroleum was already in place

since 1934.

Further, the Oil Fields (Regulation and

Development) Act, 1948 and the Petroleum and

Natural Gas Rules, 1959 provided regulatory

framework for domestic exploration and

production of Oil & Gas.

Crude oil is healthy and needed for several reasons.

The big oil and gas companies have been taking

advantage of us with their ridiculously high gas prices

over the last seven years. And the cut in their share

price should be great for investors. This allows them

to build or re-enter new positions at a better price with

a higher dividend yield. The Indian oil and gas

sector is one of the six core industries in India

and has very significant forward linkages with

the entire economy.

When Oil prices Moves UP :

Inflation increases

Govt. spending on subsidy increases

Foreign currency reserves reduce

Our export becomes weaker

GDP is affected negatively

Share market crumbles

Investment decreases