why oil prices failing

18
Oil Prices: Why they are falling and its impact on World Economy and India © Hasnain Baber 2015

Upload: hasnain-baber

Post on 15-Jul-2015

358 views

Category:

Education


1 download

TRANSCRIPT

Oil Prices: Why they are falling and its impact on World Economy and India © Hasnain Baber 2015

What Crude Oil is

• Crude oil is a naturally-occurring substance found in certainrock formations in the earth.

• It is a dark, sticky liquid classified as a hydrocarbon. Thismeans, it is a compound containing mainly carbon andhydrogen.

• Crude oil is highly flammable and can be burned to createenergy.

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

Image Courtesy - http://www.news.az/photos/page-photo/133429.jpg/

© Hasnain Baber 2015

3

Increased output from Libya

Because of the civil war in Libya, oil production had decreased to 150,000 – 250,000

barrels per day. It now produces 1 million barrels a day, which may go upto 1.2

million barrels a day by next year.

2

US Oil Boom

Oil Production in the US has increased as Shale oil production has gone up to 4

million barrels per day. As such, US import of oil from OPEC has reduced by half.

1

Increased Global Supply

Global supply of oil has surpassed the global demand,

which has resulted in the fall of prices.

Why are Oil Prices Dropping?

© Hasnain Baber 2015

6

Tepid Asian Demand

Countries in Asia are reducing oil subsidies, as a result of which oil demand has

fallen, which in turn has resulted in increased oil prices, thereby, reducing demand.

5

Negative European Economic Outlook

A slowdown is expected in Eurozone economies in 2015. The growth forecast has

been cut down by IMF to 0.8% in 2014 and 1.3% in 2015.

4

OPEC Infighting

There is a rivalry among OPEC members, who are trying to lower prices to maintain

their market share

Image Courtesy - http://www.news.az/photos/page-photo/133429.jpg/

Why are Oil Prices Dropping?

© Hasnain Baber 2015

Image Courtesy - http://money.cnn.com/2014/10/30/investing/cheap-oil-prices-hurt-iran-venezuela-saudi-arabia/

On November 27, a big meeting was held by the Cartel,

and countries, like Venezuela and Iran, proposed that

the Cartel (mainly Saudi Arabia) decreases oil

production in order to maintain stability in the oil prices.

1

Just to ensure it maintains its market share, Saudi

Arabia, the world's largest oil producer, did not agree to

reducing oil production and was willing to let prices

plummet.

2

OPEC's surprising response: Let prices keep falling

© Hasnain Baber 2015

Russian budget

heavily relies on its

oil income

More than half of its

budget revenues

come from selling Oil

and Gas

The Russian

economy may go into

Recession if oil

prices keep falling

Effect of falling oil prices on Russia

Image Courtesy: http://www.kp24.fi/data/attachments/6488fd17-c93a-453c-b788-eedd292063d9_389541.jpg © Hasnain Baber 2015

High oil prices are one of the major factors affecting the Iranian economy.

Severe economic problems may result if oil prices keep falling.

Iran may decide to reach a nuclear deal with the US to ease economic sanctions.

Image Courtesy - http://www.timesofisrael.com/irans-supreme-leader-undergoes-prostate-surgery//

Effect of falling oil prices on Iran

© Hasnain Baber 2015

This will translate into

accelerated economic

growth to a

forecasted 3.5% next

year.

Falling oil prices will

cause gas prices to

go down, which will

result in increased

consumer spending.

Effect of falling oil prices on US

Image Courtesy: http://www.ulkeajans.com/images/haberler/obama_uluslararasi_toplum_gazzede_ateskes_icin_calismali_h56636.jpg

© Hasnain Baber 2015

Reduced OPEC’s global power

Benefit to Western and European

economies

Decline in oil and natural-gas

undertakings

Reduction in Commodity price

The devalue of Oman

Increase in global demand for

goods and services

Global Consequences of falling Oil Prices

© Hasnain Baber 2015

India’s Oil Import

11%

18%

5%

10%

22%

34%

Iran Saudi Arabia

Other Western Hemisphere

Africa Other Middle East

Source: Global Trade Atlas © Hasnain Baber 2015

Energy Consumption In India

24%

1%

24%

2%

42%

7%

OilNuclearCombustible Renewables and WasteOther RenewablesCoal

Source: The International Energy Agency © Hasnain Baber 2015

Consumption of Major Petroleum Products

9%

8%

36%

7%

40%

LPG Kerosene Diesel Petrol All other products

Source: Ministry of Petroleum Basic Statics © Hasnain Baber 2015

Subsidy

• India’s subsidy bill zoomed to Rs 2.16 trillion or 2.5% of GDP .

• It was due to two reason:

High Crude Oil prices

Fertilizer subsidies, primarily on account of imported non-urea fertilizers.

• Last year budget government pegged curde oil price of brent at $90. This year they kept the same at $115.

• Next year government has reduced the budgeted amount for oil subsidy to Rs43580 crore.

© Hasnain Baber 2015

Impact of increase in oil prices on growth and inflation levels in India

International oilprices per

barrel ($)

Increase ininternational

oil prices (%)

Extent of fall inmanufacturing

sector

(%)

Extent of fall inGDP growth

(%)

Extent ofincrease in WPI

(%)

50 38.9 2.1 0.4 1.5

60 66.7 9.7 1.9 3.6

70 94.2 16.9 3.4 5.7

80 122.2 24.5 4.9 7.9

140 126.1 29.7 7.3 7.2

Source:- Extractive Industries for Development Report

GDP=Private Consumption + Gross Investment + Govt Spending + ( Export – Import).

© Hasnain Baber 2015

Effects on Transportation

61%

5%

14%

7% 13%

Transport Non-Energy Other sector Electricity and Heating Industry

Source:- Report of the Working Group on Petroleum & Natural Gas Sector for the XI plan (2007-2012)

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.

© Hasnain Baber 2015

Steps taken by the govt. and RBI

What Govt. did ?

1. Provided huge amount of subsidies to oil companies to keep them solvent.

2. This increased domestic prices of diesel and petrol.

3. Start looking for alternate energy options to prevent future oil shocks.

What RBI did?

Increase in CRR, Repo rates.

(i.e. used monetary tools to calm down the heat)

© Hasnain Baber 2015

Crux

To summarize the study

When Oil prices Moves UP :

1.Inflation increases

2.Govt. spending on subsidy increases

3.Foreign currency reserves reduce

4.Our export becomes weaker

5.GDP is affected negatively

6.Share market crumbles

7.Investment decreases

© Hasnain Baber 2015