Galloping Oil Prices

7/31/2019 Galloping Oil Prices

http://slidepdf.com/reader/full/galloping-oil-prices 1/17



• Dubbed as “black gold”

• Plays a vital role in the production and distribution of a large

number of products that are being used everyday either directly orindirectly.

• Viewed as a source of energy, the percentage share of oil in the total

world energy mix was about 36.4% in the year 2005.

• The importance of oil stems from the fact that oil is a non-renewable

finite resource



• Fluctuations in the demand, supply and price of oil can have

far-reaching consequences on the functioning of the global economy

• Price of oil has been rising steeply since 2003 and it reached a high

of $147 per barrel in July 2008

• It has been argued that unlike other commodities, the pricing of oil

does not always comply with the laws of demand and supply

• A complex combination of macro-economic, geo-political and

environmental factors plays a crucial role in determination of the

price of oil.



• Largest markets: London, New York and Singapore

• Quality of crude oil is determined on the basis of its specific

gravity and sulphur content which in turn depends on the place

from where it has been extracted

• Lesser Density less Processing, High Density higher

Processing of refining required to convert it to END

PRODUCT.

• 1980s : For sake of convenience in trading and pricing of

crude oil in the international market.



BENCHMARKING

• The price of the benchmark crude oil is taken as the baseline price on the

basis of which the price of other varieties is fixed according to theirquality in relation to the benchmark.

• Benchmark in the gulf region – DUBAI

• West Texas Intermediate (WTI) is the benchmark used in the United

States

• Popular benchmark is the OPEC basket price which takes into account theaverage of 15 different crudes from member countries which include the

Saharan Blend

• London's International Petroleum Exchange is generally accepted to be the

world benchmark



• Recent swell in oil prices is indeed the result of the existence of agap between supply and demand factors.

• When the price of oil reaches a point which the market will nolonger be able to bear, demand will automatically come down.

• On the other hand, claim that the disparity between theory and

practice is too wide in the case of oil and hence oil is an exception

to the rule and does not always obey the laws of demand and

supply.



• OPEC was created with the objective of achieving price stability in

the oil market by adjusting output according to market requirement

and at the same time ensuring that the oil producing countries get a

fair rate of return for their investment. Other oil producing nations

joined OPEC as members in subsequent years.

• Before 1960, the production and distribution of oil in the world

market was largely controlled by the „Seven Sisters‟.

Seven Sisters is a term coined by the Italian oil magnate Enrico

Mattei to refer to the seven international oil companies

who dominated the world oil market.



• OPEC has been playing a crucial role in bringing about a balance

between demand and supply, by adjusting production

• Oil prices are extremely inelastic in the short run.

• Cross elasticity of demand is also nil in the case of oil as there is

no affordable substitute for it.

• If there is a sharp decline in the price of oil, demand will not rise

dramatically due to storage considerations on the part of

consumers.



•

Futures Market is where oil is traded only on paper. Nota single drop of oil need be handled by the traders in the

futures market.

• The two important markets in which oil is traded in

paper barrels are the New York Mercantile Exchange inNew York where the West Texas Intermediate crude is

traded and the International Petroleum Exchange in

London.

• The actual users of oil such as refineries, airline

companies, etc trade in the futures market to minimize

the risk attached to the volatility of crude prices



• US $

• Geo Political Factors

• Natural Phenomenon

• Subsidies and Price Control

• Speculators



• The effect on individual economies will be either positive or

negative depending on whether the country is a net exporter or

importer of oil .

• Governmental intervention in the form of subsidies and price

controls prevent the oil market from attaining equilibrium

through the automatic adjustment of market forces.

• Economists are unanimous in their opinion that oil price shocks

can be avoided only when the price is determined by the free

play of market forces and the same is fully passed on to the

consumers without any subvention.



• In countries which predominantly subsidies oil and gas prices,the rich who own big cars and fly frequently and the highly

energy-intensive companies are the ones who are greatly

benefited by the subsidies.

• Environmentalists feel that the vertical movement of oil prices

has its own advantages.

It has created awareness among people about the peak oil

concept and the need for conserving oil. the present crisis is an excellent opportunity to educate people

about the advantages of using oil prudently.

accelerated the pace of research and development in

alternative forms of energy such as wind, solar, biofuels, etc.

Galloping Oil Prices

Documents

Transcript of Galloping Oil Prices