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• 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
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• 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.
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• 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.
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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
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• 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.
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• 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.
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• 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.
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•
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
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• US $
• Geo Political Factors
• Natural Phenomenon
• Subsidies and Price Control
• Speculators
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• 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.
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• 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.
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