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Analysis of the invention of synthetic oil on different countries

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Global Markets

  1. 1. Assessing Impact of a Future Development on Market Performance The Effect of the Discovery of Synthetic Oil on the Russia, South Africa & China markets Go Isobe Takuro Minami Benjamin Carrion Schafer Johan Westblad
  2. 2. The Discovery of Synthetic Oil <ul><li>May 31, 2010 </li></ul><ul><ul><li>Nicolas Flamel, Professor of organic chemistry at McGill University </li></ul></ul><ul><ul><li>Discovery of equivalent substitute to crude oil which is inexpensive to produce </li></ul></ul><ul><ul><li>Published globally, easily reproducible </li></ul></ul><ul><li>2011 </li></ul><ul><ul><li>Industrial production possible </li></ul></ul><ul><li>2013 </li></ul><ul><ul><li>Each country energetically self-sufficient </li></ul></ul><ul><li>2015 </li></ul><ul><ul><li>Competitive advantages in production for certain countries, trade patterns emerging </li></ul></ul>
  3. 3. Economic Impact <ul><li>2010 </li></ul><ul><ul><li>Volatility in oil price </li></ul></ul><ul><ul><li>Stock markets rise in oil importing countries / fall in oil exporting countries </li></ul></ul><ul><li>2011-2012 </li></ul><ul><ul><li>Oil importing countries booming -> Inflation increase -> Higher interest rates </li></ul></ul><ul><ul><li>Oil/gas companies going bankrupt, transforming -> Currency depreciation in oil exporting countries as capital leaves the countries. Countries with diversified economies performing better </li></ul></ul><ul><li>2012-2013 </li></ul><ul><ul><li>Oil exporting countries suffering immensely. Policies implemented to transform economies to other sectors </li></ul></ul><ul><li>2014-2015 </li></ul><ul><ul><li>Export of synthetic oil by efficient producing companies </li></ul></ul>
  4. 4. Geopolitical Impact <ul><li>2010-2012 </li></ul><ul><ul><li>Civil unrest in Arabic countries </li></ul></ul><ul><ul><li>Saudi Arabia toppled by a sunni religious group </li></ul></ul><ul><li>2012-2013 </li></ul><ul><ul><li>War breaks out between Iran, Iraq and Saudi-Arabia </li></ul></ul><ul><ul><li>Russia expanding territory into neighboring countries </li></ul></ul><ul><ul><li>Venezuela “rescued” by Colombia </li></ul></ul><ul><li>2014-2015 </li></ul><ul><ul><li>China, US and other net oil importing countries trying to stabilize situation in the Middle East </li></ul></ul>
  5. 5. Social Impact <ul><li>2010-2012 </li></ul><ul><ul><li>Social unrest in countries dependent on oil exports, especially in the Middle East and Russia </li></ul></ul><ul><ul><li>Most countries enjoy increased living standards </li></ul></ul><ul><li>2012-2014 </li></ul><ul><ul><li>Mass exodus from the Middle East to neighboring countries and Europe </li></ul></ul><ul><li>2014-2015 </li></ul><ul><ul><li>Social tensions arise in Europe </li></ul></ul>
  6. 6. Technological Impact <ul><li>2010-2012 </li></ul><ul><ul><li>Investments in renewable sources of energy and green technology to counter synthetic oil’s harmful properties </li></ul></ul><ul><li>2012-2013 </li></ul><ul><ul><li>Synthetic oil producing companies invest in more efficient production methods and R&D </li></ul></ul><ul><li>2014-2015 </li></ul><ul><ul><li>Some breakthroughs in alternative energies and green technologies although still long way to market </li></ul></ul>
  7. 7. Economic Facts
  8. 8. World Energy Sources <ul><li>Petroleum largest energy source </li></ul>Source: Energy Information Administration Annual Energy Review 2008
  9. 9. Figures and Facts Rank Consumption Production Export Import 1 United States Saudi Arabia Saudi Arabia United States 2 China Russia Russia Japan 3 Japan United States Norway China 4 India Iran Iran Germany 5 Russia China United Arab Emirates South Korea 6 Germany Canada Venezuela France 7 Brazil Mexico Kuwait India 8 Saudi Arabia United Arab Emirates Nigeria Italy 9 Canada Kuwait Algeria Spain 10 South Korea Venezuela Mexico Taiwan 11 Mexico Norway Libya Netherlands 12 France Brazil Iraq Singapore 13 Iran Iraq Angola Thailand 14 United Kingdom Algeria Kazakhstan Turkey 15 Italy Nigeria Canada Belgium
  10. 10. Cumulative Oil & Gas Wealth Transfer International Energy Agency IEA
  11. 11. IAPM E[r i ] = rf + β iw x (E[r w ] – rf) + ΣSRP j x γ j Assumption: PPP holds in the long run estimate  FX risk premium =0
  12. 12. Impact of Synthetic Oil Discovery on Russia China South Africa
  13. 13. Economic Overview <ul><li>High economic growth potential </li></ul><ul><ul><li>Workshop of the world </li></ul></ul><ul><li>Large oil importer </li></ul><ul><ul><li>11% of total imports </li></ul></ul><ul><ul><li>Increasing oil demand constrains growth </li></ul></ul><ul><li>Capital account surplus </li></ul><ul><li>CN pegged to US$ </li></ul>
  14. 14. Economic Impact Indicators Description Initial impact Market surge as the economy can grow further with synthetic oil Currency Unlikely to discontinue currency pegging Correlation with world portfolio Higher Volatility Less Beta Closer to 1.0 (from 1.07) Integration Higher Subsequent impact More integrated to the world equity market
  15. 15. Initial Impact <ul><li>Market surge as the economy can grow further with synthetic oil </li></ul><ul><ul><li>A constraint, domestic demand/surplus gap of oil, removed </li></ul></ul><ul><ul><li>Ample resources for investment in synthetic oil production </li></ul></ul><ul><ul><ul><li>Labor, land, capital account surplus </li></ul></ul></ul><ul><ul><li>Higher percentage in market capitalization </li></ul></ul><ul><li>Unlikely to discontinue currency pegging </li></ul><ul><ul><li>Gamma is zero </li></ul></ul>
  16. 16. Medium Term Impact <ul><li>Beta moves from 1.07 to 1.0 </li></ul><ul><li>More integrated to the world equity market </li></ul><ul><ul><li>China plays bigger role in the world economy </li></ul></ul><ul><ul><li>Higher percentage in market capitalization </li></ul></ul>β China World = ρ China World x σ China / σ World
  17. 17. Medium Term Impact E[r China ] = rf + β China World x (E[r World ] – rf) = 3.69% + 1.0 x (7.67% - 3.69%) = 7.67% (down from 7.95%)
  18. 18. Economic Overview <ul><li>Rich Natural Resource </li></ul><ul><li>Oil import > Coal export </li></ul>
  19. 19. Economic Impact South Africa Initial impact Positive impact as an oil importer Currency Appreciated with less import of oil (better positive current account) Correlation with world portfolio Remain high Volatility Less Beta Closer to 1.0 Integration Remains high Subsequent impact Due to the big coal/energy economy, there may be some lag to catch up with the improvement .
  20. 20. Initial Impact on South Africa <ul><li>Less cost to produce and export mineral with synthetic oil </li></ul><ul><li>Expected delay in shifting from coal to synthetic oil </li></ul><ul><li>Continue to capital inflow for mineral </li></ul><ul><li>⇒ Assumed to be Neutral </li></ul>
  21. 21. Medium Term Impact β SA World = ρ SA World x σ SA / σ World <ul><li>No Major Change in Integration </li></ul><ul><li>There are mixed impacts on South Africa, resulting in no significant impact </li></ul>
  22. 22. Middle Term Impact E[r SA ] = rf + β SA World x (E[r World ] – rf) = 3.69% + 1.23 x (7.67% - 3.69%) = 8.59% (no notable change)
  23. 23. Economic Overview <ul><li>Heavily dependent of oil/gas industry (50% of export) </li></ul><ul><li> Dutch disease </li></ul>Russian market index (RSX) vs. S&P GSCI Crude Oil Total Return Index ETN
  24. 24. Economic Impact Indicators Description Initial impact Market downturn as the economy heavily depends on oil/ gas Currency Huge devaluation (sell of Russian assets by foreign investors) Correlation with world portfolio Lower Volatility Higher Beta Lower than 1 (1.71 to 0.5) Integration Lower integration (ADRs disappear), capital restrictions, political and social uncertainties. Subsequent impact After the downturn risk mostly lies in geopolitical and other diversifiable risk. Rubble depreciation makes exports cheaper, but industries not competitive
  25. 25. Medium Term Impact <ul><li>βRussia World = 0.5 from 1.71 </li></ul><ul><li>As Russia becomes less integrated (Lukoil, Gazprom ADRs will dissapear), capital restrictions due to economic downturn, political and social instabilities </li></ul><ul><li> attractive market for international investors that can diversify the local risk </li></ul>E[r Russia ] = rf + β Russia|World x (E[r World ] – rf) = 3.69% + 0.5 (7.67% - 3.69%) = 5.68% (down from 10.5%)
  26. 26. Schafer, Westblad, Minami, Isobe (2010) <ul><li>This paper addresses the impact of the unexpected event of discovering an inexpensive method to produce syntethic oil and it analysis from the point of view of an heavily oil import depedent country (China), an heavily oil export dependent country (Russia) and moderately oil import dependent country (South Africa). The results shows that the oil exporting country will be impacted strongly in contrast with the oil importing countries, which will naturally benefit from being energically independent and having an infinite source of cheap energy. </li></ul><ul><li>  </li></ul><ul><li>The expected return on each of the countries before the event occurred were 10.5% for Russia, 7.95% for China and 8.59% for South Africa. After the event, the figures for China and Russia will change to 5.68% and 7.67% respectivelly, but that for South Africa will remain 8.59%. </li></ul><ul><li>Although this case is highly unrealistic it helps to understand the implications of the oilprice volatility on the global and local markets as well as the impact of new sources of energy. The paper also underlines the importance that energy resources, especially oil has on different economies. </li></ul>