OIL CONCERNS Major Factors Causing Oil Price Fluctuations Aminata Ka Hassana Issoufou Adam Abdullah Khan Isabell Schulz 14/11/07 International Economics

Why Concentrate On Oil Issues? Oil is a natural resource that represents our premier source of energy Black gold as it is referred, this resource has been behaving with fairly volatile prices And factors of change being both predictable and unpredictable May 2004: The price of oil hits $40 per barrel. OPEC has raised oil production but not enough to outweigh the uncertainty created by the threat of terrorism in oil-producing countries, the high demand for oil, and the low U.S. oil inventories. The increasingly gloomy fate of Yukos in Russia, responsible for two per cent of the world's oil supply, further destabilizes markets. October 2004: The price of oil hits over $50 after a general workers strike in Nigeria and low crude output in the Gulf of Mexico in the aftermath of hurricane Ivan. July 2005: The price of oil hits over $60. Analysts say it's fuelled by increased demand, especially in China, and limited U.S. refining capacity. The tension over Iran's nuclear program causes more market jitters. The only OPEC country with spare production capacity is Saudi Arabia. August 2005: Oil prices top $70 US a barrel after hurricane Katrina hits the eastern coast of the Gulf of Mexico. Katrina squeezes oil inventories by disrupting offshore drilling. January 2006: After a drop in the fall, prices surge back to more than $65 US a barrel as tension mounts in oil producers Iran and Nigeria. The United Nations ponders sanctions against Iran for its nuclear program, while militants block Nigeria's oil supply. April 2006: Oil futures rise to more than $70 US a barrel again, after reports from the U.S. that gasoline inventories are down more than expected. Unrest in Nigeria and uncertainty about the international reaction to Iran's nuclear program also affect prices.

Oil is a natural resource that represents our premier source of energy

Black gold as it is referred, this resource has been behaving with fairly volatile prices

And factors of change being both predictable and unpredictable

May 2004: The price of oil hits $40 per barrel. OPEC has raised oil production but not enough to outweigh the uncertainty created by the threat of terrorism in oil-producing countries, the high demand for oil, and the low U.S. oil inventories. The increasingly gloomy fate of Yukos in Russia, responsible for two per cent of the world's oil supply, further destabilizes markets.

October 2004: The price of oil hits over $50 after a general workers strike in Nigeria and low crude output in the Gulf of Mexico in the aftermath of hurricane Ivan.

July 2005: The price of oil hits over $60. Analysts say it's fuelled by increased demand, especially in China, and limited U.S. refining capacity. The tension over Iran's nuclear program causes more market jitters. The only OPEC country with spare production capacity is Saudi Arabia.

August 2005: Oil prices top $70 US a barrel after hurricane Katrina hits the eastern coast of the Gulf of Mexico. Katrina squeezes oil inventories by disrupting offshore drilling.

January 2006: After a drop in the fall, prices surge back to more than $65 US a barrel as tension mounts in oil producers Iran and Nigeria. The United Nations ponders sanctions against Iran for its nuclear program, while militants block Nigeria's oil supply.

April 2006: Oil futures rise to more than $70 US a barrel again, after reports from the U.S. that gasoline inventories are down more than expected. Unrest in Nigeria and uncertainty about the international reaction to Iran's nuclear program also affect prices.

2006 Oil Data

Where are the World’s oil reserves? (Both OPEC and Non OPEC Members)‏

What Causes Oil Price Fluctuations? Basics of Supply and Demand Like any other market, the oil market is governed by the market demand and supply. For instance emerging countries such as China and India, have joined the US in the top oil consuming nations causing demand to stretch supply, sometimes exceeding it. The OPEC cartel on its part has been imposing production quotas in order to keep high profits in trying to control the market Non OPEC members have minimal impacts on world oil prices

Basics of Supply and Demand

Like any other market, the oil market is governed by the market demand and supply.

For instance emerging countries such as China and India, have joined the US in the top oil consuming nations causing demand to stretch supply, sometimes exceeding it.

The OPEC cartel on its part has been imposing production quotas in order to keep high profits in trying to control the market

Non OPEC members have minimal impacts on world oil prices

Growing World Energy Demand *Data projection from 2004 to 2030

Example of growing oil demand

What causes oil price fluctuations? (Cont’d)‏ War Strikes (labor disputes)‏ Halting Transport From oil producers Bad Weather Accidents And Natural disasters Market speculations Taxes Price of Oil

Oil in Geopolitics Reasons for price fluctuations are also political Many oil producing countries find themselves exposed to political risk due to instability (Ex: Sudan, Iran, Nigeria)‏ Oil has been used as a mean of leverage in order to attain political or economic objectives (ex: Russia)‏ It has also increased the power relations among nations

Reasons for price fluctuations are also political

Many oil producing countries find themselves exposed to political risk due to instability (Ex: Sudan, Iran, Nigeria)‏

Oil has been used as a mean of leverage in order to attain political or economic objectives (ex: Russia)‏

It has also increased the power relations among nations

Common Problems in Nigeria Affecting Oil -> Leading oil exporter in Africa -> 11th largest producer of crude oil in the world -> 5th biggest source of U.S oil imports Poverty most people are struggling to survive on less than $1 a day Social, Political and Economical Instabilities difficult country to govern and control 300 different ethnic groups

-> Leading oil exporter in Africa

-> 11th largest producer of crude oil in the world

-> 5th biggest source of U.S oil imports

Poverty

most people are struggling to survive on less than $1 a day

Social, Political and Economical Instabilities

difficult country to govern and control

300 different ethnic groups

Common Problems (contd)‏ Difference between Muslims and Christians divided into communities and trying to impose their belief into their legal system Governed by military Presence of multinational oil companies also affect local economy and society ex: Shell

Difference between Muslims and Christians divided into communities and trying to impose their belief into their legal system

Governed by military

Presence of multinational oil companies also affect local economy and society

ex: Shell

Angola’s Political, Economical, Social Problems and Paradox Important producer, oil was protected from civil war for 30 years because most oil deposits are off shore. In fact: -> Absence of any other viable political party -> Government policies wanted all enterprises under state's control -> The economy is slowing down , except for oil sector

Important producer, oil was protected from civil war for 30 years because most oil deposits are off shore.

In fact:

-> Absence of any other viable political party

-> Government policies wanted all enterprises under state's control

-> The economy is slowing down , except for oil sector

contd -> Oil revenue are used to subsidize consumption or invested in enterprises that become viable -> Oil have been spent financing war and lining the government’s pocket -> The oil installations was usually sabotaged -> An independence movement has been operating in the major oil producing areas -> Agriculture has been undermined by the fighting and mines

-> Oil revenue are used to subsidize consumption or invested in enterprises that become viable

-> Oil have been spent financing war and lining the government’s pocket

-> The oil installations was usually sabotaged

-> An independence movement has been operating in the major oil producing areas

-> Agriculture has been undermined by the fighting and mines

Increase of Oil Spring and summer 2005 -> $50/barrel Winter 2005 – 2006 increase -> $ 60.30/barrel -> violence in Nigeria -> Iran’s friction with the west Spring and summer 2006 increase -> $ 79/barrel -> Hostilities in Nigeria alone have caused a supply disruption, only 26% was produced

Spring and summer 2005

-> $50/barrel

Winter 2005 – 2006 increase

-> $ 60.30/barrel

-> violence in Nigeria

-> Iran’s friction with the west

Spring and summer 2006 increase

-> $ 79/barrel

-> Hostilities in Nigeria alone have caused a supply disruption, only 26% was produced

Increase of Oil (contd)‏ Last summer 2006 decreases -> $ 66/ barrel Spring / summer 2007 increases -> $ 73.93/ barrel -> Based on civil unrest in Nigeria

Last summer 2006 decreases

-> $ 66/ barrel

Spring / summer 2007 increases

-> $ 73.93/ barrel

-> Based on civil unrest in Nigeria

Proven crude oil reserves: 87.04 billion barrels Fifth largest oil producer largest reserves of conventional oil in the western hemisphere largest reserves of non-conventional oil in the world Current production: 3.1 million bbl/d Crude oil exports 1.735 million bbl/d Oil products -> 90% of exports (30% of GDP)‏ Facts Concerning Venezuelan Oil Production

Proven crude oil reserves: 87.04 billion barrels

Fifth largest oil producer

largest reserves of conventional oil in the western hemisphere

largest reserves of non-conventional oil in the world

Current production: 3.1 million bbl/d

Crude oil exports 1.735 million bbl/d

Oil products -> 90% of exports (30% of GDP)‏

Venezuela Strike in 2002/03 at PDVSA Immediate production dropped from 3 million bbl/d to 600,000 bbl/d December 2002 increase by 48 cents to $28.92/bbl Political Situation -> unstable flow of oil re-election December 2006 Control 60% of the multinational-dominated Orinoco enterprises Diversification as a new strategy

Strike in 2002/03 at PDVSA

Immediate production dropped from 3 million bbl/d to 600,000 bbl/d

December 2002 increase by 48 cents to $28.92/bbl

Political Situation -> unstable flow of oil

re-election December 2006

Control 60% of the multinational-dominated Orinoco enterprises

Diversification as a new strategy

Venezuela – Politicisation of Oil Reduce dependence from abroad OPEC promoting government-to-government ties strengthening OPEC First South American Energy Summit 2000 Price band: $22 - $28 per barrel Re-nationalisation of PDVSA Discount-price for Caribbean countries Control of companies in Orinoco oilfields

Reduce dependence from abroad

OPEC

promoting government-to-government ties

strengthening OPEC

First South American Energy Summit 2000

Price band: $22 - $28 per barrel

Re-nationalisation of PDVSA

Discount-price for Caribbean countries

Control of companies in Orinoco oilfields

China's Increasing Demand for Oil Second largest oil consumer 8% economic growth rate for next 5 years Fixed exchange rate against USD 2003 40% of world oil demand growth over past 4 years Consumption 5.6 million bbl/d 2025 Consumption of 12.8 million bbl/d Net imports of 9.4 million bbl/d

Second largest oil consumer

8% economic growth rate for next 5 years

Fixed exchange rate against USD

2003

40% of world oil demand growth over past 4 years

Consumption 5.6 million bbl/d

2025

Consumption of 12.8 million bbl/d

Net imports of 9.4 million bbl/d

China's Increasing Demand for Oil Supply/demand imbalance M ↑ Global Campaign Co-operations with foreign oil producers African countries (10% of world oil production)‏ Increasing dependence on Middle Eastern oil

Supply/demand imbalance

M ↑

Global Campaign

Co-operations with foreign oil producers

African countries (10% of world oil production)‏

Increasing dependence on Middle Eastern oil

Venezuela – China Agreement Supply to China 1 million bbl/d by 2012 15% of China's present consumption of oil One third of Venezuela's current oil production Future CNPC activities increasing in Orinoco Strip Build refineries in China Joint enterprise

Supply to China

1 million bbl/d by 2012

15% of China's present consumption of oil

One third of Venezuela's current oil production

Future

CNPC activities increasing in Orinoco Strip

Build refineries in China

Joint enterprise

Oil as a Political Weapon: Russia World’s largest non-OPEC producer 2 nd largest oil exporter Russia-Belarus Dispute Oil price increase to $57,17/bbl (from $55/bbl)‏ Outcome $100 per 1000 m³ of gas Sell Gazprom 50% of national gas supplier Beltransgaz Gradual increase market price by 2011 Transit fees increase by around 70%

World’s largest non-OPEC producer

2 nd largest oil exporter

Russia-Belarus Dispute

Oil price increase to $57,17/bbl (from $55/bbl)‏

Outcome

$100 per 1000 m³ of gas

Sell Gazprom 50% of national gas supplier Beltransgaz

Gradual increase market price by 2011

Transit fees increase by around 70%

Oil Price Increase of 2005-2007

2007 at a Glance Pipeline Disruptions Tensions in Turkey No Oil Productions & Exporting Cartels Act OPEC decreases production

Pipeline Disruptions

Tensions in Turkey

No Oil Productions & Exporting Cartels Act

OPEC decreases production

Effects Expected recession of the early 80s Apache and Conoco-Phillips rose sharply Dollar value, exchange rates and metals Europe, prices of transport fuels are made up of the price of the refined product, plus a substantial tax element Oil shortage in Asia prior to Hurricane Katrina

Expected recession of the early 80s

Apache and Conoco-Phillips rose sharply

Dollar value, exchange rates and metals

Europe, prices of transport fuels are made up of the price of the refined product, plus a substantial tax element

Oil shortage in Asia prior to Hurricane Katrina

Effects (contd)‏ Oil prices & Developing Countries Zimbabwe, Eritrea and Tanzania with higher prices Hugo Chávez Strategy Boom in Persian Gulf States and Eurasian Arab-Islamic regions

Oil prices & Developing Countries

Zimbabwe, Eritrea and Tanzania with higher prices

Hugo Chávez Strategy

Boom in Persian Gulf States and Eurasian Arab-Islamic regions

What Would $120/barrel Mean? Demand Effects Spending Power would fall Supply Effects Company Profit Margin fall Policy Effects Price wage spiral Effects on Confidence & Financial MKT Psychology Higher prices hurt consumer confidence & investor confidence

Demand Effects

Spending Power would fall

Supply Effects

Company Profit Margin fall

Policy Effects

Price wage spiral

Effects on Confidence & Financial MKT Psychology

Higher prices hurt consumer confidence & investor confidence

Are We Looking Into Alternatives For Oil? Other sources of energy include: Hydro-electric power Wind and wave power Solar power Biofuels (ethanol: made from corn, sugar cane, switchgrass and other crops )‏ Biomass Biogas Biodiesel Share of renewable energies in primary energy consumption of European Union countries in 2005 (in %)‏

Other sources of energy include:

Hydro-electric power

Wind and wave power

Solar power

Biofuels (ethanol: made from corn, sugar cane, switchgrass and other crops )‏

Biomass

Biogas

Biodiesel

Thank You for Your Attention!

Back-Up Slides

Factors Disturbing Oil Turbulance in Middle East Instability in Venezuela & West Africa Terrorists & Insurgent groups adding a premium Natural Calamaties Speculation on Oil Sources of light sweet crude almost exhausted OPEC control & oligopoly of major oil companies

Turbulance in Middle East

Instability in Venezuela & West Africa

Terrorists & Insurgent groups adding a premium

Natural Calamaties

Speculation on Oil

Sources of light sweet crude almost exhausted

OPEC control & oligopoly of major oil companies

OPEC Members *founder Members South America 1960 Venezuela* Middle East 1967 United Arab Emirates Middle East 1960 Saudi Arabia* Middle East 1961 Qatar Africa 1971 Nigeria Africa 1962 SP Libyan AJ Middle East 1960 Kuwait* Middle East 1960 Iraq* Middle East 1960 IR Iran* Asia 1962 Indonesia Africa 2007 Angola Africa 1969 Algeria Location Joined OPEC Country

Effect of taxes comparing France, UK, US http://www.dgtpe.minefi.gouv.fr/etudes/doctrav/october-2005.pdf