CRUDE OIL Crude oil commonly known as petroleum. It is a liquid found with in earth. Composition: Hydrocarbons (50-97%) Organic compounds (N2,O2,S) ( 6-10%) Small amounts of metal (Cu,Ni,Vn,Fe) (<1%)
MARKET STRUCTURE OF CRUDE OIL Oligopolistic market structure Cartels are formed by oil producing countries Most important players in oil market are:-a) The organisation of the pertroleum countries ( OPEC )b) Non OPEC countries Saudi arabia plays dominant role in the oligopolistic oil market. From econometric evidence on saudi arabia, there is conformation of assymetrical behaviour of low cost petroleum supplier i.e. the country restrictes production in reaction to negative demand shocks, but does not expand production in response to positive ones.
TOP 5 OIL PRODUCING COUNTRIES MILLION OF BARREL PER DAY12108 SAUDI ARABIA6 RUSSIA UNITED STATES4 IRAN2 MEXICO0 SAUDI RUSSIA UNITED IRAN MEXICO ARABIA STATES
TOP 5 CONSUMER OF WORLD MILLION OF BARRELS PER DAY252015 UNITED STATES CHINA10 NORWAY IRAN5 UNITED STATES0 UNITED CHINA NORWAY IRAN UNITED STATES STATES
Supply of crude oil• Oil production is not labour intensive and therefore oil supply can be controlled easily by reducing depletion rates without affecting the labour market .• No short term substitutes for petroleum; change in supply effects market• Price elasticity of demand is highly inelastic i.e. no effect on demand due to price change• OPEC contributed 78.3% of oil reserves and 48.7% of exports
• Gulf countries have lowest production cost i.e. USD 4-5 per barrel as compare to the north sea and brazil where production cost is about USD 9-13 per barrel• Top 5 oil exporting countries
TOP 5 OIL EXPORTING COUNTRIES MILLION OF BARRELS PER DAY10 9 8 7 6 SAUDI ARABIA 5 RUSSIA 4 NORWAY 3 IRAN 2 UAE 1 0 SAUDI RUSSIA NORWAY IRAN UAE ARABIA
Demand side of crude oilDemand of oil depends upon various factor Demand of individual household and firms Oil’s importance for the economy and national security
TOP 5 IMPORTERS OF WORLD MILLION OF BARRELS PER DAY1412108 UNITED STATES JAPAN6 CHINA4 GERMANY SOUTH KOREA20 UNITED JAPAN CHINA GERMANY SOUTH STATES KOREA
IMPACT OF CRUDE OIL PRICES ON WORLD ECONOMY•It is estimated that 100 USD oilwould reduce the economic growthby 0.2-0.3%.•The global economy would not be affected asmuch because emerging economies consumeless oil, than industrialized countries do.•Many developing countries subsidize the costof gas.
IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY• India’s crude oil import bill maycross 100 billion US dollars if theglobal price stays firm at 100 -120USD/barrel.• If it continues it will upset thedelicate fiscal balance.• Rising crude oil prices will impact inflationwhether the govt absorbs the burden or passesit to consumer by increasing prices ofpetroleum products.
• India’s oil import bill in the 11 months of2010- 2011 was USD 85 billion andreported to reach 90 billion USD.•India imports nearly 80% of its crude oilrequirement, spent 79.95billion USD in2009-2010.•The recent strengthen of crude oil pricescould impact economic growthmomentum in the country.
CRUDE OIL RISE CAN HAMPER GLOBAL RECOVERY•IMF (International MonetaryFund) has warned that rising prices of scarce natural resources could aggravate poverty.•Just as the US & global economies are finallystrengthening, they face a new danger:Rocketing oil prices, which topped 120 USD abarrel.
•The main factors that would be responsiblefor economic growth moderation in 2011-12would be crude oil(CO) prices & RBI’stightening of monetary policy in response to oilprices.•Rising crude prices will lead higher inflation &higher inflation attracts monetary tightening.
•Rising oil prices could threaten the Europeaneconomy which are net importers of oil &gas, haven’t recovered fully from financialcrisis & face heavy debt loads.•Rising oil prices would push up inflation inEurope, where it already exceeds officialtargets.
GOLDGold is a dense, soft, shiny, malleable andductile metal.Gold has been a valuable and highly preciousmetal for coinage, jewelry & other arts sincelong before.
Gold standards have been the mostcommon basis for monetary policiesthroughout the human history.The world consumption of the new goldproduced is:•Jewelry -50%•Investment -40%•Industry -10%
FACTORS DETERMINING RISE IN GOLD PRICESNow the main issues to be discussed herenow are:1) Why is that investors wants to buy gold?2) What is the impact of rising gold prices on rest of the economy?
WHY INVESTORS BUY GOLD?1) Investors buy gold as a safe heaven. Gold is known to perform well whenthe rest of economy is in poor state &investors buy gold to protect them-selves financially.Gold prices rises whenever there is uncertaintyabout economic prospect or in financial market, eg.American & European debt crisis lead to increase indemand for gold.
2) Investors buy gold to protect themselvesfrom currency debasement.We can interpret the rise in gold pricesmean that investors expect future inflationto be high.Rising gold prices mean that investors arefearful about economic aspect & aboutexcess inflation.
IMPACT OF RISING GOLD PRICES ON ECONOMY1) Impact is negative. Investors are putting more money into gold & less in businesses & productive investment. . Money invested in gold doesn’t create output or employment Whereas money invested in businesses in economy would do so. Thus investment for gold is negative for economic growth.
GOLD PRICES IN INDIA•In India gold prices have gained 29%since the start of the year comparedwith just 15% gain in stock market.• Indian gold imports rose 47% to 265tonnes in the last quarter of2010, continuing a strong trend to end at alittle over 950 tonnes last year.
US DOLLAR STRENGTH,WEAKNESS & PRICE OF GOLD.•When the USD gets stronger, it takes few dollarto buy gold ie. priced in $USD. When the USDget weak then it takes more dollar to purchasegold.•CHANGE IN THE PRICE OF GOLD IS REALLY AREFLECTION OF A CHANGE IN THE VALUE OF $USDOLLAR.•WHEN THE DOLLAR GETS STRONG THEN GOLDAPPEARS TO GO DOWN & VICE VERSA.
GOLD PRICE FLUCTUATIONS IN RECENT YEARS•In March 2008, the gold price exceededUS$1,000, achieving a nominal high ofUS$1,004.38.• After the March 2008 spike, gold pricesdeclined to a low of US$712.30 per ounce inNovember.
•Pricing soon resumed on upward momentumby temporarily breaking the US$1000 barrieragain in late February 2009 but regressedmoderately later in the quarter.•Later in 2009, the March 2008 intra-day spotprice record of US$1,033.90 was broken severaltimes in October, as the price of gold enteredparabolic stages of successively new highs whena spike to $1226 of the price to the mid-October levels.
•On August 22, 2011 gold reached a newrecord high of $1908.00 at the LondonGold Fixing.
• Economic growth is fairly strong in India ascompare to rest of the world.It is growing at a slower rate but still above 7%.So India doesn’t face the same debt problemthat western country faced.•RBI has been raising interest rate & tighteningmonetary policy. So to reduce inflation RBI isreducing the rupee in circulation.
ABOUT DOLLAR• United States dollar sign: $; code: USD; also abbreviated US$), also referred to as the American dollar, is the official currency of the United States of America.• It is divided into 100 smaller units called cents or pennies• is used as the standard unit of currency in international markets for commodities such as gold and petroleum.• is the currency most used in international transactions• is one of the worlds reserve currencies( is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves).
FACTORS AFFECTING VALUE OF US DOLLARSUPPLY & DEMAND- These are decreed byinternational trade between countries.When dollar traders from other nations payfor our product and services in dollars afterconverting their currencies into dollar, whenthis done demand for dollar is created.
1) BALANCE OF TRADE – Also known ascurrent account balance.The balance of trait represents the differencebetween exports & imports in terms of goods& services.If exports exceed import in either currentaccount, it is called surplus.If imports exceed export then it is calleddeficit.
The US has been running a trade deficit with therest of world in recent times. This makes theforeign investors increasingly nervous & canaffect the dollar significantly.2) FALLING PRICES ON FOREIGN GOODS – Whenthe prices for foreign goods decreased theybecome more attractive for American consumer& create a trade deficit.When there is rise in price of foreign goodsbecause of increase in demand can make theAmerican goods more attractive & narrow thetrade deficit. This increases the value of dollar.
3) BALANCE OF INVESTMENT – When the USimports more then it exports so investorsfrom other countries have to buy US assets tokeep the dollar from falling.4) BUDGET DEFICIT & NATIONAL DEBT- The USGovt budget can affect the dollar value.5) LITTLE OR NO DEFAULT ON DEBT- When theGovt keeps a good credit history, risk goesdown & the dollar goes up.
6) PRESIDENT POPULARITY – Popularity of theUS president id tied to value of US dollars.7) TERRORIST ATTACK & WAR- Attacks damageconsumer & business confidence hampers theeconomic growth.8) CONSISTANT POLICIES- If investor feel thatthings will remain same they will flop to dollarbecause it is safe. This increases the demandthus increases the value of dollar.
9) GOVERNMENT EXPANSION- Newdepartments & increase govt functions costmoney. Like other govt expenses expandingnew groups like TSA & department ofhomeland security can lower the dollar valuedue to their opportunity cost against otherexpenses in the budget.
RELATIONSHIP BETWEEN CRUDE OIL, US DOLLAR AND GOLD PRICE• Gold is the real currency while dollar is only the representative hence the trend is people tend to favor gold to dollar when there is high inflation and diminishing dollar and vice versa• in short term there is no any clear cut cause and effect relation BUT A LONG term trend analysis shows negative correlation between gold prices and the value of dollar but gold price does not increase proportionately to the diminishing dollar.
• QUE - If there is RISE OR FALL in US dollar then what will happen to GOLD PRICE RISE OR FALL??? ANS - If the US dollar falls, Gold will remain the same for the rest of the world. But, for the U.S., we will end up paying more for the same amount of gold• QUE - If there is RISE OR FALL in US dollar then what will happen to CRUDE OIL PRICE RISE OR FALL ???? ANS If the US dollar falls, Oil prices will rise for theU.S., but oddly, it will fall for other countries. This isbecause crude oil is primarily traded in U.S. dollars
• QUE-. if there is RISE OR FALL in CRUDE OIL PRICE then what will happen to GOLD PRICE RISE OR FALL??? ANS- Since oil is used in the process ofexcavating and refining the gold, if oil prices goup, so does gold prices