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Why oil prices failing


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Oil Prices: Why they are falling and its impact on World Economy and India

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Why oil prices failing

  1. 1. Oil Prices: Why they are falling and its impact on World Economy and India © Hasnain Baber 2015
  2. 2. What Crude Oil is • Crude oil is a naturally-occurring substance found in certain rock formations in the earth. • It is a dark, sticky liquid classified as a hydrocarbon. This means, it is a compound containing mainly carbon and hydrogen. • Crude oil is highly flammable and can be burned to create energy. • Petroleum= Petra (Rock) + Oleum (Oil) (Latin) Image Courtesy - © Hasnain Baber 2015
  3. 3. 3 Increased output from Libya Because of the civil war in Libya, oil production had decreased to 150,000 – 250,000 barrels per day. It now produces 1 million barrels a day, which may go upto 1.2 million barrels a day by next year. 2 US Oil Boom Oil Production in the US has increased as Shale oil production has gone up to 4 million barrels per day. As such, US import of oil from OPEC has reduced by half. 1 Increased Global Supply Global supply of oil has surpassed the global demand, which has resulted in the fall of prices. Why are Oil Prices Dropping? © Hasnain Baber 2015
  4. 4. 6 Tepid Asian Demand Countries in Asia are reducing oil subsidies, as a result of which oil demand has fallen, which in turn has resulted in increased oil prices, thereby, reducing demand. 5 Negative European Economic Outlook A slowdown is expected in Eurozone economies in 2015. The growth forecast has been cut down by IMF to 0.8% in 2014 and 1.3% in 2015. 4 OPEC Infighting There is a rivalry among OPEC members, who are trying to lower prices to maintain their market share Image Courtesy - Why are Oil Prices Dropping? © Hasnain Baber 2015
  5. 5. Image Courtesy - On November 27, a big meeting was held by the Cartel, and countries, like Venezuela and Iran, proposed that the Cartel (mainly Saudi Arabia) decreases oil production in order to maintain stability in the oil prices. 1 Just to ensure it maintains its market share, Saudi Arabia, the world's largest oil producer, did not agree to reducing oil production and was willing to let prices plummet. 2 OPEC's surprising response: Let prices keep falling © Hasnain Baber 2015
  6. 6. Russian budget heavily relies on its oil income More than half of its budget revenues come from selling Oil and Gas The Russian economy may go into Recession if oil prices keep falling Effect of falling oil prices on Russia Image Courtesy: © Hasnain Baber 2015
  7. 7. High oil prices are one of the major factors affecting the Iranian economy. Severe economic problems may result if oil prices keep falling. Iran may decide to reach a nuclear deal with the US to ease economic sanctions. Image Courtesy - Effect of falling oil prices on Iran © Hasnain Baber 2015
  8. 8. This will translate into accelerated economic growth to a forecasted 3.5% next year. Falling oil prices will cause gas prices to go down, which will result in increased consumer spending. Effect of falling oil prices on US Image Courtesy: © Hasnain Baber 2015
  9. 9. Reduced OPEC’s global power Benefit to Western and European economies Decline in oil and natural-gas undertakings Reduction in Commodity price The devalue of Oman Increase in global demand for goods and services Global Consequences of falling Oil Prices © Hasnain Baber 2015
  10. 10. India’s Oil Import 11% 18% 5% 10% 22% 34% Iran Saudi Arabia Other Western Hemisphere Africa Other Middle East Source: Global Trade Atlas © Hasnain Baber 2015
  11. 11. Energy Consumption In India 24% 1% 24% 2% 42% 7% Oil Nuclear Combustible Renewables and Waste Other Renewables Coal Source: The International Energy Agency © Hasnain Baber 2015
  12. 12. Consumption of Major Petroleum Products 9% 8% 36% 7% 40% LPG Kerosene Diesel Petrol All other products Source: Ministry of Petroleum Basic Statics © Hasnain Baber 2015
  13. 13. Subsidy • India’s subsidy bill zoomed to Rs 2.16 trillion or 2.5% of GDP . • It was due to two reason: High Crude Oil prices Fertilizer subsidies, primarily on account of imported non- urea fertilizers. • Last year budget government pegged curde oil price of brent at $90. This year they kept the same at $115. • Next year government has reduced the budgeted amount for oil subsidy to Rs43580 crore. © Hasnain Baber 2015
  14. 14. Impact of increase in oil prices on growth and inflation levels in India International oil prices per barrel ($) Increase in international oil prices (%) Extent of fall in manufacturing sector (%) Extent of fall in GDP growth (%) Extent of increase in WPI (%) 50 38.9 2.1 0.4 1.5 60 66.7 9.7 1.9 3.6 70 94.2 16.9 3.4 5.7 80 122.2 24.5 4.9 7.9 140 126.1 29.7 7.3 7.2 Source:- Extractive Industries for Development Report GDP=Private Consumption + Gross Investment + Govt Spending + ( Export – Import). © Hasnain Baber 2015
  15. 15. Effects on Transportation 61% 5% 14% 7% 13% Transport Non-Energy Other sector Electricity and Heating Industry Source:- Report of the Working Group on Petroleum & Natural Gas Sector for the XI plan (2007-2012) The transport sector is clearly dominant in petroleum product consumption. Transport sector consumes 60% of total petroleum products. Road transport accounts for an even higher percentage of energy consumption. © Hasnain Baber 2015
  16. 16. Steps taken by the govt. and RBI What Govt. did ? 1. Provided huge amount of subsidies to oil companies to keep them solvent. 2. This increased domestic prices of diesel and petrol. 3. Start looking for alternate energy options to prevent future oil shocks. What RBI did? Increase in CRR, Repo rates. (i.e. used monetary tools to calm down the heat) © Hasnain Baber 2015
  17. 17. Crux To summarize the study When Oil prices Moves UP : 1.Inflation increases 2.Govt. spending on subsidy increases 3.Foreign currency reserves reduce 4.Our export becomes weaker 5.GDP is affected negatively 6.Share market crumbles 7.Investment decreases © Hasnain Baber 2015
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