impact of fall in crude oil price

1. Recent decline in oil prices of
crude oil: Causes and Global
Impact
Mayank ghatliya
Pankaj mundra
Savan sarothiya

2. Overview
• Introduction
• Reasons for decline in oil prices
• Financial Implications
• Macroeconomic effects
• Effects on India
• Conclusion

3. Introduction
• Crude Oil, often called “black gold” is naturally occurring, unrefined petroleum
product composed of hydrocarbon deposits.
• Trade of crude oil across the globe is one the major factors in determining the
G.D.P and financial policies of various countries across the globe
Recent overview of crude oil
• Oil prices fell sharply in the second half of 2014.
• Four-year period of stability around $105 per barrel.
• From June 2014, the global oil prices started a trend of downward shift.
• From $115 per barrel it touched a low of $42 per barrel in August 2015.
• This decline being the largest since the 2008 decline when prices fell from a
whooping $145.85 per barrel to nearly $40 per barrel.

5. Why oil prices are falling now?
• US is the biggest consumer of oil in the world. They consume 2 times the
consumption of China or 6 times the consumption of India. US is also the
largest importer of oil in the world. Today, they are trying to find oil in
their own country and reduce the imports.
Lower demand in emerging markets
• The supply of oil is not sufficient to meet the demand.
• The demand for oil in markets such as China, Brazil, Japan and Europe is
weakening. This has led to excess supply of oil than the demand.
Whenever the supply is more than the demand, the price of such product
falls.
• A global recession has left Asian demand weaker than expected, and
governments are slashing fuel subsidies across Asia.
• Across the globe the crude oil is bought and sold in dollars.
Dollar getting stronger makes oil more expensive to buy in countries outside
the US. That, in turn, weakens worldwide demand and further puts downward
pressure on oil prices.

6. Role of OPEC
Organization of the Petroleum Exporting Countries
OPEC was formed on September 14, 1960, at a meeting in Baghdad, the Iraqi
capital, attended by five countries that became the founding members. It was
registered with the United Nations Secretariat on November 6, 1962,
following Also in attendance at the Baghdad meeting were - Islamic Republic
of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. They signed the original
agreement establishing OPEC. Currently, the organisation has twelve
members, namely: Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, United Arab Emirates and Venezuela.
The organization’s principal objectives are:
• To co-ordinate and unify the petroleum policies of the Member Countries
and to determine the best means for safeguarding their individual and
collective interests
• To seek ways and means of ensuring the stabilization of prices in
international oil markets, with a view to eliminating harmful and
unnecessary fluctuations
• To provide an efficient economic and regular supply of petroleum to
consuming nations and a fair return on capital to those investing in the
petroleum industry.

7. 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

8. Financial Implications
• Lower oil prices reduce energy costs generally, as prices of competing
energy materials are forced down too.
• Oil is feedstock for various sectors, including petrochemicals, paper, and
aluminium, the decline in price directly impacts a wide range of processed
or semi-processed inputs.
• The transportation, petrochemicals, and agricultural sectors, and some
manufacturing industries, would be major beneficiaries from lower prices.
 Oil price declines generate changes in real income benefiting oil-importers
and losses hurting oil-exporters.
 The shift in income from oil exporting economies with higher average
saving rates to net importers with a higher propensity to spend should
generally result in stronger global demand over the medium-term.

9. Which country suffer when crude oil
price fall
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
Russia is the world’s largest crude oil producer.
Russia gains 70% of all tax revenues from oil and gas.
Oil revenues makes up 45% of the government budget and falling oil prices will lead to a
government budget deficit, and will require either higher taxes or government spending.
Russia’s economy is expected to shrink 4.5% next year if oil stays at $60 per barrel.

10. Saudi Arabia
• Saudi Arabia is the world's second-largest crude producer after Russia.
• It produces 10 million barrel per day.
• It will suffer financially from cheap oil.
• It oil stays at around $60 per barrel next year, the government will run a
deficit equal to 14% of GDP.
• It can afford temporary falls in oil prices because they have substantial
reserves. It has build up a stockpile of foreign currency worth some $740
billion, which it will use to finance its deficits.
• This is why Saudi Arabia has so far not responded by cutting output.
• Still, if low oil prices persist, Saudi Arabia may have to cut back on some
of the social programs.
IRAN
• One big problem for Iran is that it needs oil prices well north of $100 per
barrel to balance its budget, especially since Western sanctions have made
it much harder to export crude.
• If oil prices keep falling, the Iranian government may need to make up
revenues elsewhere say, by paring back domestic fuel subsidies (always an
unpopular move, at least in the short term).

11. What happen when oil price increases
• INFLATION:
• EROSION OF PROFIT MARGINS:
• HIKE IN INTEREST RATES:
• REDUCTION IN CREDIT GROWTH:
• FALL IN EMPLOYMENT OPPORTUNITIES:
• SLOWDOWN IN ECONOMIC GROWTH:

12. How does the fall in oil prices affect India?
• India, which is the fourth largest consumer of oil, is a big beneficiary of
falling oil prices.
• India imports nearly two-thirds of crude oil requirements.
• The reduced prices will not only lower the import bill but also help save
foreign exchange.
• And It will also enable oil marketing companies to reduce retail prices of
petrol and diesel.
• Lower oil prices have also aided government's efforts to keep inflation low
and stable besides curtailing fuel subsidies.
• A lower subsidy bill will help contain the country's fiscal deficit — a
measure of the amount the government borrows to fund its expenses — at
the budgeted level of 4.1% of GDP in 2014-15.
• With every dollar decrease in oil prices, the government's oil import bill
comes down by Rs. 4,000 crore.

13. Conclusion
• One of the most important factors that decide the future of Indian
economy is the price of petroleum products. After all a small
increase the price of this has got widespread impact on the Indian
Economy. If the price of petrol increases, it increases the
transportation cost & the cost of various products, thereby making
the companies to increase the price of these products. This causes
inflation in the Indian market and the performance of the economy
is affected. Strong economic growth of India and other developing
countries in Asia have increased the demand of petrol and other
related essential fuels, which has resulted in price hike of petrol in
India.
• Another solution that can be implemented is to create awareness
among public about the need to increase the use of public transport.
This is only viable solution in front of us.
• Declining oil prices also present a significant window of opportunity
to reform energy taxes and fuel subsidies, which are substantial in
several developing countries.