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
Crude oil is highly flammable and can be burned to
Petroleum= Petra (Rock) + Oleum (Oil) (Latin)
Oil was formed from the remains of animals and plants
that lived millions of years ago in a marine (water)
environment before the dinosaurs. Over the years, the
remains were covered by layers of mud. Heat and pressure
from these layers helped the remains turn into what we
today call crude oil . The word "petroleum" means "rock
oil" or "oil from the earth."
Price of oil
The price of oil, or the oil price, generally refers to the spot price of
a barrel of benchmark crude oil.
The demand for oil is highly dependent on global macroeconomic
conditions. According to the International Energy Agency, high oil
prices generally have a large negative impact on global economic
Organization of the Petroleum Exporting Countries
The Organization of the Petroleum Exporting Countries
(OPEC) was formed in 1960 to try to counter the oil companies
cartel, which had been controlling posted prices since the so-
called 1927 Red Line Agreement and 1928 Achnacarry
Agreement, and had achieved a high level of price stability until
Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria,
Qatar, Saudi Arabia, the United Arab Emirates and Venezuela
After the collapse of the OPEC-administered
pricing system in 1985, and a short lived experiment
with netback pricing, oil-exporting countries adopted
a market-linked pricing mechanism. First adopted by
PEMEX in 1986, market-linked pricing received
wide acceptance and by 1988 became and still is the
main method for pricing crude oil in international
trade. The current reference, or pricing markers, are
Brent, WTI, and Dubai/Oman.
Brent Crude is a major trading classification of
sweet light crude oil that serves as a major
benchmark price for purchases of oil worldwide. This
grade is described as light because of its relatively
low density, and sweet because of its low sulfur
content. Brent Crude is extracted from the North Sea.
The other well-known classifications (also called
references or benchmarks) are the OPEC Reference
Basket, Dubai Crude, Oman Crude, Urals oil and
West Texas Intermediate (WTI).
There have been successive price regimes since the
beginnings of the 20th Century:Between 1930 and 1970, it
was the so called “seven sisters pricing regime”, where the
prices where controlled and posted by oil companies.
Then, until 1985, the prices were controlled by the
producing countries, a period known as the Organization
of Petroleum Exporting Countries (OPEC) pricing regime.
After a short period of netback pricing regime (crude oil
price was tied to the price of refined products), the
reference pricing regime was adopted, this is the system
that we still use today.
In 2014, a number of events will go down in history as
major, market-moving events. From an economic viewpoint,
though, perhaps no other event will have a more significant
and long-lasting impact than the collapse of oil prices.
At this time last year, oil was trading well above $100 per
barrel. Last week, the price of a barrel of West Texas
Intermediate oil traded at less than $50.
Over the years, oil prices have fluctuated. The last two
major oil price declines were driven by central bank policy
errors – monetary contractions which led to global economic
During an economic recession, the world economic activity
contracts and demand for oil declines.
When demand for any commodity contracts, prices decline. The
current oil price decline is not accompanied by an economic growth
It’s the first of this type of decline the world has seen in many
decades. The current oil price decline isn’t being driven by a decline
in demand, instead it’s being driven by an increase in supply.
With technological advancements, oil can now be coaxed out of the
ground. The amount of oil which can be squeezed from rock shale
deposits is stunning.
Oil production in the United States and Canada is now
outstripping production in Saudi Arabia. Last year, when the Saudi’s
announced they were not cutting production to “defend” prices,
market activity moved oil prices downward.
Technological changes tend to be long-lasting and ongoing.
“Moore’s Law” refers to the computer industry and states that
the number of transistors in an integrated circuit doubles very
two years. We’ve seen massive efficiency and productivity
improvements in the computers we use. Once made, changes
driven by technological advancements –irrespective of the
industry — tend to continue.
These changes are nothing new. They represent the latest
cyclical “bust” in oil prices, continuing the long-wave cycle of
booms and busts the industry experienced in the past.
The world’s annual Global Economic Output (GDP) was $69
trillion as of last summer. According to the Oil Market Intelligence
report, the world’s consumers of oil bought $3.8 trillion (when prices
were at $100 per barrel) of oil to produce that $75 trillion of
economic output. With oil at $50 per barrel, that same production
can occur with an energy “cost” of $1.9 trillion. This represents a
production “savings” of $1.9 trillion, or 2.73 percent of global GDP.
Now, this isn’t to say that global GDP will be 2.73 percent higher
due to the oil price decline, but rather the economic growth of nations
consuming oil will benefit mightily at the expense of oil-producing
In June 2014, the price of Brent crude was up around $115 per
barrel. As of January 23, 2015, it had fallen by more than half, down
to $49 per.
For much of the past decade, oil prices have been high — bouncing
around $100 per barrel since 2010 — because of soaring oil
consumption in countries like China and conflicts in key oil nations
like Iraq. Oil production in conventional fields couldn't keep up with
demand, so prices spiked.
High prices spurred companies in the US and Canada to start drilling
for new, hard-to-extract crude in North Dakota's shale formations and
Alberta's oil sands. Then, over the last year, demand for oil in places
like Europe, Asia, and the US began tapering off, thanks to weakening
economies and new efficiency measures.
By late 2014, world oil supply was on track to rise much
higher than actual demand.A lot of unused oil was simply
being stockpiled away for later. So, in September, prices
started falling sharply.
As prices slid, many observers waited to see whether
OPEC, the world's largest oil cartel, would cut back on
production to push prices back up. (Many OPEC states,
like Saudi Arabia and Iran, need higher prices to balance
their budgets.) But at its big meeting last November,
OPEC did nothing. Saudi Arabia didn't want to give up
market share and refused to cut production — in the hopes
that lower prices would help throttle the US shale boom.
That was a surprise. So oil went into free-fall.
Crude oil price move up or down, inflation
follows in the same direction.
Crude oil price increases, it’s directly
affects the rate inflation. When the prices
went to high of more than $100/barrel in
2008, the inflation also went up to 12.27%
which was highest for India in previous two
Effects on Transportation
Other sector Electricity and Heating
The transport sector is clearly dominant in
petroleum product consumption.
Transport sector consumes 60% of total
Road transport accounts for an even higher
percentage of energy consumption
Oil is not only a physical commodity bought, sold and traded on
global markets; it has also become an important financial asset since
the USA and the world began liberalized trading of oil commodity
futures (i.e. a financial security) in the late 1990s on a global scale.
Just as declines in oil spills over to declines of other physical
commodities (e.g. copper, iron ore, gold, etc.), oil financial securities
(i.e. oil commodity futures) price deflation can also ‘spill over’ to
other financial assets, causing their decline as well, in a ‘chain like’
‘financial asset chain effect’ could arise if oil prices continued to
decline below USD$60 a barrel.
That would represent a nearly 50 percent deflation in oil prices
that could potentially set in motion a more generalized global
financial instability event, possibly associated with a collapse of the
corporate junk bond market in the USA that has fueled much of USA
Saudi Arabia and its neocon friends in the USA are targeting both
Iran and Russia with their new policy of driving down the price of
oil. The impact of oil deflation is already severely affecting the
Russian and Iranian economies.
In other words, this policy or promoting global oil price deflation
finds favor with significant political interests in the USA, who want
to generate a deeper disruption of Russian and Iranian economies for
reasons of global political objectives. It will not be the first time that
oil is used as a global political weapon, nor the last.
Oil consumption in India
Imports and domestic oil production in India
Market Share of Oil and Gas Companies
Market Share of Oil and Gas
The Petroleum Act to control issues relating to
import, transport, storage, production, refining
and blending of petroleum was already in place
Further, the Oil Fields (Regulation and
Development) Act, 1948 and the Petroleum and
Natural Gas Rules, 1959 provided regulatory
framework for domestic exploration and
production of Oil & Gas.
Crude oil is healthy and needed for several reasons.
The big oil and gas companies have been taking
advantage of us with their ridiculously high gas prices
over the last seven years. And the cut in their share
price should be great for investors. This allows them
to build or re-enter new positions at a better price with
a higher dividend yield. The Indian oil and gas
sector is one of the six core industries in India
and has very significant forward linkages with
the entire economy.
When Oil prices Moves UP :
Govt. spending on subsidy increases
Foreign currency reserves reduce
Our export becomes weaker
GDP is affected negatively
Share market crumbles