Threats for the World Economy: The Danger of Rising Oil Prices            Sherif Mohamed           Katharina Jungblut     ...
The Rise of Oil Producing Industry       1859: Colonel Edwin L. Drake and George Bissellwith first drilling rig to produce...
The Ubiquity of Oil Today                                           Kerosene                      Make-up                 ...
Global Oil Consumption Today     Global oil consumption per capita  (tonnes of oil equivalents)Source: worldpress.com, eco...
Growing Global Oil Consumption • IEA’s forecast for global oil demand   in 2011: 89 mbpdSource: IEA; businessinsider.com (...
Historical Development of Nominal Oil PriceSource: IEA (2009)
Traditional Market Theory• Free and competitive market• Forces of supply and demand• Equilibrium price
Reality of Oil prices• Change permanently in hardly predictable ways• Influenced by various determinants at different  times
Demand Growth in Emerging CountriesAdvanced OECD countries account formore than half of global oilconsumptionDemand of eme...
Demand Growth in Emerging CountriesSource: IEA (2010)
Speculation on Futures MarketsSpeculators with short-term profit oriendedfocusInstitutional investors hedge against future...
Speculation on Futures Markets       •January 2011: net long positions on crude oil hit their highest point in four years ...
The Power of OPEC        Organization of the Petroleum Exporting Countries                 about 40% of             about ...
The Power of OPEC                      Organization of the Petroleum Exporting Countries 2007: Angola and Ecuador in 2009:...
The Power of OPEC                     Organization of the Petroleum Exporting Countries          negative news about geopo...
Peak Oil TheoryWorld oil reserves are reaching peak productioncapacity and start to shrinkAnnual discoveries of crude oil ...
Peak Oil TheorySource: fraw.org (2008)
Determinants of Oil Prices         • No systematic explanantion         • Triggered by numerous and time-varying mechanism...
Inflation• Oil price shocks proven inflationary• Sharp changes in inflation follow major oil price changes• Correlation ha...
Inflation Transmission Mechanism                                         Inflation                         Unchanged      ...
Determinants of Proneness to InflationOil-intensity of productionPercentage of oil imports vs. domestic oilproductionStren...
Decreasing Vulnerability to Inflation • Declining oil intensity in the US since 1970s • Diminishment of European trade uni...
Inflation outcomes Effects predominantly       No effects on core                                                    80% o...
Fiscal and Monetary Policies                                     Dual effects of oil shocks                              D...
Inflaton Targeting• Increasing independence of central  banks• Prevailing adaption of price stability  objectives• Anchor ...
Conclusions• Accumulated forces of demand and  implications of supply drive prices of oil• Oil prices are highly volatile ...
Conclusions• Large and energy-intensive countries are     • most vulnerable to oil price fluctuations     • Major drivers ...
Prospects• Simulation: Oil price of $191 will result in 0%  global economic growth• Yet, world has become less vulnerable ...
Prospects• Rising oil prices      • A real and serious threat to global economy      • A unique challenge and opportunity ...
Danger of rising Oil prices
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Danger of rising Oil prices

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Danger of rising Oil prices from the macroeconomic point of view

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Danger of rising Oil prices

  1. 1. Threats for the World Economy: The Danger of Rising Oil Prices Sherif Mohamed Katharina Jungblut 28 June 2011
  2. 2. The Rise of Oil Producing Industry 1859: Colonel Edwin L. Drake and George Bissellwith first drilling rig to produce oil in Titusville, Pennsylvania
  3. 3. The Ubiquity of Oil Today Kerosene Make-up Gasoline Diesel Medicine Fuel Food HeatingAdditives Oil Crude Oil Fertilizers Jet Fuel Pesticides Synthetic Heavy Oil Fibers Fuel Bunker Plastics Fuel
  4. 4. Global Oil Consumption Today Global oil consumption per capita (tonnes of oil equivalents)Source: worldpress.com, ecoglobe.ch (2007)
  5. 5. Growing Global Oil Consumption • IEA’s forecast for global oil demand in 2011: 89 mbpdSource: IEA; businessinsider.com (2010)
  6. 6. Historical Development of Nominal Oil PriceSource: IEA (2009)
  7. 7. Traditional Market Theory• Free and competitive market• Forces of supply and demand• Equilibrium price
  8. 8. Reality of Oil prices• Change permanently in hardly predictable ways• Influenced by various determinants at different times
  9. 9. Demand Growth in Emerging CountriesAdvanced OECD countries account formore than half of global oilconsumptionDemand of emerging countries isincreasing at a far greater paceChina‘s CAGR of demand: 7% between1990 and 2010Price elasticity of demand fairly low
  10. 10. Demand Growth in Emerging CountriesSource: IEA (2010)
  11. 11. Speculation on Futures MarketsSpeculators with short-term profit oriendedfocusInstitutional investors hedge against future pricerisksExpectations exert upward pressure short- andmid-term real pricesTendency to „overshoot“
  12. 12. Speculation on Futures Markets •January 2011: net long positions on crude oil hit their highest point in four years • April 2011: Speculators keep up bets that crude and heating oil prices will riseSource: Reuters (2011)
  13. 13. The Power of OPEC Organization of the Petroleum Exporting Countries about 40% of about 55% of 2/3 of global global supply global exports reservesNon-OPEC production has stagnated since 2004Increase in global supply attributable to OPEC countriesStrength of OPEC has increased since the 1990sSpecific threat from geopolitical tensions raises precautionary demand
  14. 14. The Power of OPEC Organization of the Petroleum Exporting Countries 2007: Angola and Ecuador in 2009: Indonesia outSource: OPEC(2006), IEA (2010)
  15. 15. The Power of OPEC Organization of the Petroleum Exporting Countries negative news about geopolitical tensions • expected risk of short- to medium-term supply shocks • increased precautionary demand • greater price volatilitySource: IEA (2011)
  16. 16. Peak Oil TheoryWorld oil reserves are reaching peak productioncapacity and start to shrinkAnnual discoveries of crude oil declining since 1960sAnnual production exceeds annual discoveries since1980sSo far, no clear-cut empirical evidence of scarcity rentIssue is projected to gain considerable impact in thefuture
  17. 17. Peak Oil TheorySource: fraw.org (2008)
  18. 18. Determinants of Oil Prices • No systematic explanantion • Triggered by numerous and time-varying mechanisms of demand- and supply-forces• Suggested key features of future prices Limited Low price expansion of elacticity production of demand capacity Demand growth in emerging countries
  19. 19. Inflation• Oil price shocks proven inflationary• Sharp changes in inflation follow major oil price changes• Correlation has weakened over time / even became negative
  20. 20. Inflation Transmission Mechanism Inflation Unchanged real value of Companies goods and adjust prices servicesIncrease inprice of oil
  21. 21. Determinants of Proneness to InflationOil-intensity of productionPercentage of oil imports vs. domestic oilproductionStrength of labor unionsProduct market competitionExchange rate movements
  22. 22. Decreasing Vulnerability to Inflation • Declining oil intensity in the US since 1970s • Diminishment of European trade unions‘ bargaining power • Product market liberalization
  23. 23. Inflation outcomes Effects predominantly No effects on core 80% of effect is immediate short-run inflation since 1980s• Impact of a 10% increase in oil prices
  24. 24. Fiscal and Monetary Policies Dual effects of oil shocks Decrease Increase inflation economic output Dilemma for policymaking Amplifyinflation Concentrate on reccessive effects, Aim at neutralizing effects on inflation Lower interest rates, increase money supply Increase interest rates, restrict money supply Reductions in economic output
  25. 25. Inflaton Targeting• Increasing independence of central banks• Prevailing adaption of price stability objectives• Anchor inflation expectations among market participants• Prevent temporary inflationary shocks from becoming embedded in core inflation
  26. 26. Conclusions• Accumulated forces of demand and implications of supply drive prices of oil• Oil prices are highly volatile and overall increasing• Negative effects on economic stability and growth• Redundancies and sub-optimum allocation of production factors• Deterioration of purchasing power
  27. 27. Conclusions• Large and energy-intensive countries are • most vulnerable to oil price fluctuations • Major drivers of global economic performance• Monetary policies can eliminate a considerable part of inflationary effects• Trade-off between price stability and economic growth hardly avoidable
  28. 28. Prospects• Simulation: Oil price of $191 will result in 0% global economic growth• Yet, world has become less vulnerable to oil price shocks over the past decades • Economic and fiscal policies • More efficient strategic management of resources • Learning curves from past oil shocks
  29. 29. Prospects• Rising oil prices • A real and serious threat to global economy • A unique challenge and opportunity for each national economy to restructure, stabilize and invigorate

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