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Oil prices falling and Their Impact on World and Indian Economy
- 1. Oil Prices: Why they are falling and its impact on World Economy and India
- 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 - http://www.news.az/photos/page-photo/133429.jpg/
- 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. • It is refined to produce usable products such as gasoline, diesel and various forms of petrochemicals. • 80% of international crude oil is transported through waterways in supertankers. • Majority of oil reserves is in middle east of the world.
- 4. 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 $30 per barrel in Feb 2016. • This decline being the largest since the 2008 decline when prices fell from a whooping $145.85 per barrel to $32 per barrel.
- 5. Crude Oil Price Trend
- 6. West Texas Intermediate (WTI) crude oil is of very high quality and is at refining a larger portion of gasoline. Its API gravity is 39.6 degrees, which makes it a "light" crude oil, and it contains only about 0.24 percent of sulphur (making a "sweet" crude oil). West Texas Intermediate (WTI) & Brent Blend Brent Blend is actually a combination of crude oil from fifteen different oil fields located in the North Sea. It is still a "light" crude oil, but not quite as "light" as WTI, and it contains about 0.37 percent of sulphur (making it a "sweet" crude oil, but again slightly less "sweet" than WTI).
- 7. West Texas Intermediate (WTI) & Brent Blend
- 8. 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? 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. 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.
- 9. Crude Oil - Demand v/s Supply
- 10. 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. Why are Oil Prices Dropping? Strengthening US Dollar 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.
- 11. 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 up to 1.2 million barrels a day by next year. OPEC Infighting There is a rivalry among OPEC members, who are trying to lower prices to maintain their market share. Why are Oil Prices Dropping?
- 12. On November 27 2014, 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
- 13. Oil Exporting Countries Russia Saudi Arabia Iran U.s.a Venezuela
- 14. 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
- 15. Saudi Arabia is the world's second largest crude producer after Russia. It oil stays at around $60 per barrel next year, the government will run a deficit equal to 14% of GDP. If low oil prices persist, Saudi Arabia may have to cut back on some of the social programs. Effect of falling oil prices on Saudi Arabia
- 16. 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. Effect of falling oil prices on Iran
- 17. 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
- 18. The nation's economy is set to shrink some 3% this year and inflation is rampant In Venezuela oil sales provide both 47% of government revenues and the main source of foreign currency. Effect of falling oil prices on Venezuela
- 19. 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
- 20. Monetary & Fiscal Policies Declining oil prices may reduce medium-term inflation expectations below target. Central banks could respond with additional monetary policy which can support growth Oil importingcountries: Oil Exportingcountries: Lower oil prices might trigger Contractionary Fiscal Policy Measures. Developing countries: May benefit more from a decline in energy input costs. Household inflation expectations in developing economies may also be more responsive to changes in fuel prices than in developed countries
- 21. Effect of falling oil prices on 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.
- 22. Effect of falling oil prices on INDIA As per rough estimates, a $10 fall in crude could reduce the current account deficit by approximately 0.5% of GDP and the fiscal deficit by around 0.1% of GDP. 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 With every dollar decrease in oil prices, the government's oil import bill comes down by Rs. 4,000 crore.
- 23. Conclusion Following four years of stability at around $105 per barrel, oil prices fell sharply in the second half of 2014. The decline in oil prices was quite significant compared with the previous episodes of oil price drops during the past three decades. There have been a number of long-terms and short-term drivers behind the recent plunge in oil prices: several years of large upward surprises in oil supply; some downward surprises in demand; unwinding of some geopolitical risks that had threatened production; change in OPEC policy objectives; and appreciation of U.S. Dollar. Supply related factors have clearly played a dominant role.
- 24. Conclusion The decline in oil prices has significant macroeconomic, financial implications. If sustained, it will support activity and reduce inflationary, external, and fiscal pressures in oil-importing countries. On the other hand, it would affect oil-exporting countries adversely by weakening fiscal and external positions and reducing economic activity. However, declining oil prices also present a significant window of opportunity to reform energy taxes and fuel subsidies, which are substantial in several developing countries, and reinvigorate reforms to diversify oil-reliant economies.
Editor's Notes
- WTI's reign as the global oil benchmark was recently overthrown by Brent crude. Simply put, the preference for Brent crude today stems from the fact that it may be a better indicator of global oil prices. Brent essentially draws its oil from more than a dozen oil fields located in the North Sea. It's also still considered a sweet crude, despite having a higher sulfur content than WTI. Although most Brent is destined for European markets, it's already used as a price benchmark for other grades.
- Current price of Crude oil is $29.44 Current price of Brent Crude oil is $33.36
- This wasn't always the case. Between 2010 and 2014, as you can see above, oil demand was soaring around the world, as countries recovered from the financial crisis but global production was struggling to keep up. Many older oil fields were stagnating. Conflicts in places like Libya and Iraq were restricting supply. Countries had to draw down their stockpiles, and prices soared to around $100 per barrel. Those high prices, however, spurred drillers in the United States to use innovative hydraulic fracturing and horizontal drilling techniques to unlock vast quantities of oil from shale formations in places like North Dakota and Texas. It's hard to overstate the impact of the franking boom: US crude oil production has nearly doubled since 2010. Eventually, supply caught up with demand — and then surpassed it. That's when the crash came. By mid-2014, global demand was starting to slow down. Europe was still reeling from the euro zone mess. China's economy was starting to stumble. But the United States continued to produce more and more oil. Iraq and Libya were also starting to bring more production back online. So prices began sliding, down to $70 per barrel.
- Negative European Economic Outlook 1.European Central Bank president Mario Draghi has left investors concerned about the continent’s slow growth. Germany’s exports were down 5.8 percent in August, stoking the fears of anxious investors that the EU’s largest economy had double dipped into recession last quarter. 2.Across the Euro zone, the IMF again lowered its growth forecast to 0.8 percent in 2014 and 1.3 percent in 2015. Strengthening US Dollar 1.Across the globe the crude oil is bought and sold in dollars. 2.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. 3.High estimates suggest that a 10 percent appreciation is associated with a decline of about 10 percent in the oil price, whereas the low estimates suggest 3 percent or less. 4.Even though global oil prices are falling, they’re falling less for countries with currencies that are weaker than the US dollar.
- Increased output from Libya 1.The timeline of the Libyan Civil War begins on15 February 2011 and ends on 20 October 2011. It begins with a series of peaceful protests, similar to others of the Arab Spring, later becoming a full-scale civil war between the forces loyal to Muammar Gaddafi's government and the anti-Gaddafi forces 2.Because of internal strife, analysts have until recently assumed that Libya’s output would hover around 150,000-250,000 thousand barrels per day. 3.It turns out that Libya has sorted out their disruptions much quicker than anticipated, producing 810,000 barrels per day in September. Libyan officials told the Wall Street Journal last week that they expect to produce a million barrels per day by the end of the month and 1.2 million barrels a day by early next year. OPEC Infighting To be Explained in Further Slides.
- 1.On November 27 2014, 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. 2. 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. 3. Saudi Arabia decided to increase production in order to maintain its market share, hoping that the subsequent fall in oil prices would crush US frackers, who require higher prices to stay profitable. And that's when things got really interesting. 4. US drillers turned out to be far more adaptable to low oil prices than the Saudis thought, as companies cut costs and boosted productivity in order to keep the oil flowing. 5. Iraq has nearly doubled production since 2014 — to more than 4 million barrels per day — as it recovers from conflict. 6. Thanks to the nuclear deal with the US, Iran will start exporting more oil this year as sanctions are lifted, offsetting declines elsewhere.
- 1.Russia is the world’s largest crude oil producer. 2.Russia gains 70% of all tax revenues from oil and gas. 3.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. 4.Russia’s economy is expected to shrink 4.5% next year if oil stays at $60 per barrel. 5.The plunging price of oil has also caused the ruble's value to collapse.
- 1.Saudi Arabia is the world's second-largest crude producer after Russia. 2.It produces 10 million barrel per day. 3.It will suffer financially from cheap oil. 4.It oil stays at around $60 per barrel next year, the government will run a deficit equal to 14% of GDP. 5.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. 6.This is why Saudi Arabia has so far not responded by cutting output. 7.Still, if low oil prices persist, Saudi Arabia may have to cut back on some of the social programs.
- 1.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. 2.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).
- 1.In the US a fall in crude prices would have more varied impacts. 2.For many people, it will offer a nice economic boost: cheaper oil means lower gasoline prices which have fallen to $2.47 per gallon. 3.However oil-producing states like Texas and North Dakota are likely to see a drop in revenues and economic activity. 4.The falling price of oil is also putting severe pressure on Alaska’s state budget. 5.All told, oil prices are likely to be good for 42 states and bad for the other 8.
- 1.It is another major oil producer. 2.In Venezuela oil sales provide both 47% of government revenues and the main source of foreign currency. 3.Venezuela are relying on oil revenues to fund generous social spending. 4.A fall in oil prices could lead to a significant budget deficit and social problems. 5.The nation's economy is set to shrink some 3% this year and inflation is rampant.