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

1. Oil Prices: Why they are falling and its impact
on World Economy and India © Hasnain Baber 2015

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)
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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. 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 - http://www.news.az/photos/page-photo/133429.jpg/
Why are Oil Prices Dropping?
© Hasnain Baber 2015

5. Image Courtesy - http://money.cnn.com/2014/10/30/investing/cheap-oil-prices-hurt-iran-venezuela-saudi-arabia/
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. 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
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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 - http://www.timesofisrael.com/irans-supreme-leader-undergoes-prostate-surgery//
Effect of falling oil prices on Iran
© Hasnain Baber 2015

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
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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
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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
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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
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12. Consumption of Major Petroleum Products
9%
8%
36%
7%
40%
LPG Kerosene Diesel Petrol All other products
Source: Ministry of Petroleum Basic Statics
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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 $115.
• Next year government has reduced the budgeted amount
for oil subsidy to Rs43580 crore.
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14. Impact of increase in oil prices on growth
and inflation levels in India
International
oil
prices per
barrel ($)
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. 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. 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. 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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© Hasnain Baber 2015