CHANGE IN OIL PRICES:

Outline:

Background Research on other sources of energy Reasons of changes in price Effect in Pakistan

Background

Trend (2000-2015)

Major oil suppliers

Trend (2003-2015)

2003In 2003, crude oil was selling for $30/barrel. But due to invasion of Iraq increased to approx. $35/barrel because Iraq have global reserves and oil production was decreased.2004-2008In late 2004 prices jumped upto $50/barrel due to various changes i-e change in supply and demand, decreased Iraq production etc.

In mid 2006 crude oil price was all time record for trading for $79/barrel due to political tensions like North Korea’s missile launch, on going Iraq war as well as Israel Lebanon war.Oil prices fell to $30.28/barrel because of financial crisis(2007-2008) 2009-2013Oil prices rised to $82/barrel after the financial crisis in 2009.In 2011the oil prices hit $100/barrel because of political unrest in Egypt.For about three and half years the price largely remained in the $90–$120 range.

2014-2015In the middle of 2014, price started declining due to a significant increase in  U.S. shale oil production and China and Europe's demand for oil decreased. And because of oversupply of oil by OPEC. The price of oil dropped to $62.75/barrel and in 2015 oil prices dropped below $50/barrel.

Major Suppliers

Research on Other Sources of Energy

As the dramatic change in the oil prices, it gave chance to alternative or different source of energy. In USA it was found that large deposits of oil shale are present from which shale oil can be extracted and used as a energy source but it was expensive when crude oil was around $30 to $60. As crude oil prices increased it gave feasibility to the companies to use that energy and now USA is in position to export oil globally because of the large deposits of oil shale.

Oil Shale

Oil shale is in the form of rocks but when it is broken down chemically, oil and gas can is produced from it. Although it is expensive because more drilling and extra processes are involved as compared to the extraction liquid crude oil which much cheaper than this. But globally the deposits of oil shale are 2.6 to 2.8 trillion barrels. And this will change global economics in coming years.

© Hasnain Baber 2015

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.

Factors Affecting Oil Prices:

© Hasnain Baber 2015

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/

Impacts of Increase in Oil Prices: It is not just oil prices that rise:With the increase in oil prices our daily life usage goods also rise. Increase in oil prices results in increase in the prices of other fossil fuels. High oil prices do not go away, except in

recession:Cost of extracting oil are also high and we can say that cost of oil extraction will rise faster than the rate of inflation. Salaries do not increase to offset rising oil prices:Salaries do not increase with the increase in oil prices.

Spikes in oil prices are tend to be associated with recessions:

Due to increase in oil prices people spend only on their basic requirements. High oil prices do not “recycle” well

through the economy:Increase in oil prices do not create much employments in the economy. Housing prices are adversely affected by

high oil prices:If a person is required to pay more for basic needs he can not afford a house.

Business Profitability is adversely affected by high oil prices

Impact of high oil prices does not go “away”:

Inflation effects which can be a depression in an economy is not neutralized soon, it needs years to gain a stable economy. Government Finances are especially

affected by high oil prices:Government has to pay social security benefits to unemployed people. It’s tax collection decreases.

Higher oil prices reflect increases growth in oil sector but decreases overall growth outside the oil industry.

Airline Example