Factors Affecting Oil Prices
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Factors Affecting OIL Prices • • • • • •
Economic Growth Exchange Rates Inventories Marginal Producers Lack of Investment Violence in the Middle east
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
1979-81: IRANIAN REVOLUTION AND IRAN-IRAQ WAR In 1981 recession was caused by the Volker credit squeeze, when interest rates were increased sharply, with the objective of ending an inflationary spiral of which rising oil prices were a symptom rather than a cause.
1990-91 IRAQ INVADES KUWAIT AND FIRST GULF WAR “The impact of oil prices was negligible, not least because Saudi Arabia and other Arab nations were allied with U.S. forces and made efforts to counteract the price increase”
1996-99: DEMAND-INDUCED PRICE SURGE “Global demand began to swell as the high-tech bubble encouraged a big investment boom in North America and Europe and as the Asian economies began to recover.”
2002-05: IRAQ II AND SURGING DIL DEMAND “The tripling of crude oil prices since 2002 has had generally more muted and often paradoxical effects on the financial markets”
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
IVANHOES PROJECTION •
According to Ivanhoe (a renowned Economist), the critical date is when global Oil demand will substantially exceed the available supply from the few Persian Gulf Moslem oil exporters.
•
The permanent global oil shortage will begin when the world's oil demand exceeds global production( around 2010) if normal oil-fields decline occurs & the world's key oil producer, Saudi Arabia, has serious political problems that curtail its exports.
•
World oil production will thereafter continue to decline at a dwindling rate.
•
The major discoveries of oil is nearly over and even in future if some discoveries happens it would be not as huge as earlier ones. Hence the production would increase due to some technological advances but ultimately the supply would come down and there would be huge increase price of oil.
PAPER BARRELS "What About So Called 'Reserve Growth'"?
In recent years, the USGS and other agencies have estimated US domestic oil production would not peak until well into the 21st century, and possibly not until the 22nd century. This was despite the fact US production had already peaked in 1970, just as Hubbert had predicted. Unfortunately, these upwards revisions are best classified as "paper barrels", meaning they exist on paper only, not in the real world. • • •
This concept of paper barrel actually means that the oil is only present in the paper not physically. This makes the oil trading in the derivative market very volatile . The basic reason for the investor would be if there is lot of oil then price would come down which would bring down the cost of production for the manufacturing companies which would make greater profits.
IVANHOES PROJECTION
Economic Growth Exchange Rates Inventories Marginal Producers Lack of Investment Violence in the Middle east
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
1979-81: IRANIAN REVOLUTION AND IRAN-IRAQ WAR In 1981 recession was caused by the Volker credit squeeze, when interest rates were increased sharply, with the objective of ending an inflationary spiral of which rising oil prices were a symptom rather than a cause.
1990-91 IRAQ INVADES KUWAIT AND FIRST GULF WAR “The impact of oil prices was negligible, not least because Saudi Arabia and other Arab nations were allied with U.S. forces and made efforts to counteract the price increase”
1996-99: DEMAND-INDUCED PRICE SURGE “Global demand began to swell as the high-tech bubble encouraged a big investment boom in North America and Europe and as the Asian economies began to recover.”
2002-05: IRAQ II AND SURGING DIL DEMAND “The tripling of crude oil prices since 2002 has had generally more muted and often paradoxical effects on the financial markets”
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
Emerging Concepts The Oil Gauge Model •
To assess the response of activity and inflation to higher oil prices
•
This model examines the impact of oil prices on inflation by looking both at the long-run positive correlation between inflation and growth, as well as on the asymmetric impact of oil prices on activity.
•
net oil price Increase is used which is real (inflationadjusted)
•
With the use of a VAR methodology, impulse response functions of real activity and inflation to a 10% increase in the price of oil is derived.
•
Our Oil gauge Model finds that a 10% increase in the price of oil shaves G7 real GDP by 0.15% in the first year and 0.30% over two years. The response of inflation to an oil price increase of 10% is 0.26% in the first year and 0.45% over two years. These estimates suggest that the developed economies have become better
IVANHOES PROJECTION •
According to Ivanhoe (a renowned Economist), the critical date is when global Oil demand will substantially exceed the available supply from the few Persian Gulf Moslem oil exporters.
•
The permanent global oil shortage will begin when the world's oil demand exceeds global production( around 2010) if normal oil-fields decline occurs & the world's key oil producer, Saudi Arabia, has serious political problems that curtail its exports.
•
World oil production will thereafter continue to decline at a dwindling rate.
•
The major discoveries of oil is nearly over and even in future if some discoveries happens it would be not as huge as earlier ones. Hence the production would increase due to some technological advances but ultimately the supply would come down and there would be huge increase price of oil.
PAPER BARRELS "What About So Called 'Reserve Growth'"?
In recent years, the USGS and other agencies have estimated US domestic oil production would not peak until well into the 21st century, and possibly not until the 22nd century. This was despite the fact US production had already peaked in 1970, just as Hubbert had predicted. Unfortunately, these upwards revisions are best classified as "paper barrels", meaning they exist on paper only, not in the real world. • • •
This concept of paper barrel actually means that the oil is only present in the paper not physically. This makes the oil trading in the derivative market very volatile . The basic reason for the investor would be if there is lot of oil then price would come down which would bring down the cost of production for the manufacturing companies which would make greater profits.
IVANHOES PROJECTION
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