Report On Crude Oil

1 2BACKGROUND

Oil •

It is the burial and transformation of biomass over the last 200 million years.

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Energy source for its intrinsic qualities of extractability, transportability, versatility, and cost.

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The total amount of oil underground is finite.

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A production peak could be brought about by voluntary reductions in oil consumption before physical limits to continued supply growth kick in.

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Now concerns have arisen in recent years about the relationship between (1) the growing consumption of oil and the availability of oil reserves and (2) the impact of potentially dwindling supplies and rising prices on the world’s economy and social welfare.

General Characteristics •

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Crude oil is a mixture of hydrocarbons that exists in a liquid phase in natural underground reservoirs. Oil and gas account for about 60 per cent of the total world's primary energy consumption. Almost all industries including agriculture are dependent on oil in one way or other. Oil & lubricants, transportation, petrochemicals, pesticides and insecticides, paints, perfumes, etc. are largely and directly affected by the oil prices. Aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel, distillate fuel oil, residual fuel oil, liquefied petroleum gas, lubricants, paraffin wax, petroleum coke, asphalt and other products are obtained from the processing of crude and other hydrocarbon compounds.

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The prices of crude are highly volatile. High oil prices lead to inflation that in turn increases input costs; reduces non-oil demand and lower investment in net oil importing countries.

Categories of Crude oil •

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West Texas Intermediate (WTI) crude oil is of very high quality. Its API gravity is 39.6 degrees (making it a "light" crude oil), and it contains only about 0.24 percent of sulphur (making a "sweet" crude oil). WTI is generally priced at about a $2-4 per-barrel premium to OPEC Basket price and about $1-2 per barrel premium to Brent, although on a daily basis the pricing relationships between these can very greatly. Brent Crude Oil stands as a benchmark for Europe. India is very much reliant on oil from the Middle East (High Sulphur). The OPEC has identified China & India as their main buyers of oil in Asia for several years to come.

Crude Oil Units (average gravity)

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1 US barrel = 42 US gallons. 1 US barrel = 158.98 litres. 1 US barrel = 158.98 litres.

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1 tonne = 7.33 barrels .

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1 short ton = 6.65 barrels .

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Note: barrels per tonne vary from origin to origin.

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Global Scenario • •

Oil accounts for 40 per cent of the world's total energy demand. The world consumes about 76 million bbl/day of oil.

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United States (20 million bbl/d), followed by China (5.6 million bbl/d) and Japan (5.4 million bbl/d) are the top oil consuming countries. Balance recoverable reserve was estimated at about 142.7 billion tones (in 2002), of which OPEC was 112 billion tones.

OPEC fact sheet OPEC stands for 'Organization of Petroleum Exporting Countries'. It is an organization of eleven developing countries that are heavily dependent on oil revenues as their main source of income. The current Members are Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. • • •

OPEC controls almost 40 percent of the world's crude oil. It accounts for about 75 per cent of the world's proven oil reserves. Its exports represent 55 per cent of the oil traded internationally.

Indian Scenario • •

India ranks among the top 10 largest oil-consuming countries. Oil accounts for about 30 per cent of India's total energy consumption. The country's total oil consumption is about 2.2 million barrels per day. India imports about 70 per cent of its total oil consumption and it makes no exports.

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India faces a large supply deficit, as domestic oil production is unlikely to keep pace with demand. India's rough production was only 0.8 million barrels per day. The oil reserves of the country (about 5.4 billion barrels) are located primarily in Mumbai High, Upper Assam, Cambay, Krishna-Godavari and Cauvery basins. Balance recoverable reserve was about 733 million tones (in 2003) of which offshore was 394 million tones and on shore was 339 million tones. India had a total of 2.1 million barrels per day in refining capacity. Government has permitted foreign participation in oil exploration, an activity restricted earlier to state owned entities. Indian government in 2002 officially ended the Administered Pricing Mechanism (APM). Now crude price is having a high correlation with the international market price. As on date, even the prices of crude biproducts are allowed to vary +/- 10% keeping in line with international crude price, subject to certain government laid down norms/ formulae. Disinvestment/restructuring of public sector units and complete deregulation of Indian retail petroleum products sector is under way.

Prevailing Duties & Levies on Crude Oil Particulars

Rates

Basic Customs Duty Cess NCCD* Education cess Octroi War fedge

10% Rs.1800 per metric tonne Rs.50 per metric tonne 2% 3% Rs.57 per metric tonne

Market Influencing Factors

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OPEC output and supply. Terrorism, Weather/storms, War and any other unforeseen geopolitical factors that causes supply disruptions. Global demand particularly from emerging nations. Dollar fluctuations. DOE / API imports and stocks. Refinery fires & funds buying.

Exchanges dealing in crude futures • The New York Mercantile Exchange (NYMEX) . • The International Petroleum Exchange of London (IPE). • The Tokyo Commodity Exchange (TOCOM). Price history • Crude oil prices behave much as any other commodity with wide price swings in times of shortage or oversupply. • The crude oil price cycle may extend over several years responding to changes in demand as well as OPEC and non-OPEC supply. • Crude Oil prices ranged between $2.50 and $3.00 from 1948 through the end of the 1960s. • When viewed in 2004 dollars an entirely different story emerges with crude oil prices fluctuating between $15 $17 during the same period. The apparent 20% price increase was just keeping up with inflation. • In 1972 the price of crude oil was about $3.00 per barrel and by the end of 1974 the price of oil had quadrupled to over $12.00. The Yom Kippur War started with an attack on Israel by Syria and Egypt on October 5, 1973. The United States and many countries in the western world showed strong support for Israel. As a result of this support several Arab exporting nations

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imposed an embargo on the countries supporting Israel. Arab nations curtailed production by 5 million barrels per day (MMBPD) about 1 MMBPD was made up by increased production in other countries. The net loss of 4 MMBPD extended through March of 1974 and represented 7 percent of the free world production. From 1974 to 1978 world crude oil prices was relatively flat ranging from $12.21 per barrel to $13.55 per barrel. Events in Iran and Iraq led to another round of crude oil price increases in 1979 and 1980. The Iranian revolution resulted in the loss of 2 to 2.5 million barrels of oil per day between November, 1978 and June, 1979. At one point production almost halted. The combination of the Iranian revolution and the Iraq/Iran War resulted in crude oil prices more than doubling from $14 in 1978 to $35 per barrel in 1981. Crude oil prices plummeted below $10 per barrel by mid-1986. The price of crude oil spiked in 1990 with the uncertainty associated Iraqi invasion of Kuwait and the ensuing Gulf War. From 1990 to 1997 world oil consumption increased 6.2 million barrels per day. Asian consumption accounted for all but 300,000 barrels per day of that gain and contributed to a price recovery that extended into 1997. The price increases came to a rapid end when the impact of the economic crisis in Asia was either ignored or severely underestimated by OPEC. In December, 1997 OPEC increased its quota by 2.5 million barrels per day (10 percent) to 27.5 MMBPD effective January 1, 1998. Prices began to recover in early 1999 and OPEC reduced production another 1.719 million barrels in April 1999. Between early 1999 and the middle of 1999 OPEC production dropped by about 3 million barrels per day and was sufficient to move prices above $25 per barrel.

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In January 2002 when OPEC reduced its quota by 1.5 million

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In 2007

barrels per day and was joined by several non-OPEC producers including Russia who promised combined production cuts of an additional 462,500 barrels. This had the desired effect with oil prices moving into the $25 range by March, 2002. By mid-year the non-OPEC members were restoring their production cuts but prices continue to rise and U.S. inventories reached a 20-year low later in the year. In 2003 Average crude oil price reach $27.69 In 2004 average crude oil price reach $37.41 In 2005 average crude oil price reach $50.04/$49.81 In 2006 average crude oil price reach $58.30

January February March April

$46.53 $51.36 $52.64 $56.08

(All figures are in average price) METHODS OF PRODUCTIONS 1. ENHANCED OIL RECOVERY

3 Enhanced oil recovery (EOR) refers to the third stage of oil production, whereby sophisticated techniques are used to recover remaining oil from reservoirs that have otherwise been exhausted through primary and secondary recovery methods. During EOR, heat (such as steam), gases (such as carbon dioxide (CO2)), or chemicals are injected into the reservoir to improve fluid flow. Thermal and gas injection techniques account for almost all EOR activity in the United States, with CO2 injection being the technique that is currently attracting the most commercial interest. In the United States, EOR methods are currently being applied in a variety of regions, although most CO2 EOR occurs in the Permian Basin in Texas. Most EOR efforts in the United States

are currently managed by small, independent operators. Globally, EOR has been introduced in a number of countries, but North America is estimated to represent over half of all global EOR production. 4 2. DEEPWATER AND ULTRADEEP WATER DRILLING

Deepwater drilling refers to offshore drilling for oil in depths of water between 1,000 and 5,000 feet, while ultradeepwater drilling refers to offshore drilling in depths of water between 5,000 and 10,000 feet, according to DOE. The department reported that oil production at these depths involves a number of differences over shallow water drilling, such as drills that operate in extreme conditions, pipes that withstand deepwater ocean currents over long distances, and floating rigs as opposed to fixed rigs. The primary region for domestic deepwater drilling is the Gulf of Mexico, where deepwater drilling has become a major focus in recent years, particularly as near-shore oil production in shallow water has been declining. Globally, deepwater drilling occurs offshore in many locations, including Africa, Asia, and Latin America. 3. OIL SANDS

Oil sands are deposits of bitumen, a thick, sticky form of crude oil, which is so heavy and viscous that it will not flow unless heated or diluted with lighter hydrocarbons. It must be rigorously treated to convert it into an upgraded crude oil before it can be used by refineries to produce gasoline and diesel fuels. While conventional crude flows naturally or is pumped from the ground, oil sands must be mined or recovered “in-situ,” or in place. During oil sands mining, approximately 2 tons of oil sands must be dug up, moved, and processed to produce 1 barrel of oil. During in-situ recovery, heat, solvents, or gases are used to produce the oil from oil sands buried too deeply to mine. The largest deposit of oil sands globally is found in Alberta, Canada—accounting for at least 85 percent of the world’s oil sands reserves—

although DOE reported that deposits of oil sands can also be found in the United States in Alabama, Alaska, California, Texas, and Utah. 4. HEAVY AND EXTRA HEAVY OILS

Heavy and extra-heavy oils are dense, viscous oils that generally require advanced production technologies, such as EOR, and substantial processing to be converted into petroleum products. Heavy and extra-heavy oils differ in their viscosities and other physical properties, but advanced recovery techniques like EOR are required for both types of oil. Heavy and extra-heavy oil reserves occur in many regions around the world, with the Orinoco Oil Belt in Eastern Venezuela comprising almost 90 percent of the total extraheavy oil in the world. In the United States, heavy oil reserves are primarily found in Alaska, California, and Wyoming, and some commercial heavy oil production is occurring domestically. 5. OIL SHALE

Oil shale refers to sedimentary rock that contains solid bituminous materials that are released as petroleum-like liquids when the rock is heated. To obtain oil from oil shale, the shale must be heated and the resultant liquid must be captured, in a process referred to as “retorting.” Oil shale can be produced by mining followed by surface retorting or by in-situ retorting. The largest known oil shale deposits in the world are in the Green River Formation, which covers portions of Colorado, Utah, and Wyoming. Estimates of the oil resource in place range from 1.5 trillion to 1.8 trillion barrels, but not all of the resource is recoverable. In addition to the Green River Formation, Australia and Morocco are believed to have oil shale resources. At the present time, a RAND study reported there are economic and technical concerns associated with the development of oil shale in the United States, such that there is uncertainty regarding

whether industry will ultimately development of the resource.

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Top petroleum-producing countries In order of amount produced in 2004 in MMbbl/d & ML/d: # 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Producing Nation for 2004 (×106bbl/d) (×103m³/d) Saudi Arabia (OPEC) 10.37 1,649 Russia 9.27 1,474 1 United States 8.69 1,382 Iran (OPEC) 4.09 650 1 Mexico 3.83 609 1 China 3.62 576 1 Norway 3.18 506 1,3 Canada 3.14 499 1 Venezuela (OPEC) 2.86 455 United Arab Emirates (OPEC) 2.76 439 Kuwait (OPEC) 2.51 399 Nigeria (OPEC) 2.51 399 United Kingdom 1 2.08 331 2 Iraq (OPEC) 2.03 323

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peak production of conventional oil already passed in this state

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Though still a member, Iraq has not been included in production figures since 1998

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Canada has the world's second largest oil reserves when tar sands are included, and is the leading source of U.S. imports, averaging 1.7 MMbbl/d in April 2006

Top petroleum-exporting countries In order of amount exported in 2003: 1. 2. 3. 4. 5. 6. 7. 8.

Saudi Arabia (OPEC) Russia Norway Iran (OPEC) United Arab Emirates (OPEC) Venezuela (OPEC) Kuwait (OPEC) Nigeria (OPEC)

9. Mexico 10. Algeria (OPEC) 11. Libya (OPEC) Note that the USA consumes almost all of its own production, while the UK has recently become a net-importer rather than net-exporter.

Top petroleum-consuming countries # Consuming Nation 1 United States 2 China 3 Japan 4 Russia 5 Germany 6 India 7 Canada 8 South Korea 9 France 10 Italy 11 Saudi Arabia 12 Mexico 13 United Kingdom 14 Brazil

(bbl/day) (m³/day) 20,030,000 3,184,516 6,391,000 1,016,088 5,578,000 886,831 2,800,000 445,164 2,677,000 425,609 2,320,000 368,851 2,300,000 365,671 2,061,000 327,673 2,060,000 327,514 1,874,000 297,942 1,775,000 282,202 1,752,000 278,546 1,722,000 273,776 1,610,000 255,9

Top petroleum-importing countries Oil imports by country # Importing Nation (bbl/day) (m³/day) 1 United States 13,150,000 2,090,683 2 Japan 5,449,000 866,322 3 China 3,226,000 512,893 4 Netherlands 2,284,000 363,127 5 France 2,281,000 362,650 6 South Korea 2,263,000 359,788 7 Italy 2,158,000 343,095 8 Germany 2,135,000 339,438 9 India 2,090,000 332,283 10 Spain 1,582,000 251,518

11 United Kingdom 1,084,000 172,342 12 Belgium 1,042,000 165,665 13 Canada 963,000 153,105 14 Turkey 616,500 98,016 RELATIONSHIP OF SUPPLY AND DEMAND OF OIL TO OIL PRICE

The price of oil is determined in the world market and depends mainly on the balance between world demand and supply. Recent world production of oil has been running at near capacity to meet rising demand, which has put upward pressure on oil prices. Figure 4 shows that world oil prices in nominal terms—unadjusted for inflation—are higher than at any time since 1950, although when adjusted for inflation, the high prices of 2006 are still lower than were reached in the 1979-80 price run-up following the Iranian Revolution and the beginning of the Iran-Iraq war.

All else being equal, oil consumption is inversely correlated with oil price, with higher oil prices inducing consumers to reduce their oil consumption.8 Specifically, increases in crude oil prices are reflected in the prices of products made from crude oil, including gasoline, diesel, home heating oil, and petrochemicals. The extent to which consumers are

willing and able to reduce their consumption of oil in response to price increases depends on the cost of switching to activities and lifestyles that use less oil. Because there are more options available in the longer term, consumers respond more to changes in oil prices in the longer term than in the shorter term. For example, in the short term, consumers can reduce oil consumption by driving less or more slowly, but in the longer term, consumers can still take those actions, but can also buy more fuel-efficient automobiles or even move closer to where they work and thereby further reduce their oil consumption. Supply and demand, in turn, affect the type of oil that is produced. Conventional oil that is less expensive to extract using lower-cost drilling techniques will be produced when oil prices are lower. Conversely, oil that is expensive to produce because of the higher cost technologies involved may not be economical to produce at low oil prices. Producers are unlikely to turn to these more expensive oil sources unless oil prices are sustained at a high enough level to make such an enterprise profitable. Given the importance of oil in the world’s energy portfolio, as cheaper oil reserves are exhausted in the future, nations will need to make the transition to more and more expensive and difficult-toaccess sources of oil to meet energy demands. Recently, for example, a large discovery of oil in the Gulf of Mexico made headlines; however, this potential wealth of oil is located at a depth of over 5 miles below sea level, a fact that adds significantly to the costs of extracting that oil

The Impact of Higher Oil Prices on the Global Economy •

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There will be a transfer of income from oil consumers to oil producers. As the propensity to spend of those who lose income (energy consumers) is generally larger than the propensity to spend of those who gain income (energy producers), there will be some fall in demand. On an international level, the transfer is from oil importing countries to oil exporters and oil exporters tend to expand demand only gradually (in the past, they have spent about 1/3 of their additional revenues after one year, rising to 75 percent after 3 years).In addition, a reduction in demand can also occur within producing countries that allow higher oil prices to feed through to consumers, as energy producers tend to have a lower propensity to consume than energy consumers. There will be a rise in the cost of production of goods and services in the economy, given the increase in the relative price of energy inputs, putting pressure on profit margins. As the oil intensity of production in advanced countries has fallen over the past three decades, the supply side impact for a given increase in oil prices can be expected to be less than in past episodes. In developing countries, however, where the oil intensity of production has declined less, the impact may be closer to that in the earlier period.

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There will be an impact on the price level and on inflation. Its magnitude will depend on the degree of monetary tightening and the extent to which consumers seek to offset the decline in their real incomes through higher wage increases, and producers seek to restore profit margins. These responses can create a wage/price spiral, as was the case, for example, during the oil shocks in the 1970s.

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There will be both direct and indirect impact on financial markets. Actual as well as anticipated changes

in economic activity, corporate earnings, inflation, and monetary policy following the oil price increases will affect equity and bond valuations, and currency exchange rates. •

Finally, depending on expected duration of price increases, the change in relative prices creates incentives for suppliers of energy to increase production (to the extent that there is scope for doing so) and investment, and for oil consumers to economize.

Bibliography www.wtrg.com www.wikipedia.org www.opec.org www.iea.org www.energy.gov www.mcx.com