Professional Documents
Culture Documents
By Dr Azrai Abdullah/
Azhan Hasan
1 10/26/2010
Learning Outline
2 10/26/2010
The History of Oil
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Demand Curve
The x-axis is the price, and the y-axis is the demand.
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Supply Curve
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The Meeting of Demand & Supply
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How Market Works
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Oil Supply and Demand
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Oil Market
l The result of this is that the oil market is one where small
changes to the supply or demand curve cause large
changes to the clearing price.
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Case Study 1 - The Oil Shocks of the
1970s
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Explanation on Model
l It is not only sellers’ cartels that affect the oil price. When
Hurricane Katrina knocked out production in the Gulf of
Mexico it had a similar effect - the supply curve was shifted
to the left and prices rose.
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Case Study 2 - Short-Term Changes to
Supply and Demand Curves
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The Model [2]
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Crude Oil Prices 1947 - May, 2008
Crude Oil Prices 1947 - May, 2008
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Global Oil Demand [1]
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Global Oil Demand [2]
- Issue of reserves
- Behavior of various suppliers
- Distinguish between OPEC and non OPEC non-
- Different and diverse suppliers outside OPEC ranging
from national oil companies, IOCs and independents
- Widely assumed that non OPEC behaves
competitively
- OPEC behavior much more complex
- Many diverse theories in literature ranging
from cartel to competitive behavior.
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Determinants of Non OPEC Oil
Supply
World R/P 30 35 42 41
ratio (years)
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Economic Based Models
Economic factors
- real oil prices, costs, regulatory factors play an important
role in determining oil production role
Given the different models and the wide range of elasticity estimates, it is
no surprise that non-OPEC supply projections differ considerably across
studies and over time.
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Supply of Oil: Role of OPEC
EIA (2006) 32.9 – 37.9 29.3 – 43.3 29.8 – 46.9 30.9 – 51.0
(Upper bound –
Lower bound)
EIA (2005) 30.6 – 32.7 43.5 – 49.2 51.6 – 61.0 61.3 – 74.4
(Upper bound –
Lower bound)
IEA (2006) 35.9 56.3
(Base line
scenario)
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LIMITATIONS
l Gately (2004) calculates the OPEC’s net present value of profits for
different choices of OPEC’s market share:
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Limitations of Supply-Demand
Framework
l Using this framework to project oil prices is likely to result i n mistakes
for a number of reasons in
- highly sensitive to assumptions made about income and price
elasticity of demand, the price elasticity of supply, role of
reserves, OPEC behaviour
- price (demand )
- Geology
- Climate change
(Taxes)
- Political turmoil
- Prices (supply )
- Technology
Europe:
13.3MB/ 144M
USA:
Day
13.5M
B/Day China+Japan
Ormuz +India
13MBD 10.3MB/Day
Malacca
10.3MBD
Countries in red
89% of World Oil Reserves
81% of World Gas Reserves
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Investments of the Future 2005-2030
« Risks are not below the ground, but above the ground »
(Daniel Yergin)
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The Origin of Higher Price
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A prolonged period of surging FUEL, FOOD and
commodity prices hasten the build up of the
“PERFECT STORM”…
l Price of houses in the US took a steep dive, further deteriorating the sub-
prime crisis with astronomical financial losses.
l The weakening US Dollar worsens the already ‘soft’ global economy which has
already been impacted by rising inflation as a result of higher energy and food
prices.
l In the meanwhile, crude oil prices continue with their record breaking price
rally.
37 Source : Bloomberg
10/26/2010
A combination of traditional drivers (Geopolitics,
Supply/Demand and Environment) and ‘new market
fundamentals’ (financial economics, rising cost and
speculation) have led to oil prices rally
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Curse Or Windfall?
Food for Thought [1]
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Curse Or Windfall?
Food for Thought [2]
- Nigeria:
Incessant Niger Delta rebel and militants attacks
wiped off over 1 million bpd of the country’s total oil
production, thus creating future supply uncertainty
in the global oil markets.
42 10/26/2010
Causes of High Oil Prices –
Geopolitics [2]
- Iran:
Increasing speculation of US-Iran military
confrontation fuels more uncertainty and
heightens the fear of supply disruption that will
send global oil prices to record highs.
- Iraq:
Heightens security concerns owing to protracted
US occupation, as well as threat of sectarian
violence between Sunni and Shia’a.
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Causes of High Oil Prices – Financial
Economics/Markets [1]
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Causes of High Oil Prices – Financial
Economics/Markets [2]
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Key Assumptions [1]
l Major geopolitical issues such as heightened security concerns in
Iraq and Nigeria, and possible US-Iran military confrontation
continue to remain uncertain and unresolved over the medium term
(3 to 5 years).
l Oil prices are expected to remain high at above $100 per barrel for
the rest of 2008 if the supply/demand imbalance, geopolitical tension
and financial markets turmoil persist.
l Oil prices for 2008 fell to its lowest level of $91.49 on September can
be seen as a temporary correction as oil prices continue to remain
on a ‘high plateau’ where oil is still trading at least than 80% above
the 2005 price.
Source : CIRU-CPDD PETRONAS
46 10/26/2010
Key Assumptions [2]
l For oil price to escalate beyond $150 towards $200 per barrel, there
have to be major or sudden supply disruption/shocks from the top
oil producing countries, or serious distortion to the markets via
excessive and uncontrolled speculation.
l Demand for energy, particularly oil, from China and India remains
robust over a longer period, which is in line with their respective
strong growth projection.
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Key Assumptions [3]
48 10/26/2010
Impact and Implication of High Oil
Prices [1]
l Global Economy
- Prolonged high oil price may lower GDP growth
owing to increasing cost of doing business.
- Rising inflation.
- Asia’s export-oriented economies are vulnerable
to higher oil prices.
- Developed countries will accelerate the
development of alternative fuels.
49 10/26/2010
Impact and Implication of High Oil
Prices [2]
l Socio-Political
- Widespread protests against oil price spike
across the major economies (US, France,
Spain, China, India, etc).
- Socio-political upheaval that may impact
political stability.
- Drastic change in consumer habits – becoming
more calculative, efficient and prudent in energy
consumption.
50 10/26/2010
Impact and Implication of High Oil
Prices [3]
l Malaysian Economy
- Higher revenues for the government (from CITA, PITA,
royalties, dividends and duties).
- Increasing inflationary pressure. Bank Negara stated that the
inflation will increase to more than 6%.
- Energy intensive sector will be burdened with higher cost of
doing business.
- Exports will soften due to declining demand from trading
partners such as US and EU.
- Increased unemployment due to slower economic growth.
- The amount of subsidy to be provided by the government for
2008-09 will be much higher.
Source : CIRU-CPDD PETRONAS
51 10/26/2010
Impact and Implication of High Oil
Prices [4]
l PETRONAS
- Sustained high oil price will lead to higher revenue
and profit for PETRONAS.
- E&P investment in domestic deepwater, small
marginal fields and EOR projects become more
attractive.
- Better incentives to develop and monetize our oil and
gas reserves in Africa and Turkmenistan.
- Drilling, seismic, fabrications, raw materials and other
upstream-related services may cost higher.
- Potential development in alternative energy as one of
the sustainable solutions to high energy costs.
Source : CIRU-CPDD PETRONAS
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Key Issues/Challenges [1]
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Key Issues/Challenges [2]
l The oil & gas industry faces myriad of issues/challenges from many fronts:
- Geopolitics - Uncertainty and heighten security concerns enhance the risk
premium and costs of doing business.
- Energy vs. food security - direct and increased confrontation & competition
between food and fuel.
54 10/26/2010