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8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 139
ECONOMICS
NATIONAL UNIVERSITY OFMODERN
LANGUAGE LAHORECAMPUS
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 239
ECONOMIC
SOIL PRICE EFFECT ON WORLDCONOMICS
presented by Usman Ahmad Qadri MBA-2night Numl student
Asad
Iqbal MBA-2 night Numl student
Awais Ahmad Tahir
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 339
MBA-2 night Numl student
SHUMAIR
IJAZ MBA-2 night
Numl student
FahranNasir
Mba-2 Night numl student
Presented to MissFatima
This Project is Dedicated tomy Beloved
Father amp Motherfamiliesour
friends
And all the teachers howteach me hellip
--Usman Ahmad Qadri
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 439
Asad IqbalAwais Ahmad
Tahir
ShUMAIR Ijaz FAHRAN NASIR
TABLE OFCONTENT
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 539
1 Introductionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(1)
2 Historyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(3)
i Truman doctrinehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
ii Expropriation vs economic warfare 1950helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
iii Suez(post war petroleum order)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(4)
iv Opec(organization of the petroleum exporting countries)helliphelliphelliphelliphelliphelliphellip
(5)
v End of 1960 to early 1970helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vi 1973 Yom kippur Warhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vii 1973 Oil crisis helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
viii Desert Stormhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(8)
3 Current oil price impact on Transitioneconomyhellip(9)
i In 2000-2007helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(9)
ii In 2008 to upwardhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(12)
4 Oil price impact on different countrieshelliphelliphelliphelliphellip(17)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 639
i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 739
Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 839
Oil resources in the different part of world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 239
ECONOMIC
SOIL PRICE EFFECT ON WORLDCONOMICS
presented by Usman Ahmad Qadri MBA-2night Numl student
Asad
Iqbal MBA-2 night Numl student
Awais Ahmad Tahir
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 339
MBA-2 night Numl student
SHUMAIR
IJAZ MBA-2 night
Numl student
FahranNasir
Mba-2 Night numl student
Presented to MissFatima
This Project is Dedicated tomy Beloved
Father amp Motherfamiliesour
friends
And all the teachers howteach me hellip
--Usman Ahmad Qadri
8142019 economics project of oil
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Asad IqbalAwais Ahmad
Tahir
ShUMAIR Ijaz FAHRAN NASIR
TABLE OFCONTENT
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1 Introductionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(1)
2 Historyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(3)
i Truman doctrinehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
ii Expropriation vs economic warfare 1950helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
iii Suez(post war petroleum order)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(4)
iv Opec(organization of the petroleum exporting countries)helliphelliphelliphelliphelliphelliphellip
(5)
v End of 1960 to early 1970helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vi 1973 Yom kippur Warhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vii 1973 Oil crisis helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
viii Desert Stormhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(8)
3 Current oil price impact on Transitioneconomyhellip(9)
i In 2000-2007helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(9)
ii In 2008 to upwardhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(12)
4 Oil price impact on different countrieshelliphelliphelliphelliphellip(17)
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i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
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Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
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Oil resources in the different part of world
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2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
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httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
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httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
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httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
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httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
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httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
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httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 339
MBA-2 night Numl student
SHUMAIR
IJAZ MBA-2 night
Numl student
FahranNasir
Mba-2 Night numl student
Presented to MissFatima
This Project is Dedicated tomy Beloved
Father amp Motherfamiliesour
friends
And all the teachers howteach me hellip
--Usman Ahmad Qadri
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 439
Asad IqbalAwais Ahmad
Tahir
ShUMAIR Ijaz FAHRAN NASIR
TABLE OFCONTENT
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1 Introductionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(1)
2 Historyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(3)
i Truman doctrinehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
ii Expropriation vs economic warfare 1950helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
iii Suez(post war petroleum order)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(4)
iv Opec(organization of the petroleum exporting countries)helliphelliphelliphelliphelliphelliphellip
(5)
v End of 1960 to early 1970helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vi 1973 Yom kippur Warhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vii 1973 Oil crisis helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
viii Desert Stormhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(8)
3 Current oil price impact on Transitioneconomyhellip(9)
i In 2000-2007helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(9)
ii In 2008 to upwardhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(12)
4 Oil price impact on different countrieshelliphelliphelliphelliphellip(17)
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i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
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Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
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Oil resources in the different part of world
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httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
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httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
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bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
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httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
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httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
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httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
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1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
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httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
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7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
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Asad IqbalAwais Ahmad
Tahir
ShUMAIR Ijaz FAHRAN NASIR
TABLE OFCONTENT
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1 Introductionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(1)
2 Historyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(3)
i Truman doctrinehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
ii Expropriation vs economic warfare 1950helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
iii Suez(post war petroleum order)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(4)
iv Opec(organization of the petroleum exporting countries)helliphelliphelliphelliphelliphelliphellip
(5)
v End of 1960 to early 1970helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vi 1973 Yom kippur Warhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vii 1973 Oil crisis helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
viii Desert Stormhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(8)
3 Current oil price impact on Transitioneconomyhellip(9)
i In 2000-2007helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(9)
ii In 2008 to upwardhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(12)
4 Oil price impact on different countrieshelliphelliphelliphelliphellip(17)
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i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
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Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
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Oil resources in the different part of world
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httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
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httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
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24)- OPEC (Organization of the Petroleum Exporting Countries)
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bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
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httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
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httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
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httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
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bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
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httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
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8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 539
1 Introductionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(1)
2 Historyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(3)
i Truman doctrinehelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
ii Expropriation vs economic warfare 1950helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(3)
iii Suez(post war petroleum order)helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(4)
iv Opec(organization of the petroleum exporting countries)helliphelliphelliphelliphelliphelliphellip
(5)
v End of 1960 to early 1970helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vi 1973 Yom kippur Warhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
vii 1973 Oil crisis helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(6)
viii Desert Stormhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(8)
3 Current oil price impact on Transitioneconomyhellip(9)
i In 2000-2007helliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(9)
ii In 2008 to upwardhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(12)
4 Oil price impact on different countrieshelliphelliphelliphelliphellip(17)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 639
i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
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httpslidepdfcomreaderfulleconomics-project-of-oil 739
Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 839
Oil resources in the different part of world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
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5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 639
i Oil price Impact on Pakistan Economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
ii Current situationhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
(18)
iii How Pakistan is coping with the challenge of High oil
prices(19)
5 Analysis of the Impact of high oil priceImpact on Global economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
hellip(24)
i Oil price shocks and the Economy1 oil price shocks affect economic activity2 purchasing power effects3 sensitive is GDP to oil price shocks4 Economy relationship symmetric
6 Twenty Surprising ways High oil price affects theGlobal economyhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip
helliphellip(25)
Conclusionhelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphelliphellip(
1)-Introduction
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 739
Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 839
Oil resources in the different part of world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
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httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 739
Crude Oil
Is the raw unprocessed liquid form that comes out of theground It is also known as petroleum Crude oil is a fossil fuelmeaning that it was made nat-urally from decaying plants and animals living millions of yearsago Crude oilsvary in color from clear to tar-black and in viscosity from water to almost solid
Fuel
Any substance (liquid solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy whentreated in a certain way such as by burning or by combustion inan engine When the fuel is burned it is destroyed and leaves uswith carbon emissions
Fuel prices
Typically displayed in either Price Per Liter (Litre) in the UKEurope Australia New Zealand and South Africa and Price Per Gallon in the US and Canada
Fuel economy
Also known as Fuel Efficiency can be best described as ways todrive carefully smoother and effeciently to get achieve moremiles per gallon
Petrol
Also known as Gasoline refined from Crude oil and is approx
15 lighter in density than petroluem diesel A mixture of various hydrocarbons used as a fuel
8142019 economics project of oil
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Oil resources in the different part of world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
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httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
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httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
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httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
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$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
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8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 839
Oil resources in the different part of world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 939
2)- HISTORY
21)-March 12 1947 Truman Doctrine
bull New Aramco Socol Standard Oil of NJ Texaco Socony
bull Gulf Oil ndash Shell in Kuwait
bull Iranian contract between Anglo Iranian and Standard Oil
bull Socony
22)-Expropriation vs economic warfare
1950
bull No oil export no money economic trouble
bull US and Brithish assisted coup
bull The shah regained power
Oil consortium Jersey Socony Texaco
Standard of CaliforniaGulf Shell CFP
Anglo Iranian
Result The economic is trouble because they have no
trend export of oil in the world
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
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httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1039
23)-Suezbull Suez represented the post-war petroleum order
bull 23 of Europersquos oil passed through Suez
bull 23 of traffic in Suez was oil
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1139
24)- OPEC (Organization of the Petroleum Exporting Countries)
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1239
bull End of 1950s Soviet Union is the second largest oil
producer
bull Oil companies cut prices
OPECrsquos aim
bull Building national refineriesbull National integrated oil companiesbull Stabilize market for themselves 60-40 share
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1339
241)-Founding of OPECThe Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries including Iran seven Arabcountries plus Ecuador Indonesia Nigeria Angolaand Venezuela OPEC had
been formed onSeptember 14 1960 at the Baghdad conference
It was made to protest pressure by major oil companies(mostly owned by US British and Dutch nationals) to reduce
oil prices and payments to producers At first it had operated as an informal
bargaining unit for the sale of oil by Third World nations It confined itsactivities to gaininga larger share of the revenues produced by Western oil
companies and greater control over the levels of production However in the early
1970s it beganto exert its strength
25)-End of 1960s early 1970s
Recession in US and British powerbull Demand in oil was catching up with supply ndash end of surplusbull Huge economic growth fueled by oil
bull US oil production 113 million barrels per day the peak
bull More dependency on Middle Eastern oil
26)-1973 Yom Kippur warbull The Soviet Union supported Egypt and Syriabull The USA supported Israelbull World War conflict was imminentbull Oil exporters increased oil prices 100
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1439
bull Arabs cut oil supply and eventually stopped exporting toUSA
bull A weak president in the yom kippur war
contributed to theoil crisis
27)-1973 oil crisis
bull January 1973mdashThe 1973ndash1974 stock market crash beginsbull August 23 1973mdashIn preparation for the Yom Kippur War
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby the Arabs will use the oil weapon as part of the upcomingmilitary conflict [8]
bull September 15mdashThe Organization of Petroleum ExportingCountries (OPEC) declares a negotiating front consisting of the 6 Persian Gulf State to pressure for price increases and an end to support of Israel based on the 1971 Tehranagreement
bull October 6mdashEgypt and Syria attack Israel on Yom Kippur
starting the fourth Arab-Israeli War bull October 8ndashOctober 10mdashOPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail
bull October 12mdash The United States initiates Operation Nickel
Grass an overt strategic airlift operation to provideweapons and supplies to Israel during the Yom Kippur War
bull October 16mdashSaudi Arabia Iraq Abu Dhabi Kuwait and Qatar unilaterally raise posted prices by 17 to $365 per barrel and announce production cuts
bull
October 17mdashOPEC oil ministers agree to use oil as aweapon to punish the West for its support of Israel in the Arab-Israeli war They recommend an embargo against unfriendly states and mandate a cut in exports
bull October 19mdashUS President Richard Nixon requests Congressto appropriate $22billion in emergency aid to Israelincluding $15 billion in out-right grants[9] Saudi Arabia
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1539
Libya and other Arab states proclaim an embargo on oilexports to the United States
bull October 23ndashOctober 28mdashThe Arab oil embargo is extended
to the Netherlands
bull
November 5mdashArab producers announce a 25 output cut A further 5 cut is threatened
bull November 23mdashThe Arab embargo is extended to Portugal
Rhodesia and south africabull November 27mdashUS President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price production allocation and marketing controls
bull December 9mdashArab oil ministers agree to another five
percent cut for non-friendly countries for January 1974bull
December 25mdashArab oil ministers cancel the five percent output cut for January Saudi oil minister Yamani promises aten percent OPEC production rise
bull January 7ndashJanuary 9 1974mdashOPEC decides to freeze pricesuntil April 1
bull February 11mdash United States Secretary of State Henry Kissinger unveils the Project Independence plan to makeUS energy independent
bull February 12ndashFebruary 14mdashProgress in Arab-Israelidisengagement brings discussion of oil strategy among theheads of state of Algeria Egypt Syria and Saudi Arabia
bull March 17mdashArab oil ministers with the exception of Libya
announce the end of the embargo against the United States
December 1974mdashThe 1973ndash1974 stock market crash ends
28)-Desert Storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1639
bull August 2 1990 Iraqi invasion of Kuwait
bull New oil shock supply decreased
bull Loss had been compensated by December from other
sources
bull January 17 1991 Desert Storm
bull February 28 cease fire
Desert storm
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1739
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES
31)-IN 2000 ndash 2007
bull The price of oil affects just about everything that is made
transported eaten and sold in the United States But withoil approaching $100 a barrel the impact on the US
economy has been less than many analysts expected
bull Time and again economists from Alan Greenspan on down
have warned that higher oil prices are inflationary They make it more expensive to drive to buy an airplane ticket and to manufacture anything from air conditioners to
zippers
bull Despite that the economy grew at an annual rate of 49
percent last quarter Thats been a surprise to Jay Bender president of a South Dakota injection-molding companyNPR interviewed him in January 2003 when oil sold for $32a barrel At the time he worried that rising oil prices would make raw materials more expensive
bull Thats going to be a challenge and if it does squeeze our
bottom line too hard it will have an impact on our ability toinvest in capital equipment and grow our business Bender said in 2003
bull Today he says the cost of raw materials has increased but
I would say probably not as much as I thought it would and maybe what I was forgetting [in 2003] hellip is when thesecosts go up they impact my competitors as well
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1839
bull So how is his company doing now
bull Were doing well he said I would say its the same
scenario as three or four years ago that our sales are
continuing to increase our top line is good we just set asales record in August and we broke it again last month inOctober
bull Bender said he has survived because by becoming more
efficient fighting back against higher prices and passing onsome increases to customers
bull Economist Ken Goldstein of The Conference Board which
compiles the Consumer Confidence Index said whatshappened to Bender is happening across the economy Hesaid it may not look like it when you see all those SUVs but the US is more energy efficient than it used to be and alternative fuels are more widely available
bull When oil gets much more expensive hellip some biofuels
become more cost effective Goldstein said We are ableto make that switch today We werent able to make that earlier
bull Federal Reserve Governor Alice Rivlin said there is another
reason the economy has survived price increases mdash lessmanufacturing
bull We dont depend on energy as much because we dont
depend on manufacturing as much Rivlin said Servicesare less energy intensive
bullGoldstein believes the days of relatively painless priceincreases are ending A lot of things are getting moreexpensive
bull For example the price of some of these sports drinks
hadnt increased in seven years It did this summer and precisely because the price of transporting that stuff by
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 1939
truck to the supermarket to the grocery store got moreexpensive to the point where they had to go for a priceincrease he said
bull Goldstein says there is always a lag between the time
when oil goes up and the time its impact is felt in the
economy
bull This $100 mdash near $100 mdash a barrel crude oil thats still on
the tanker he said That hasnt even gotten to therefinery let alone to the gas station on the corner
bull When it does he said gasoline could hit $4 a gallon
bull Thats bound to be felt by consumers Whether they stop
spending will depend partly on other factors such as howwell the housing industry and the job market do But the
past few years have shown that the economy can adjust torising prices better than people once thought
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2039
$0
$10
$20
$30
$40
$50
$60
$70
$80
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007
King Fahd
gets mad
Everyone
gets mad
Exxon
ValdezIraq-Iran
war ends
Tankerwar
Saddam
gets madOPEC
market
share strategy
a badidea
Warm
winter
Fund
buying
OPEC
agreement
Asian
recession
$bbl
911 Threat of
Iraq embargo
Iraq
war
Financial Markets
Discover Commodity
Investing
Chinese Demand
Nigerian
Disruptions
32)-IN 2008CURRENT ISSUES ABOUT THE OIL PRICE
I Retail gasoline prices fell to a national average of
$222 a gallon dragged down by the falling price of
crude which now costs 60 percent less per barrel
than it did in mid-July
II Light sweet crude for December delivery fell more
than 5 percent or $325 to $5916 a barrel on the
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2139
New York Mercantile Exchange In earlier electronic
trading crude fell to $5832 its lowest point since
March 2007
III Oil prices fell two days ahead of a report from the
International Energy Agency which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month
IV Volatile price swings are occurring almost every day
on the trading floorV While the Nymex contract is now trading near first-
half 2007 prices the difference then between daily
highs and lows was around $150 a barrel while
now the average daily range is around $550 a
barrel with recent daily peaks at $950 said analyst
Olivier Jakob of Petromatrix in Switzerland
VI Investors have grown increasingly leery about the
swooning US economy which faces its worst
recession in decades
VII Industry analysts had expected China and India
would continue buying crude if the US and other
western nations went into recession but the booming
economies of Asia have begun to show signs of fatigue
VIII Some forecasts had called for Chinas gross domestic
product to grow 10 percent next year More recent
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2239
forecasts have it closer to 6 percent the firm Cameron
Hanover said in a report Tuesday
IX A $586 billion stimulous package in China boosted markets
globally early Monday but those gains fizzled quickly and asell-off that began by midday in the US continued in Asia
and Europe Tuesday
X On Tuesday the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc and Starbucks Corp gave
investors more evidence the housing market and consumer
spending are getting weaker
XI Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period while Starbucks reported lower
sales across the coffee chain leading to profits that fell
below analysts expectations
XII Gasoline fell again overnight dipping 2 cents to a national
average of $222 for a gallon of regular unleaded
according to auto club AAA the Oil Price Information
Service and Wright Express The average price has fallen
nearly 32 percent in the past month and according to AAA
could be headed to $2 a gallon nationally by years end
XIII Crude demand from the US the worlds largest consumer
of energy is a key driver of oil prices
XIV We saw extremely poor car sales and pretty shocking
unemployment numbers from the US last week said
Toby Hassall an analyst with Commodity Warrants
Australia in Sydney It wouldnt surprise me if oil edged
down toward $50
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2339
XV US car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 65 percent
last month
XVI Oil prices fell despite signs that OPEC members are goingahead with production cuts agreed to at an emergency
meeting in Vienna Austria last month
XVII Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries which will
meet on Dec 17 in Oran Algeria
XVIII The prime minister of Qatar said Tuesday that fair oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue avoiding price
spikes in the future
XIX Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers it could trigger price spikes in the near future
when demand picks up
XX But for now it is waning energy demand not the supply
controlled by OPEC that is dominating crude prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2439
XXI Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging
XXII Militants in Nigeria on Monday resumed attacks on the
countrys oil installations The military said it killed eight
people while guarding a facility in the oil-rich south of the
country
XXIII Militants frequently attack oil facilities seeking to hobble
Africas biggest petroleum industry and force Nigeriasfederal government to send more oil funds to the southern
states where the crude is pumped
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2539
XXIV The focus of the market has really been on the demand
side Hassall said Id be surprised if supply side issues in
Nigeria could change the mood of the market
XXV In other Nymex trading heating oil futures fell 748 centsto $193 a gallon while gasoline prices dropped 73 cents
to $12945 a gallon Natural gas for December delivery
tumbled 398 cents to $685 per 1000 cubic feet
XXVI In London December Brent crude tumbled 6 percent or
$354 to $5554 a barrel on the ICE Futures exchange
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2639
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2739
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2839
41)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY
411)-CURRENT SITUATION
bull On month-on-month basis Pakistanrsquos oil import bill rose
to 1406 billion dollars during August 2008 from 9957million dollars in the corresponding month of last year
witnessing surge in oil import prices both in Arabian LightCrude and frequently hike in crude oil prices in westerncountries during the period under review
bull Given domestic shortages and emerging political
concerns for strategic reserves the countryrsquos food importbill increased to 2521 million dollars with an increase of 518 million dollars during the second month of currentfinancial year from 2003 million dollars in August 2007
However official sources and economic experts areforeseeing that currently with international crude oiltrading close to $92 per barrel 7 months low Pakistancan save $1-15b in oil import bill This will have apositive impact on current account deficit for theupcoming months of FY09 The country imported $41869million worth of wheat which along with price hikes of palm oil and other products raised the food import bill to$51m during August 2008
bull The State Bank of Pakistan reported on Tuesday that in
the category of petroleum group countryrsquos importpayments on petroleum products increased to $7542million in August 2008 against $3552 million in August2007 while country had spent $652 million on the import
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 2939
of petroleum crude
bull It is important to note that in August 2008 petroleum
products with petroleum crude and palm oil in food group
imports requirements registered a strong growth ascompared to slowdown in import growth of thesecommodities witnessed during last month of FY09 (July2008)
bull The total machinery grouprsquos import payments swelled to
$4529 million in the month of August 2008 against 4331million in August 2007 showing an increase growth inpower generating machinery and textile machinery which
surged to $ 76631 million and 93196 millionrespectively during the course of period under review
bull In machinery group mobile phones growth substantially
hampered by 21 million dollars to 18351 million dollarsin August 2008 to 39380 million dollars in August 2007According to official data on foreign trade trade deficit of the country had widened by 4767 percent to 3522billion dollars during July-August 2008 from 2385 billiondollars in July-August 2007 on year-on-year basis amidrecord acceleration in the import growth caused byinflated petroleum group imports increased import of wheat and slowdown in export growth
bull During August the second month of the current financial
year trade deficit amounted at 18777 billion dollarsshowing an increase growth of 1418 percent against1644 billion dollars in the last month of prevalent fiscal(July 2008) During the particular course of past month
(August 2008) country witnessed record volume of tradedeficit soared by 4637 percent to $1877b from $1282bin the corresponding month of FY08
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3039
42)-How Pakistan is coping with the Challenge of
High Oil Prices
The trend in rising prices has become a grave concern for thedeveloping economy like Pakistan Because if this trend continued can result ininflationary pressures in theeconomy increasing budget deficit and balance of payment
problems and slowdown in theeconomic growth
421)- Pakistan Energy Sector ScenarioEnergy sector has a direct link with the economic development of a country In linewith the rising growth rate of GDP demand for energy has alsogrown rapidly Per capitaenergy consumption of the country is estimated at 14 million
Btu3the energy consumption has grown at an annual average rate of 44 percent from to 2005-08
Although it is only a fraction of other industrialising countries inthe region as Thailand and Malaysia
in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role) In addition limited refining capacity leads toheavy dependence on the imports of petroleum products
According to the Ministry of Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3139
is about 16 million tons out of which only 18 are met throughlocal resources while thebalance 82 is met through imports Therefore theinternational oil price fluctuations have a direct impact on the oil
prices in the local market
422)-Impact of High Oil Prices
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3239
In July 2008 has seen the maximum of $147 per barrel Thisrising trend in oil price in the international market has hurt theeconomies of many countries in the world including that of Pakistan The extent to which economies hurt as a result of price
shock depends on the countryrsquos dependency on oil Beforeanalysing the impact of high oil prices at the macro level the paper will look at some of the indicators showing thevulnerability of the Pakistanrsquos economy
423)-GDP Growth and Oil pricesIncreasing oil prices squeeze income and demand At a givenexchange ratemore domestic output is needed to pay for the same volume of oil imports If the domesticcurrency depreciates in response to induced payments deficitsthis further cuts the purchasing
power of domestic income over imported goods Since important trading partners are alsolikely to suffer income losses slower growth of external demand aggravates these direct impacts
The government has consumed its budgetary target of bank borrowing (Rs 130 billion) by
January 2008 further borrowing from banking or non-bankingsources may destabilize thefinancial health (Khan 2008) It is estimated that utilization of PSDP would remainsignificantly lower than allocated Rs 520 billion
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3339
Rapidly growing economies will generally experience more rapid growth of non-oil taxationand hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil price increase In Pakistan non-oil taxation is more or less thesame for the last few years
424)-Oil Prices and Inflation Another channel via which high oil prices may affect macroeconomic performance is throughthe high costs of production thus reducing output
425)-Balance of Payment EffectOur petroleum imports account for 24 percent of total imports(and represented up to 44
percent of export earnings) in 2006-07 While in 1999-2000 theshare of petroleum imports
was 27 percent of total imports and accounts for 33 percent of total export earnings
Improving terms of trade would mean that a smaller volume of exports would be needed to
pay for a given quantity of imports For Pakistan this ratiohowever is decreasing that is more exports are needed to offset the burden of rising import bill
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3439
-15
-10
-05
00
05
10
15
20
25
30
35
40
Price Effect Income Effect Substitution
Effect
Net Demand
Change
2004 2005 2006 2007 2008
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3539
5)-Analysis of the impact of
high oil price on the GlobalEconomy
51)-Oil Price Shocks and the
Economy
511)-oil price shocks affect economic activity
bull Eight out of ten post WW2 recessions followed by oil price
shocks
bull Statistical evidence links oil prices to inflation higher
interest rates and higher unemployment rates
bull Consensus An inverse statistical relationship
between oil price changes and economic activity
512)-Purchasing power effects
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3639
bull Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
bull On net demand for oil importerrsquos goods reduced
bull Lower consumption lower GDP growth higher saving and
lower interest rates
513)-Sensitive is GDP to oil price shocks
bull Empirical studies The economyrsquos sensitivity to oil priceshocks has declined in past decade
bull Monetary policy can shape how oil price shock isexperienced slower growth versus higher inflation
bull
514)-Economy relationship symmetric
bull Rising oil prices seem to retard economic activity more
than falling oil prices stimulate it
bull Possible explanation more economic adjustment costs and
coordination problems with rising oil prices
6)-20 Surprising Ways High Oil Prices
Affect the Global Economy
When you think of high oil prices yoursquore probably reminded of huge bills at the pump and inflating costs on goods and services However the high cost of oil brings on so much morethan thatFollowing some of the lesser-known ways high oil
prices affect the global economy
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3739
1 Less Asian growth As China and India grow they relyheavily on oil which is part of the reason for the spike inprices However theyrsquore shooting themselves in the footbecause the higher prices go the less they can afford and
their growth is slowed They also use energy lessefficiently so the prices are exacerbated
2 Bargaining power With higher oil prices oil-exportingcountries hold the power This might embolden thesenations to become more assertive or demanding of othercountries in both political and economic ways
3 Alternative energy grows As oil gets more expensivealternative energy becomes much more attractiveInvestment and employment in clean technology goes up
right along with high oil prices4 European countries are marginally affected With the dollar
declining on the euro Europeans feel the rising cost of oilmuch less than others
5 Bad monetary policy Rising energy costs are a cause forconcern in most households and governments tend toreact to this sort of situation However if they react withinappropriate policies they can make things worse bysimply prolonging the inevitable
6
Exporters hold on to their moneyInstead of pumping profitsback into the global economy exporters tend to save them
That means that the global demand will tend to fall
7 Helps US dollar Although wersquore not seeing this currently intheory higher oil prices should support a stronger dollar
This is because oil is priced in dollars and demand fordollars will increase with higher oil prices and dollar-denominated investment from exporters
8 Other energy exporters flourish Exporters of non-oil energylike coal and gas flourish as consumers attempt to shift tocheaper energy
9 New capital shift As prices are hiked investors considerputting their money in other sectors which has astimulating effect on the economy
10 China has a cushion Although as a developing countryChina is hit harder by oil prices they seem to have a
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3839
cushion as investment moves away from oil and theymaintain a fixed exchange rate with the dollar
11 The US doesnrsquot have it so bad Although your wallet maybeg to differ the United States is not hit as hard as other
oil importers because we still produce about 40 of the oilwe consume
12 Government subsidies fail Some governments subsidizefuel and higher oil prices put pressure on them Thesubsidies interfere with supply and demand as consumerscontinue to demand more while prices stay relatively flat
13 Interest rates go up As higher oil prices lead to inflation andrigidities in government expenditures interest rates rise
14 Oil-producing countries donrsquot earn as much as yoursquod think
While the dollar suffers oil exporting countries are subjectto reduced purchasing power as they buy goods in euros
15 International business suffers When the cost of oil goes upflights get more expensive and corporate travel costs goup This leads to less frequent business trips tointernational locations
16 The virtual economy flourishes As the cost of transportationrises virtual work and net meetings become more popular
17 The travel sector suffers Hotels cruises airlines and others
in the travel industry are affected negatively by high oilprices because transportation costs are higher andconsumers are spending less because of stress on theirbudgets
18 Countries will stop paying bills At some point manycountries may be forced to choose between oil andinternational debt repayments As they default on theseloans theyrsquoll hurt large international finance institutions
19 Consumers save more When consumers are faced with
rising oil costs many create precautionary savings just incase things get worse
20 Consumers buy cars Although budgets are being squeezedconsumers
will buy more cars presumably to upgrade to a more fuel-efficient foreign model
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it
8142019 economics project of oil
httpslidepdfcomreaderfulleconomics-project-of-oil 3939
7)-Conclusion
bull The economy experiences somecostly adjustment to both rising and falling oil prices
bull When oil prices rise slowingeconomic activity is further retarded by adjustment costs
bull When oil prices fall stimulated economic activity is somewhat offset by adjustment costs
bull We then have asymmetry rising oil prices retard economic activity by morethan falling prices stimulate it