Impact of Crude Oil Prices on Exchange

“IMPACT OF CRUDE OIL PRICES ON EXCHANGE RATE AND INDIAN ECONOMY”

BY: RAHUL KUMAR

SAP ID:500014735

MENTOR:DR. VIPUL SHARMA

04/10/2023 University of Petroleum and Energy Studies 2

OUTLINE

• OBJECTIVE• LITERATURE REVIEW• METHODOLOGY• CRUDE OIL DYNAMICS IN INDIA• OVERVIEW OF EXCHANGE RATE• ANALYSIS• FINDINGS AND CONCLUSION


OBJECTIVE

• Impact of Crude oil Prices on Trade deficit• Effect of Crude oil Prices on Exchange rate• To Study the Relationship between oil prices

and Inflation• Impact of Crude oil Prices on Indian GDP

4

LITERATURE REVIEW

• Robert A. Amano and Simon van Norden “Exchange rate and oil prices”• Abeysinghe “Estimation of direct and indirect impact of

oil price on growth”• Hamilton “Crude Oil and the Macro economy”

04/10/2023 University of Petroleum and Energy Studies

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METHODELOGY

The linear regression model was selected to inspect the casual relationship between oil price volatility, Inflation, GDP, , Exchange rate, trade deficit of Indian economy. For relation of exchange rate and oil price data was converted into natural log to establish the monthly percentage change.

University of Petroleum and Energy Studies

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DATA COLLECTION

• OIL PRICES (Indian Oil Corporation Limited)• WPI (Office of the Economic Adviser)• EXCHANGE RATE(Pacific Exchange Rate

Service)• IMPORT/EXPORT(Ministry of commerce)• GDP(Reserve Bank of India)


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INFORMATION ON THE DATAFor relation of oil price and exchange rate data was converted into natural log to

determine the monthly percentage change.

Monthly percentage change was calculated as follows LOG CRUDE OIL = LN (CRUDE OILT/CRUDE OILT-1) LOG USD/INR = LN (USD/INRT/USD/INRT-1)

The % changes in GDP were calculated as follow: %GDP = (GDPT - GDPT-1)/ (GDPT) x 100 The % change in oil prices was calculated This was done by: % Oil Price (P) = (PT - PT-1)/ (PT) x 100



CRUDE OIL DYNAMICS IN INDIA


REAL AND NOMINAL CRUDE PRICES


EXCHANGE RATE

Exchange rate is the rate at which one currency trades against another in foreign exchange market.

Factor affecting exchange rate:• International trade• Inflation• Government polices• FII,FDI• Strength of the Economy


DIRECT AND INDIRECT QUOTE

• A direct quote is a home currency price of a unit of foreign currency

• An indirect quote is a foreign currency price of a unit of foreign currency

“Rs 45.5/$” is a direct quote in India and indirect quote in USA.


CRUDE OIL IMPORT

11%

18%

5%

10%22%

34%

Iran Saudi Arabia Other Western Hemisphere Africa

Other Middle East


PRICE TREND


FACTOR AFFECTING CRUDE OIL PRICES

• World oil demand• World oil supply• Weather conditions• Government policy• Political Conditions• Futures Market


IMPACT OF CRUDE PRICE ON GLOBAL ECONOMY


IMPACT OF INCRESE IN OIL PRICES ON GROWTH AND INFLATION LEVELS IN WORLDWIDE

International oilprices per barrel ($)

Increase ininternational oil prices (%)

Extent of fall inmanufacturing sector

growth (%)

Extent of fall inGDP growth(%)

Extent ofincrease in WPI (%)

50 38.9 2.1 0.4 1.5

60 66.7 9.7 1.9 3.6

70 94.2 16.9 3.4 5.7

80 122.2 24.5 4.9 7.9

140 126.1 29.7 7.3 7.2

*source: goldmansacs


ANALYSIS

Theoretical Analysis

Oil Price and Inflation

Oil Price and Trade deficit

Oil Price and GDP

Oil Price and Exchange rate


THEOTERICAL MODEL

ER02

ER01

Qty01 Qty02

DUSD01

DUSD02

EXCHANGE RATE(INR/USD)

S USD

Quantity of USD


THEOTERICAL MODEL ANALYSIS

• When the price of oil is increases, more US Dollar is demanded by Indian Economy in order to pay import bill. The relation is shown in figure; there is a rightward shift from DUSD to DUSD1. Thus it raises the exchange rate INR to INR .This whole figure represent a deprecation of Indian currency.

Thus proving my hypothesis is that as the price of oil will increase, the Indian currency will depreciate.


IMPACT OF CRUDE OIL IMPORT ON TRADE DEFECIT

YearCrude

Oil Value

TOTAL IMPORT

CRUDE OIL % OF TOTAL IMPORT

Total Export

C.oil % of total export

TRADE DEFICIT

2004-05 117003 501065 23.35086 375340 31.1725369 1257252005-06 171702 660409 25.99934 456418 37.61946286 2039912006-07 219029 840506 26.05918 571779 38.30658349 2687272007-08 272699 1012312 26.93822 655864 41.57855897 3564482008-09 348304 1374436 25.34159 840755 41.42752645 5336812009-10 375277 1363704 27.51895 845534 44.38343106 5181702010-11 455276 1683467 27.04395 1142922 39.8343894 5405452011-12* 672220 2342217 28.70016 1224883 54.88034367 1117334

In Rs. Crore


ANALYSIS SUMMARY

Descriptive StatisticsLOG CRUDE OIL LOG (USD/NGN)

Mean 0.006066543 Mean 0.002346853Standard Error 0.009931473 Standard Error 0.00246335Median 0.020977923 Median -0.000761518Mode #N/A Mode #N/AStandard Deviation 0.089383256 Standard Deviation 0.022170147Sample Variance 0.007989367 Sample Variance 0.000491515Kurtosis 3.53368503 Kurtosis 0.430681522Skewness -1.544008367 Skewness 0.557762885Range 0.512307284 Range 0.106154752Minimum -0.33690617 Minimum -0.042837089Maximum 0.175401114 Maximum 0.063317662Sum 0.491389984 Sum 0.190095055Count 81 Count 81


ANALYSIS

• In the descriptive statistics table above which shows the distinctiveness of the full sample data set, we see the mean of both the returns on crude oil and USD/INR exchange rate are both positive, this indicate we have more of increase than decrease in the changes in both of the variables.

• The standard deviation of the crude oil is much higher than that of the exchange rate which indicates that more degree of variability of crude oil as compared with exchange rate which means the dispersion the data points of the exchange is closer to its mean.


ANALYSIS (CONTD….)

• The returns of the crude oil is negatively skewed which indicate that the majority of the allocation is concentrated to the right, which means low values in the sharing are comparatively few, whereas exchange rate is positively skewed which indicates that the greater part of the allocation will be to the left, and the higher values in this allocation are relatively few.

• The returns on Crude oil have a higher kurtosis as compared with exchange rate which indicates there is more crude oil variance might be as a result of uncommon soaring deviations.


OIL PRICE AND INFLATION

• It has been seen that rising oil prices has a negative effect on inflation but it depend that whether economy is developed as USA or developing as India and oil importing(USA, China, India) or oil exporting(Saudi Arabia, Russia, Iran).

• Nevertheless there are also extra factors also to judge, such as assured event which show the way to increase in Inflation. Consequently oil price may not affect Inflation at all.

• Data include WPI and crude oil price from January 2011 to December 2013.


GRAPH

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 240

50

100

150

200

250

300

350

400

CRUDE PRICECRUDE INFLATION


CRUDE OIL V/S ALL COMMODITY

CRUDE PRICE

CRUDE INFLATION

CRUDE PRICE 1CRUDE INFLATION 0.4879 1

INFLATIONCRUDE PRICE

INFLATION 1

CRUDE PRICE 0.085025308 1


OIL PRICE AND INFLATION(CONTD..)

• The correlation between crude oil price and inflation is 0.08. The sign of coefficient of correlation shows there is a positive correlation between crude oil price and inflation. In other word both the variable moves in same direction. The value of coefficient of correlation indicates that when the crude oil prices increases, 8.5 of the time WPI also increases and vice versa.

• Visual inspection of the data suggests that WPI increases as the price of crude oil increase.


REGRESSION ANAYSIS• The question now is how to formalize the relationship in Quantitative

manner. We can do through regression. Let assume that there is a linear relationship between crude oil price

and WPI. We can express the linear relationship mathematically as : Y = α + β x Y = dependent variable, X = independent variable α = Y Intercept β = Slope coefficient

• The above equation relates inflation and crude oil price which precisely says that inflation can be explained by crude oil prices. In other words variation in inflation can be explained by variation in crude oil prices. But Crude oil price is not the only factor which affects the Inflation. There is numerous other factor such as money supply, interest rate etc affecting inflation. To account all these error we include an error term in the regression model.


REGRESSION ANALYSIS(CONTD…)

• For the regression model I use inflation(WPI Data) as a dependent variable and crude oil price as an independent variable.

The final model will be Inflation Y= α + crude oil price β + e Y = Dependent variable (Inflation) X = Independent variable (crude price) α = Estimated Y intercept β = Estimated slope coefficient e = error term


REGRESSION ANALYSIS(CONTD…)SUMMARY OUTPUT

Regression StatisticsMultiple R 0.08502531R Square 0.0072293Adjusted R Square -0.0378966Standard Error 7.00420934Observations 24

ANOVAdf SS MS F Significance F

Regression 1 7.859382005 7.859382 0.160203 0.69283Residual 22 1079.296868 49.05895Total 23 1087.15625

Coefficients Standard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 149.833471 23.28927094 6.433584 1.79E-06 101.5345 198.1325 101.5345 198.1325CRUDE PRICE 0.0853659 0.213279604 0.400253 0.69283 -0.35695 0.527681 -0.35695 0.527681


REGRESSION ANALYSIS(CONTD…)• Y = α + β x = 149.83 + 0.08 X• According To estimated regression equation, for every 1 % increase

in crude oil price inflation will increase by .08 percentage point.• The value of α is 149.83. This shows that when price of crude oil is

zero, the level of inflation will be 149.83.• R Square is 0.07, which means that independent variable X

explains .7 % in total variation in dependent variable Y.• The calculated T value is less than the critical value at 5 %

significance level. Null hypothesis is not rejected and conclude that there is negative association between WPI and crude oil price.


OIL AND GDPSUMMARY OUTPUT

Regression StatisticsMultiple R 0.21164R Square 0.044792Adjusted R Square0.024468Standard Error8.571662Observations 49

ANOVAdf SS MS F Significance F


CoefficientsStandard Error t Stat P-value Lower 95%Upper 95%Lower 95.0%Upper 95.0%Intercept 2.792775 1.225064 2.279696 0.027208 0.328263 5.257286 0.328263 5.257286OIL -0.09622 0.064817 -1.48456 0.144337 -0.22662 0.03417 -0.22662 0.03417


REGRESSION ANALYSIS• From the OLS estimation above Y = 2.79 – 0.011 This shows that a 1 % increase in oil prices causes a 1 % decrease

in GDP, Which is consistent against the economic theory. However there was a weak relation of 0.04 and β-value too rejected at the 5 % confidence/significance level. So a log model also needs to be investigating the price of oil impact.

Analyzing on the log Forms WTI and GDP were converted into log forms. According to regression from the log forms, the relationship is

positive. 1% increase in oil price increase GDP BY 11%. This is not reliable with the economic assumption due to other factor..


OIL AND EXCHANGE RATE2006-13 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OIL

CRUDE PRICE 1(USD/INR) 0.152904352 1LOG (USD/INR) 0.216394996 0.197115542 1LOG CRUDE OIL 0.150502563 -0.182441037 -0.395081233 1

2011-13 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OILCRUDE PRICE 1(USD/INR) -0.39835814 1LOG (USD/INR) -0.24561444 0.05882618 1LOG CRUDE OIL 0.486602685 -0.079362396 -0.518021021 1

2006-11 CRUDE PRICE (USD/INR) LOG (USD/INR) LOG CRUDE OILCRUDE PRICE 1(USD/INR) 0.226405507 1LOG (USD/INR) -0.50917198 -0.2452431 1LOG CRUDE OIL 0.210019475 -0.389621261 0.150359132 1


REGRESSION ANALYSIS

Multiple R 0.39836R Square 0.15869Adjusted R Square 0.11662Standard Error 3.82044Observations 22

ANOVA

df SS MS FSignificance F


Coefficients

Standard Error t Stat P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept 80.1856 15.1364 5.29752 3.48E-05 48.6116 111.76 48.6116 111.76CRUDE PRICE -0.267 0.13746 -1.9423 0.06632 -0.5537 0.01975 -0.5537 0.01975

SUMMARY

Regression


ANALYSIS• Important point is R2. It is the square of the sample correlation

coefficient between the variable which are dependent. Here R square is 0.15, meaning that 15 % of the variation in the USD-INR is explained by the variation in oil prices.

We’ve anticipated the following linear connection between the price of oil and exchange rate.

y = 0.80 – 0.26 x Exchange rate is taken on y axis and prices of oil are on the x axis, which

will gives us the correlation: Exchange Rate = 0.80 -0.26 Oil Prices We can infer numerical figures as follows: -0.26 indicates the correlation between changes in exchange rate and

changes in the oil price which represent that at whatever time oil prices go up by a dollar, the Indian rupee loose 26 paisa on the U.S. one.


CONCLUSION

• Oil prices go up by a dollar, the Indian rupee loose 26 paisa on the U.S. one.

• 1% increase in oil price decreases GDP BY 1.1% of India.• 1 % increase in crude oil price inflation will increase

by .08 point.• The standard deviation of the crude oil is much higher

than that of the exchange rate which indicates that more degree of variability of crude oil as compared with exchange rate

• Increase in crude oil prices widens trade deficit gap.


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Impact of Crude Oil Prices on Exchange