Transcript Economic SummitRecent decline in oil pricesMarch 6, 2015

Economic Summit
Recent decline in oil
prices
March 6, 2015
Reza Varjavand
Associate Professor of Economics
GSM, Saint Xavier University
US crude oil market, facts and figures
 The US is the biggest consumer, importer, and now the leading
producer according to many analysts
 Total spending on crude oil = 8.5% of GDP, $1.5 trillion
 Daily consumption of 20 million barrel, almost 45% domestic
production and 55% imported (74% from Canada, Mexico,
Venezuela, and Saudi Arabia)
 The US domestic production almost doubled since 2008 to about 9
million barrel/day
 The booming shale oil industry accounts for 3.5 million barrel/day,
nearly 40% of domestic production and 17.5% of total consumption
 Crude oil is still the number one source of energy in the US, 36% of
total
 With surge in domestic production and import from non-OPEC
sources, the US dependency on Middle Eastern oil is diminishing.
Top ten oil producing countries
s/energy-environmen }
Top ten oil consuming countries
(millions of barrels per day)
Rank
Consumers
Total Oil Consumption
1.
United States
20.5
2.
China
6.5
3.
Japan
5.4
4.
Germany
2.6
5.
Russia
2.6
6.
India
2.3
7.
Canada
2.3
8.
Brazil
2.2
9.
South Korea
2.1
10.
France
2.0
OPEC VS the US, Shares of world oil
production, 10 to 50%
Fracking boom
Recent decline in price of crude oil
The contributing factors:
Demand related
Supply related
Product related
Strength of US dollar
Changes in consumers priorities
Popularity of services
Environmental and fuel efficiency
concerns
Geopolitical factors including conflict of
interests among OPEC nations
Latest crude oil price from NASDAQ
Effects of falling oil prices on the US
economy
 Dropping prices signify a mixed blessing for the
economy, there are many gainers and a few losers.
 US consumers are the biggest gainers, aggregate
and per household
 Manufacturing sectors: automobile, transportation,
airline, and other businesses
 Shale oil industry and its future economic viability
 Effects on different states and the US economy as a
whole
Oil consumption goes hand-in-hand with economic
growth
Breakeven Prices for different kinds of crude
oil
Possible policy implication
Low prices may strengthen the need for
reforms in energy policy:
Restrictions on exports
Subsidies and tax incentives to oil companies
and ethanol-producing farmers
Using taxes instead of subsidies to promote cost
awareness and to regulate consumption
Viability of the Keystone pipeline project
Possibility of price rebound
 Expectations of economic recovery
worldwide
 OPEC acting as an collaborative oligopoly
(cartel) again, member nations may
change their strategy and their attitudes
toward one another
 Law of demand and supply becomes
relevant instead of geopolitical factors
 Increasing world's stockpiles of crude oil
Effects of low prices on oil-exporting
nations
 Saudi Arabia
 Russia
 Iran
 Venezuela
 Nigeria
Structure of crude oil market
 Size, about 90 million barrel/day production (each barrel
contains 42 gallons)
 Stages of operation: Exploration, Development, and
Production
 The types of benchmark crude Oil: WTI, West Texas
Intermediate, for the US domestic producers and Brent for
the global market.
 Key producers in global market: USA, Saudi Arabia, Russia,
China, and Canada, the share of top ten producers = 64%
of total.
 OPEC share is currently 40% of the world market. Non-OPEC
producers 48% and t he US share is about 12%,
 7 Companies dominating the global oil market: BP, Gulf,
Standard of CA, Chevron, Shell, Standard of NJ, Exxon.
Major Players in global oil
market

Share of world oil production

50

%

PROJ.

OPEC countries

40

30

20

United States

10

0

’96

’00

’04

’08

’12

’16

Source: Energy Information Administration