CRUDE OIL, GOLD PRICE, DOLLAR PRICE

SUBMITTED BY: MANPREET KAUR

GAVESHNA PALAVI

SHIVANI GOEL RAHUL RAJ

CRUDE OIL

CRUDE OIL Crude oil commonly known as petroleum. It is a liquid found with in earth. Composition: Hydrocarbons (50-97%) Organic compounds (N2,O2,S) ( 6-10%) Small amounts of metal (Cu,Ni,Vn,Fe) (<1%)

MARKET STRUCTURE OF CRUDE OIL

Oligopolistic market structure Cartels are formed by oil producing countries Most important players in oil market are:-a) The organisation of the pertroleum countries ( OPEC )b) Non OPEC countries Saudi arabia plays dominant role in the oligopolistic oil market. From econometric evidence on saudi arabia, there is conformation

of assymetrical behaviour of low cost petroleum supplier i.e. the country restrictes production in reaction to negative demand shocks, but does not expand production in response to positive ones.

TOP 5 OIL PRODUCING COUNTRIES

SAUDI ARABIA

RUSSIA UNITED STATES

IRAN MEXICO0

2

4

6

8

10

12

MILLION OF BARREL PER DAY

MILLION OF BARREL PER DAY

TOP 5 CONSUMER OF WORLD

UNITED STATES

CHINA NORWAY IRAN UNITED STATES

0

5

10

15

20

25

MILLION OF BARRELS PER DAY

MILLION OF BARRELS PER DAY

Supply of crude oil

• Oil production is not labour intensive and therefore oil supply can be controlled easily by reducing depletion rates without affecting the labour market .

• No short term substitutes for petroleum; change in supply effects market

• Price elasticity of demand is highly inelastic i.e. no effect on demand due to price change

• OPEC contributed 78.3% of oil reserves and 48.7% of exports

• Gulf countries have lowest production cost i.e. USD 4-5 per barrel as compare to the north sea and brazil where production cost is about USD 9-13 per barrel

• Top 5 oil exporting countries

TOP 5 OIL EXPORTING COUNTRIES

SAUDI ARABIA

RUSSIA NORWAY IRAN UAE0123456789

10

MILLION OF BARRELS PER DAY

MILLION OF BARRELS PER DAY

Demand side of crude oil Demand of oil depends upon various factor Demand of individual household and firms Oil’s importance for the economy and national

security

TOP 5 IMPORTERS OF WORLD

UNITED STATES

JAPAN

CHINA

GERMANY

SOUTH KOREA

0

2

4

6

8

10

12

14

MILLION OF BARRELS PER DAY

MILLION OF BARRELS PER DAY

IMPACT OF CRUDE OIL PRICES ON WORLD ECONOMY

•It is estimated that 100 USD oil would reduce the economic growth by 0.2-0.3%.•The global economy would not be affected as much because emerging economies consume less oil, than industrialized countries do.•Many developing countries subsidize the cost of gas.

IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY

• India’s crude oil import bill may cross 100 billion US dollars if the global price stays firm at 100 -120 USD/barrel.• If it continues it will upset the delicate fiscal balance.• Rising crude oil prices will impact inflation whether the govt absorbs the burden or passes it to consumer by increasing prices of petroleum products.

• India’s oil import bill in the 11 months of 2010- 2011 was USD 85 billion and reported to reach 90 billion USD.•India imports nearly 80% of its crude oil requirement, spent 79.95billion USD in 2009-2010.•The recent strengthen of crude oil prices could impact economic growth momentum in the country.

CRUDE OIL RISE CAN HAMPER GLOBAL RECOVERY

•IMF (International Monetary Fund) has warned that rising prices of scarce natural resources could aggravate poverty.

•Just as the US & global economies are finally strengthening, they face a new danger: Rocketing oil prices, which topped 120 USD a barrel.

•The main factors that would be responsible for economic growth moderation in 2011-12 would be crude oil(CO) prices & RBI’s tightening of monetary policy in response to oil prices.

•Rising crude prices will lead higher inflation & higher inflation attracts monetary tightening.

•Rising oil prices could threaten the European economy which are net importers of oil & gas, haven’t recovered fully from financial crisis & face heavy debt loads.

•Rising oil prices would push up inflation in Europe, where it already exceeds official targets.

GOLD

Gold is a dense, soft, shiny, malleable and ductile metal.

Gold has been a valuable and highly precious metal for coinage, jewelry & other arts since long before.

Gold standards have been the most common basis for monetary policies throughout the human history.

The world consumption of the new gold produced is:•Jewelry -50%•Investment -40%•Industry -10%

GOLD PRICES IN INDIACITIES GOLD (10g)(Rs)

Chennai 26700.00

Mumbai 26590.00

Delhi 26980.00

Calcutta 27040.00

FACTORS DETERMINING RISE IN GOLD PRICES

Now the main issues to be discussed here now are: 1) Why is that investors wants to buy

gold?2) What is the impact of rising gold prices

on rest of the economy?

WHY INVESTORS BUY GOLD?

1) Investors buy gold as a safe heaven. Gold is known to perform well when the rest of economy is in poor state & investors buy gold to protect them-selves financially.

Gold prices rises whenever there is uncertainty about economic prospect or in financial market, eg. American & European debt crisis lead to increase in demand for gold.

2) Investors buy gold to protect themselves from currency debasement. We can interpret the rise in gold prices mean that investors expect future inflation to be high.

Rising gold prices mean that investors are fearful about economic aspect & about excess inflation.

IMPACT OF RISING GOLD PRICES ON ECONOMY

1) Impact is negative. Investors are putting more money into gold & less in businesses & productive investment. . Money invested in gold doesn’t create output or employment Whereas money

invested in businesses in economy would do so. Thus investment for gold is negative for economic growth.

GOLD PRICES IN INDIA

•In India gold prices have gained 29% since the start of the year comparedwith just 15% gain in stock market.• Indian gold imports rose 47% to 265 tonnes in the last quarter of 2010, continuing a strong trend to end at a little over 950 tonnes last year.

US DOLLAR STRENGTH,WEAKNESS & PRICE OF GOLD.

•When the USD gets stronger, it takes few dollar to buy gold ie. priced in $USD. When the USD get weak then it takes more dollar to purchase gold.•CHANGE IN THE PRICE OF GOLD IS REALLY A REFLECTION OF A CHANGE IN THE VALUE OF $US DOLLAR. •WHEN THE DOLLAR GETS STRONG THEN GOLD APPEARS TO GO DOWN & VICE VERSA.

GOLD & DOLLAR GRAPH

GOLD PRICE FLUCTUATIONS IN RECENT YEARS

•In March 2008, the gold price exceeded US$1,000, achieving a nominal high of US$1,004.38.

• After the March 2008 spike, gold prices declined to a low of US$712.30 per ounce in November.

•Pricing soon resumed on upward momentum by temporarily breaking the US$1000 barrier again in late February 2009 but regressed moderately later in the quarter.

•Later in 2009, the March 2008 intra-day spot price record of US$1,033.90 was broken several times in October, as the price of gold entered parabolic stages of successively new highs when a spike to $1226 of the price to the mid-October levels.

•On August 22, 2011 gold reached a new record high of $1908.00 at the London Gold Fixing.

• Economic growth is fairly strong in India as compare to rest of the world. It is growing at a slower rate but still above 7%. So India doesn’t face the same debt problem that western country faced.

•RBI has been raising interest rate & tightening monetary policy. So to reduce inflation RBI is reducing the rupee in circulation.

DOLLARS

ABOUT DOLLAR• United States dollar sign: $; code: USD; also abbreviated US$),

also referred to as the American dollar, is the official currency of the United States of America.

• It is divided into 100 smaller units called cents or pennies

• is used as the standard unit of currency in international markets for commodities such as gold and petroleum.

• is the currency most used in international transactions

• is one of the world's reserve currencies( is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves).

FACTORS AFFECTING VALUE OF US DOLLAR

SUPPLY & DEMAND- These are decreed by international trade between countries.When dollar traders from other nations pay for our product and services in dollars after converting their currencies into dollar, when this done demand for dollar is created.

1) BALANCE OF TRADE – Also known as current account balance. The balance of trait represents the difference between exports & imports in terms of goods & services.If exports exceed import in either current account, it is called surplus.If imports exceed export then it is called deficit.

The US has been running a trade deficit with the rest of world in recent times. This makes the foreign investors increasingly nervous & can affect the dollar significantly.

2) FALLING PRICES ON FOREIGN GOODS – When the prices for foreign goods decreased they become more attractive for American consumer & create a trade deficit. When there is rise in price of foreign goods because of increase in demand can make the American goods more attractive & narrow the trade deficit. This increases the value of dollar.

3) BALANCE OF INVESTMENT – When the US imports more then it exports so investors from other countries have to buy US assets to keep the dollar from falling.

4) BUDGET DEFICIT & NATIONAL DEBT- The US Govt budget can affect the dollar value.

5) LITTLE OR NO DEFAULT ON DEBT- When the Govt keeps a good credit history, risk goes down & the dollar goes up.

6) PRESIDENT POPULARITY – Popularity of the US president id tied to value of US dollars.

7) TERRORIST ATTACK & WAR- Attacks damage consumer & business confidence hampers the economic growth.

8) CONSISTANT POLICIES- If investor feel that things will remain same they will flop to dollar because it is safe. This increases the demand thus increases the value of dollar.

9) GOVERNMENT EXPANSION- New departments & increase govt functions cost money. Like other govt expenses expanding new groups like TSA & department of homeland security can lower the dollar value due to their opportunity cost against other expenses in the budget.

RELATIONSHIP BETWEEN CRUDE OIL, US DOLLAR AND GOLD PRICE

• Gold is the real currency while dollar is only the representative hence the trend is people tend to favor gold to dollar when there is high inflation and diminishing dollar and vice versa

• in short term there is no any clear cut cause and effect relation BUT A LONG term trend analysis shows negative correlation between gold prices and the value of dollar but gold price does not increase proportionately to the diminishing dollar.

• QUE - If there is RISE OR FALL in US dollar then what will happen to GOLD PRICE RISE OR FALL???ANS - If the US dollar falls, Gold will remain the same for the rest of the world. But, for the U.S., we will end up paying more for the same amount of gold

• QUE - If there is RISE OR FALL in US dollar then what will happen to CRUDE OIL PRICE RISE OR FALL ????

ANS If the US dollar falls, Oil prices will rise for the U.S., but oddly, it will fall for other countries. This is because crude oil is primarily traded in U.S. dollars

•QUE-. if there is RISE OR FALL in CRUDE OIL PRICE then what will happen to GOLD PRICE RISE OR FALL???

ANS- Since oil is used in the process of excavating and refining the gold, if oil prices go up, so does gold prices

FIVE YEAR TREND OF CRUDE OIL

FIVE YEAR TREND OF GOLD

CONCLUSION

• GOLD AND CRUDE OIL HAVE POSITIVE RELATIONSHIP

• US DOLLAR AND GOLD HAVE NEGATIVE RELATIONSHIP

• US DOLLAR AND CRUDE OIL HAVE NEGATIVE RELATIONSHIP

THANK YOU