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    Seven Questions About The Recent Oil Price Slump

    Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.


    Seven Questions About The Recent Oil Price Slump

    Oil prices have plunged recently, affecting everyone: producers, exporters, governments, and consumers.

    Rabah Arezki, Olivier Blanchard

    December 22, 2014

    Overall, we see this as a shot in the arm for the global economy. Bearing in mind that our simulations do not represent a forecast of the state of the global economy, we find a gain for world GDP between 0.3 and 0.7 percent in 2015, compared to a scenario without the drop in oil prices. There is however much more to this complex and evolving story. In this blog we examine the mechanics of the oil market now and in the future, the implications for various groups of countries as well as for financial stability, and how policymakers should address the impact on their economies.

    In summary:

    We find both supply and demand factors have played a role in the sharp price decline since June. Futures markets suggest that oil prices will rebound but remain below the level of recent years. There is however substantial uncertainty about the evolution of supply and demand factors as the story unfolds.

    While no two countries will experience the drop in the same way, they share some common traits: oil importers among advanced economies, and even more so emerging markets, stand to benefit from higher household income, lower input costs, and improved external positions. Oil exporters will take in less revenue, and their budgets and external balances will be under pressure.

    Risks to financial stability have increased, but remain limited. Currency pressures have so far been limited to a handful of oil exporting countries such as Russia, Nigeria, and Venezuela. Given global financial linkages, these developments demand increased vigilance all around.

    Oil exporters will want to smooth out the adjustment by not curtailing fiscal spending abruptly. For those without savings funds and strong fiscal rules, budgetary and exchange rate pressures may, however, be significant. Without the right monetary policies, this could lead to higher inflation and further depreciation.

    The fall in oil prices provides an opportunity for many countries to decrease energy subsidies and use the savings toward more targeted transfers, and for some to increase energy taxes and lower other taxes.

    In the euro area and Japan, where demand is weak and conventional monetary policy has done most of what it can, central banks forward guidance is crucial to anchor medium term inflation expectations in the face of falling oil prices.

    Again, our simulations of the impact of the oil price drop do not represent a forecast for the state of the world economy in 2015 and beyond. This we will do in the IMF’s next World Economic Outlook in January, where we will also look at many other cross-currents driving growth, inflation, global imbalances and financial stability.

    What follows is our attempt to answer seven key questions about the oil price decline:

    What are the respective roles of demand and supply factors?

    How persistent is this supply shift likely to be?

    What are the effects likely to be on the global economy?

    What are likely to be the effects on oil importers?

    What are likely to be the effects on oil exporters?

    What are the financial implications?

    What should be the policy response of oil importers and exporters?

    What are the respective roles of demand and supply factors?

    Oil prices have fallen by nearly 50 percent since June, 40 percent since September (see Chart 1).[2] Metal prices, which typically react to global activity even more than oil prices, have also decreased but substantially less so than oil (see Chart 2). This casual observation suggests that factors specific to the oil market, especially supply ones, could have played an important role in explaining the drop in oil prices.

    A closer look reinforces this conclusion. Revisions between June and December of International Energy Agency forecasts of demand (see Chart 3), combined with estimates of the short run elasticity of oil supply, suggest that unexpected lower demand between then and now can account for only 20 to 35 percent of the price decline.

    On the supply side, the evidence points to a number of factors, including surprise increases in oil production. This is in part due to faster than expected recovery of Libyan oil production in September and unaffected Iraq production, despite unrest.[3]

    A major factor, however, is surely the publicly announced intention of Saudi Arabia—the biggest oil producer within OPEC—not to counter the steadily increasing supply of oil from both other OPEC and non-OPEC producers, and the subsequent November decision by OPEC to maintain their collective production ceiling of 30 million barrels a day in spite of a perceived glut.

    स्रोत : www.imf.org

    What Causes Oil Prices to Fluctuate?

    Discover how OPEC, demand and supply, natural disasters, production costs, and political instability are some of the major causes in oil price fluctuation.


    What Causes Oil Prices to Fluctuate?

    By NICK LIOUDIS Updated August 30, 2021

    Reviewed by CHARLES POTTERS

    Fact checked by MARCUS REEVES

    Oil is a commodity, and as such, it tends to see larger fluctuations in price than more stable investments, such as stocks and bonds. There are several influences on oil prices, a few of which we will outline below.


    Oil prices are influenced by a variety of factors, particularly the decisions about output made by producers like the Organization of Petroleum Exporting Countries (OPEC), independent petro-states like Russia, and private oil-producing firms like ExxonMobil.

    Like any product, the laws of supply and demand influence prices.

    Natural disasters that could potentially disrupt production, and political unrest in oil-producing countries all impact pricing.

    Production costs influence prices, along with storage capacity.

    Although less impactful, the direction of interest rates can also influence the price of commodities.

    OPEC Influences Prices

    OPEC, or the Organization of Petroleum Exporting Countries, is the main influencer of fluctuations in oil prices. OPEC is a consortium that, as of 2021, is made up of 13 countries: Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela.


    According to 2018 statistics, OPEC controls almost 80% of the world's supply of oil reserves.


    The consortium sets production levels to meet global demand and can influence the price of oil and gas by increasing or decreasing production.

    Before 2014, OPEC vowed to keep the price of oil above $100 a barrel for the foreseeable future, but midway through that year, the price of oil began to tumble. It fell from a peak of above $100 a barrel to below $50 a barrel.


    OPEC was the major cause of cheap oil in that instance, as it refused to cut oil production, leading to the tumble in prices.

    Supply and Demand Impact

    As with any commodity, stock, or bond, the laws of supply and demand cause oil prices to change. When supply exceeds demand, prices fall; the inverse is also true when demand outpaces supply.

    The dramatic drop in oil prices in 2014 has been attributed to lower demand for oil in Europe and China, coupled with a steady supply of oil from OPEC.


    The excess supply of oil caused oil prices to fall sharply.

    While supply and demand impact oil prices, it is actually oil futures that set the price of oil. A futures contract for oil is a binding agreement that gives a buyer the right to buy a barrel of oil at a set price in the future. As spelled out in the contract, the buyer and seller of the oil are required to complete the transaction on a specific date.

    Natural Disasters

    Natural disasters are another factor that can cause oil prices to fluctuate. For example, when Hurricane Katrina struck the southern U.S. in 2005, affecting almost 20% of the U.S. oil supply, it caused the price per barrel of oil to rise by $13.

    5 6

    In May 2011, the flooding of the Mississippi River also led to oil price fluctuation.


    The United States consumes almost one-fourth of the world's oil.


    Political Instability

    From a global perspective, political instability in the Middle East causes oil prices to fluctuate, as the region accounts for the lion’s share of the worldwide oil supply. For example, in July 2008, the price of a barrel of oil reached $128 due to the unrest and consumer fear about the wars in both Afghanistan and Iraq.


    Production Costs and Storage

    Production costs can cause oil prices to rise or fall as well. While oil in the Middle East is relatively cheap to extract, oil in Canada in Alberta’s oil sands is more costly.


    Once the supply of cheap oil is exhausted, the price could conceivably rise, if the only remaining oil is in the tar sands.

    U.S. production also directly affects the price of oil. With so much oversupply in the industry, a decline in production decreases overall supply and increases prices.

    In February 2020 the U.S. had an average daily production level of approximately 12.7 million barrels of oil.


    That average production, while volatile, can trend downward. Consistent weekly drops put upward pressure on oil prices as a result.

    Oil diverted into storage has grown exponentially, and key hubs have seen their storage tanks filling up rather quickly. As of mid-April 2020, the storage hub at Cushing holds roughly 60 million barrels—with a total capacity of 76 million barrels.


    Interest Rate Impact

    While views are mixed, the reality is that oil prices and interest rates have some correlation between their movements. However, they are not tightly correlated. In truth, many factors affect the direction of both interest rates and oil prices. Sometimes those factors are related, sometimes they affect each other, and sometimes there's no rhyme or reason to what happens.

    One of the basic theories stipulates that increasing interest rates raise consumers' and manufacturers' costs, which reduces the amount of time and money people spend driving. Fewer people on the road translates to less demand for oil, which can cause oil prices to drop. In this instance, we'd call this an inverse correlation.

    स्रोत : www.investopedia.com

    Questions and Answers: G7 agrees oil price cap

    Highlights, press releases and speeches

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    Questions and answers3 December 2022Brussels

    Questions and Answers: G7 agrees oil price cap to reduce Russia's revenues, while keeping global energy markets stable

    What does the oil price cap achieve?

    The price cap – which comes on top of the EU import ban on Russian seaborne crude oil and oil products, and the corresponding bans of other G7 partners – will further reduce the revenues Russia earns from oil. The oil price cap [60 USD per barrel for crude oil] will also serve to stabilise global energy prices which Moscow's illegal war on Ukraine has inflated.

    It will help address inflation and keep energy costs stable at a time when high costs – particularly elevated fuel prices – are a great concern to all Europeans.

    How has the cap been set?

    The price cap rate has been set in legislation by the Council and agreed by the international Price Cap Coalition. This Price Cap Coalition conducted a technical exercise and reached consensus on the appropriate level at which to fix the price cap rate. This rate is a price per barrel.

    The price cap rate has been approved by a unanimous decision of the Council. This decision will introduce the price cap in Annex XI to Decision 2014/512/CFSP. In accordance with this Decision, the price cap has been inserted into EU law by an amendment of Annex XXVIII to Regulation (EU) 833/2014 via a Commission Implementing Act. Any subsequent changes would require the same procedure i.e. a Council Decision and a Commission Implementing Act.

    This information will be published in the Official Journal of the EU.

    Is the cap set in stone?

    No. The price cap is fixed for now but adjustable over time. After the initial cap has been set, the price may be amended in the future to reflect market developments and technical changes, as agreed by the Price Cap Coalition. This review should take into account a variety of factors, which can include the effectiveness of the measure, its implementation, international adherence and alignment, the potential impact on coalition members and partners, and market developments.

    What sort of exceptions have been agreed?

    The price cap does not affect in any way the full EU import ban on Russian crude and petroleum products and the specific exceptions and derogations thereunder which were already agreed in previous sanctions packages. These exceptions and derogations allow certain Member States to continue importing crude oil and petroleum products from Russia due to their specific situation or to import seaborne crude oil from Russia if the supply of crude oil by pipeline from Russia is interrupted for reasons beyond their control.

    Specific projects which are essential for the energy security of certain third countries may be exempted from the price cap. The current list of exempted projects referred to in Article 3n(6)(c) are contained in Annex XXIX.

    Are there any transition periods provided for the transport of Russian oil?

    The price cap enters into force as of 5 December 2022 for crude oil and as of 5 February 2023 for petroleum products [the price for refined products will be finalised in due course]. These measures apply to Russian crude oil falling under CN code 2709 00 and Russian petroleum products falling under CN code 2710. There is a 45-day wind-down period for seaborne Russian crude oil purchased above the price cap, provided it is loaded onto a vessel at the port of loading prior to 5 December 2022 and unloaded at the final port of destination prior to 19 January 2023. Maritime-related services and maritime transport can be provided during this period.  There is no equivalent provision for petroleum products.

    After the initial price cap has been set, the price may be amended by the Price Cap Coalition. Where this occurs and the price in Annex XXVIII is changed, there is wind-down period of ninety days (90) for the maritime related services and maritime transport of Russian crude oil (and petroleum products).

    What happens if a ship disrespects the price cap?

    If a third country flagged vessel intentionally carries Russian oil above the price cap, EU operators will be prohibited from insuring, financing and servicing this vessel for the transport of Russian oil or petroleum products for 90 days after the cargo purchased above the price cap has been unloaded.

    If an EU vessel, such as an EU flagged vessel, violates the price cap, it will be subject to the consequences that follow under each Member State's national legislation.

    Which countries have agreed to this oil price cap?

    G7 members and other participating countries (‘Price Cap Coalition'), such as Australia.

    What about the risk of circumvention? Surely shipping companies will just reflag?

    EU sanctions apply within the jurisdiction (territory) of the EU, to EU nationals in any location, to companies and organisations incorporated under the law of a Member State – including branches of EU companies in third countries, as well as on board aircraft or vessels under Member States´ jurisdiction.

    The prohibition to transport Russian seaborne oil applies to all EU vessels, i.e. EU flagged vessels, and also vessels that are owned, chartered and/or operated by EU companies or nationals. This would also cover agents acting on their behalf. The EU refrains from adopting sanctions having extra-territorial application in breach of international law. For the oil price cap, all countries are currently being invited by the G7 to join the Price Cap Coalition.

    स्रोत : ec.europa.eu

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