Research Paper - Oil Crisis in The 21ST Century

OIL CRISIS IN THE TWENTY
FIRST CENTURY
SUBMITTED TO – PROF. ANAMIKA SRIVASTAVA
ADIL VASUDEVA
20171480
BBALLB’17 Sec -C
INTRODUCTION
It is essential for an economy to produce goods and services in accordance with the size
of that particular economy, and as the economies cater to millions of people, reaching a level of
production to satisfy each and every consumer, we require great amounts of power. From
where do we get this power? We get this power by burning fossil fuels like oil, coal, petroleum,
crude oil etc. which have been accumulating under the earth’s surface for thousands of years
and are a renewable source of energy. Being a renewable source of energy, oil is depleting by
the hour and it is causing a crisis, which is directly affecting economies all around the world.
The available supply of these sources is scarce and will last us for a short term. We can
determine an economy from the amount of power it uses and a vital point in determining the
amount of power an economy uses is oil.
The price of crude oil went through an unpredictable and unanticipated hike from just
$25 per barrel to $160 per barrel from 1999-2008. And this unforeseen rise caused a rapid
increase in demand. Also, the Organization of Petroleum Exporting Countries (OPEC) made
numerous production cuts on the oil produced by the middle east which further caused an all-
time hike in the petroleum prices.
Since 1845, oil production has increased from virtually nothing to approximately 86
million barrels per day (Mb/d) today (IEA, 2010).1This has caused the standard of living to
increase at a fast rate. In 2004 the oil production was on a big time low but the developing
countries like India, China and other Asia-pacific countries had a sky rocketing demand for oil
This was followed by an increase in oil prices globally, and then a fall.
1
http://theoildrum.com/node/9015
Figure 1. Oil production stopped growing in 2004 while demand continued to increase. The
result was a global oil price spike that contributed to the subsequent economic contraction.
Liquid fuels include crude oil, lease condensate, natural gas plant liquids, other liquids, and
refinery processing gains and losses as defined by the EIA. Source: Hirsch (2010)2
Before the dramatic oil price drop in June 2014, there had been many other fluctuations
in crude oil prices (Fig.2). Average crude oil spot price reached $52 per barrel at the end of
December 2016 from a low of $29.8 per barrel at the end of January 2016. Crude oil price is
very much on a recovery path and it is expected that it may stabilize in the range of $55-$60 per
barrel in 2017.3
Figure 2: Crude price trend: -
Source: Prepared by authors based on BP Statistical Energy Review, 2016 data4
The main reasons behind this fall and appraisal of oil prices were: -
1.) the production cuts by the Organization of Petroleum Exporting Countries (OPEC) on the
middle east countries.
2.) The rising demand of crude oil and petroleum in the Asia-Pacific and the other
developing countries.
We can see the various trends in oil prices from 1990 - 2016 in the above given Figure 2.
2
http://theoildrum.com/node/9015
3
https://energy.economictimes.indiatimes.com/energy-speak/what-caused-the-oil-price-slump-and-how-did-it-
impact-india/2117
4
https://energy.economictimes.indiatimes.com/energy-speak/what-caused-the-oil-price-slump-and-how-did-it-
impact-india/2117
AGENDA: -
In this paper we will be covering the following topics: -
1.) Supply and demand of oil and what affects the price of oil has on that.
2.) The role of OPEC (Organization of Oil Exporting Countries) all along these crises.
3.) The impact of oil shocks on the Indian economy.
SUPPLY ANS DEMAND OF OIL AND ITS EFFECTS: -

The demand and supply of oil largely depends upon the major production companies,
how the allocate their resources, the pricing techniques they use, how these companies provide
incentives and subsidiaries, the price of oil creates certain stimulants which have an effect on
behavior and this is the behavior which in the course of time helps us in determining the
demand and supply of oil. If the prices of oil are at a soaring rate for elongated periods of time,
it results in reduction of demand, people become energy conservers, they start avoiding
petroleum guzzling vehicles which reduces the demand adversely. Looking at the supply side,
high oil prices makes the companies initiate more drilling projects. Loads of money is poured
into research and innovation. High prices facilitate the companies in openly investing in projects
that wouldn’t have been possible if low prices prevailed.
On the flipside, if low prices are predominating the economies, it results in a huge
shortage of supply. Companies in due course because of lack of resources and money have to
put a stop on the ongoing projects, drilling processes etc. and this results in the demand of oil
to shoot up at a ridiculous rate. The people do not focus on the question of efficiency and
conservation due to the low prices of oil and the demand also increases unbelievably.
ROLE OF OPEC ALONG THE CRISIS: -

For decades OPEC had been the mammoth in the oil production with its members being backed
with most of the oil supplies in the world. The founding members of the Organization of Oil
Exporting countries are Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. are Qatar, Indonesia,
Libya, the United Arab Emirates, Algeria and Nigeria.5 But after the 20th century and even after
battling the 1970 oil crisis OPEC had started to loosen its grip in the 21 st century. In the period
of 2008-12 Libya’s oil production had reduced drastically, and a trade embargo was waivered
on Iran by the European Union and the United States of America, all these occurrences lead
OPEC through a hard time. All along the crisis OPEC had largely caused various production cuts
on oil and prevented a lot of imports from taking place since the rates were unexplainable high
and the costs prevailing around the import of oil were also on a all time high. A consequence of
5
https://www.ourenergypolicy.org/wp-content/uploads/2013/08/RoleOfOPEC.pdf
this (OPEC being the largest importer to numerous Asian pacific countries) developing countries
experienced a huge demand of crude oil. This caused shortage and scarcity and the prices of oil
were already touching the sky.
HOW OIL SHOCKS SHOOK THE INDIAN ECONOMY: -

Oil shocks in the Indian economy or any economy for that matter is dependent on various
factors like the amount of energy consumed by the economy, the GDP of the nation, how much
crude oil is produced by that particular economy and what amounts of oil is imported by the
country. More than two-thirds of the total crude oil imported by India originates in the Middle
East and more than 80% imports are from OPEC countries. This implies that a significant
proportion of India’s crude oil supplies pass through the geopolitical bottleneck.6 Now, to get
the point of what oil shocks do and what really is there impact, we need to know that oil shocks
make various macroeconomic factors unguarded and they get affected adversely, these factors
are : -
 GDP
 Affects on Current account balance
 Fiscal balances (in case of provision of fuel subsidies by the government)7
GDP growth rate: -
it can be brainstormed from the above given Figure, that in the past the high prices of crude
oil have highly altered GDP rates of the economy.
7
https://www.teriin.org/projects/nfa/2008-2013/pdf/working-paper-No18-Oil-volatility.pdf
The high international crude oil prices have an impact on the domestic economy since they
have an impact on the current account balances, inflation rate and fiscal balances. And all these
factors affect the national income. Recently the Indian economy has been substantially
dependent on import of Crude Oil, which has led to an imbalance of the trade balance in the
economy.
FISCAL BALANCE, WHAT SUBSIDIES DO: -

As we know subsidies prevail on a lot of oil products, and also the de facto regulations which
are prevalent on petroleum prices. Since crude oil and petroleum play such a huge role in an
economy it is but, obvious that if there are rapid changes in the prices of these products are
going to make a drastic change in the government revenue balances. After the 1970 oil crisis,
the government created a mechanism by which the government itself took care of the prices of
these precious products i.e. crude oil and petroleum. And these government regulations lead to
changes in the fiscal balance of the economies. We can finally reach a conclusion that high fuel
prices will affect the fiscal and the current account balances by a deficit.

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OIL CRISIS IN THE TWENTY

Source: Prepared by authors based on BP Statistical Energy Review, 2016 data4

SUPPLY ANS DEMAND OF OIL AND ITS EFFECTS: -

ROLE OF OPEC ALONG THE CRISIS: -

HOW OIL SHOCKS SHOOK THE INDIAN ECONOMY: -

FISCAL BALANCE, WHAT SUBSIDIES DO: -

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