The Supply and Demand of Crude Oil - Term Paper Example

? The supply and demand of Crude Oil of the of the Table of Contents Introduction 3 Literature Review 3 Analysis of the Literature 6 Conclusion and Recommendations 8 References 10 Introduction There is much ambiguity in manufacturing industries that result from rapidly mounting costs of energy, raw materials and labor inputs. The rising costs are an outcome of the general level of inflation in the countries of Europe. Many big companies, particularly those, that are conducting operations across several countries in the world are now carrying out researches aimed at weighing the probable influence of the theatrical increase in prices of crude oil on their businesses (Wilson, 1975). Supply of oil at the global level is becoming progressively tighter with the passing of the day and this phenomenon is referred to as one most decisive factor that has lead to the recent massive towering of oil prices. This paper is intended to study in detail the price condition of the current global oil market and the trend of demand and supply shown by the different importers and exporters. Information collected from secondary sources is reviewed in the next section of the paper and is analyzed in the third section. Based on the analysis recommendations are added to the concluding portion of the paper. Literature Review Demand for petroleum products in the region of the Asia-Pacific countries is showing a growing trend. China is in particular, one of the fastest growing economies in the world and its noteworthy economic development creates high demand for crude oil. India is the other significant developing country where the demographic factor leads to high demand of crude oil. These countries are big importers of oil in the international market. According to the preliminary statistics published in the reports of the U.S. Energy Information Administration (EIA) in the history of the US, it is the first instance in 40 years time, that China has reached the top position in the rank of net oil importers in the world exceeding the net import of the United States. This outcome has partly occurred due to the rise in taxes in the United States that is considered as a potential reason by analysts behind distorting the country’s net oil imports (Oil Price, 2013). On one hand, a score of regulations related to the petroleum industry are relaxed by a number of countries, which assures that the pressure for compressing the demand and supply of petroleum is going to be reduced to a certain extent. This is because deregulation is expected to expand the worldwide trade in crude oil and petroleum products over the years. However, on the other hand, the regulation is being implemented in the different countries at differing paces, which creates differential levels of participation in international trade by these countries. Free trade might be hampered by the economic condition and the policies adopted by the importing country which dictates the level of import in the country (Nakanishi & Komiyama, 2006). Trends in energy consumption trends show that the total consumption of primary energy in the world was near about 10,800 million tons oil equivalent (MTOE) in 2010. The forecast of the total consumption for the year 2030 is around 16,000 MTOE. This shows approximately 1.2 times and 1.7 times the total consumption figure estimated for 2003 (estimated at about 9,300 MTOE) respectively. American oil boom The newly arising oil boom in America is bringing marked changes in the petroleum market in the whole world. According to the opinion of experts, the emerging importance of America in the petroleum market is reducing the influence of the OPEC countries on this market and reducing the OPEC’s impact on political upheavals related to prices (Incantalupo, 2013). The U.S. government has revealed after a study conducted by the Energy Information Administration that technically estimated amount of recoverable oil from proven shale reserves in 41 countries is approximately 345 billion barrels (Reuters, 2013b). Oil prices have remained in a close range of approximately $95 each barrel. With abundant supply in the global oil market, the policy declarations by the US Federal Reserve are highly anticipated. The Fed’s is concentrating on stimulating demand. Chairman Ben Bernanke has announced that the central bank might reduce bond purchases in May 2013. It would reduce money supply in the economy and reduce interest rates thereby boosting productive activities (Jacob, 2013a). The rising level of inventory of crude oil is unexpectedly high (Jacob, 2013b). The dependence of America on the imported oil and gasoline is decreasing due to the boom in shale drilling in the states of Texas and North Dakota. These reserves are yielding a bounty of high-quality crude that is low on sulphur (Meyer, 2013). Owing to ample supplies and low demand of crude oil prices of crude oil are low and gains for companies are getting capped (Reuters, 2013a). The major proportion of crude oil is drilled in the Midwest portion of the United States and experts’ from the International Energy Agency (IEA) (an advisory group based in Paris) have declared that such huge supply form the country is sending shock waves to virtually almost all bays in the global world market. It is a matter of discussion and debate in the current situation, since, if the opinion is proved to be correct with passing of time prices might be considerably lowered or at the least increase at a miserable rate in the future years. Besides the upheaval over oil price boom in drilling of oil also has a significant environmental aspect. The global society is now becoming increasingly aware of the environment in which it belongs and demand for energy has been significantly affected by such evolutions. The method in which the oil is being pulled up from the underground to the surface of the earth and the way in which it is consumed provokes controversial discussions around the world (Incantalupo, 2013). The capacity of oil supply from different countries is growing rapidly at an unprecedented level. If this phenomenon continues unhindered it would soon outpace the demand for oil. This would potentially lead to overproduction of crude and create an abrupt dip in its prices. The world at present produces nearly 75 million barrels per day (Incantalupo, 2013). The federal government has made the forecast that output of crude oil by the US from the world’s shale formations would be pitched up from 2012 figures of 2 million barrels per day to the height of 2.8 million barrels per day in 2020. This implies that total oil production in the US would be boosted from 6.8 million barrels per day in 2013 to 7.5 million barrels per day in 2020 (Incantalupo, 2013). Analysis of the Literature The amount of consumption of crude oil is set to increase by the Asian economies and that by the American and OECD economies is expected to show a downward trend. With reference to the structure of energy consumption of primary form of energy, such as crude oil, on the basis of different regions, a salient feature of the major oil importing countries has been deciphered. The combined share of oil consumption by the United States and the OECD member countries of Europe are forecasted to plunge from a 2003 figure of 52.7 percent to 41.5 percent in the year 2030. In the mean time, the largest rise in consumption in this sector is predicted to be witnessed in Asia; with an estimated rise of 7.5 percent points and reach 37.6 percent in 2030 (Nakanishi & Komiyama, 2006). This shows that the developing countries are lodging greater demand for these products than the fully developed industrialized nations of the world. It can be concluded from such patterns of energy consumption that these countries are recording higher levels of economic development than the other industrialized nations. The breakdown of the total global consumption in 2003 and in 2010 has been studied to understand the trend better. In 2003, the share of crude oil consumption was the highest, recording 38.5 percent internationally (Nakanishi & Komiyama, 2006). This was followed by coal with 27.0 percent consumption, natural gas with 22.5 percent consumption, hydro power with 2.4 percent consumption and nuclear energy with 7.1 percent consumption. In 2030, the projected share for oil is 37.2 percent. Recently, a trend of switch in demand from oil to natural gas has been observed. Analysts have forecasted that this diversification of the sources of energy supply is expected to continue till 2030. The supply of crude oil by the OPEC countries has been increased in May 2013. The supply increased from 135 kb/d to 30.89 mb/d, reaching the highest point in seven months time. While several factors led to reduction of crude oil supply by Nigeria, Libya and Iraq, the produce increased in the gulf countries, such as, the UAE region, Saudi Arabia, Kuwait and Iran. This made up for the reduced supplies. Also, on account of the Canadian maintenance the global supply of oil also went down by 90 kb/d. Despite the overall fall in oil demand, a seasonal hike in supply is expected, particularly from the non OECD countries. China has run a good spring maintenance, Saudi Arabia has increased its distillation capacity significantly and the Amuay plant in Venezuela has been recovered after it caught fire in 2012 and has started producing output. Thus higher supply of oil is expected from China, Saudi Arabia and Venezuela (International Energy Agency, 2013). The scenario in price levels is not very charming. Prices of internationally traded benchmark grades of crude oil varied in a low range and even reached the lowest edge in the early days of June. In the bleak economic outlook in the world, the market showed a bearish sentiment through the majority of days in May. Forecasts made about the growth in relative global demand for crude oil shows a minute change of 0.9 percent (amounting to a rise of at 785 kb/d) for the current year 2013. Estimates about absolute demand have been squeezed on the basis of the revision of historical data provided by Russia. The projected supply growth for the non-OPEC region is maintained at 1.1 mb/d for the year 2013 and is unmoved since May 2013. Since the growth rate of the big European countries is sluggish it is not being able to provide the required boost to the economy and therefore demand for crude is lacking. The OPEC looks after the oil price level in the world. Since the supply from America is rising rapidly and the influence of the OPEC is declining, it is affecting the price level in the market. Conclusion and Recommendations Economic activity in the world has been on the downside after the financial downturn in the USA and the Europe in the last decade. The economic slump is taking a deep toll on oil demand by even the major oil consuming countries in the world. According to a report by OPEC, the deceleration of the U.S. economy with its high rate of unemployment and feeling of insecurity and uncertainty among the citizens has considerably damped the oil demand made by the country. Besides the US is running in high budget deficit which is adversely affecting the overall consumption level in the country, equally affecting the demand for crude oil. The debt crisis of the Euro zone has cast hard impact on the European economies and is still hindering the economies to achieve the estimated growth rate for 2013. OPEC has cut down the oil demand for the region which is a major thrust behind reducing crude prices. Rising production by US inspires the IEA to predict that by 2018 the US would become the largest producer of oil snatching away market share from the OPEC (International Energy Agency, 2013). The US economy is making a huge supply of crude oil and is realizing the tension created in the international forum by the global slow-down. The country is also developing in a sluggish manner. The governments of the US and other developed countries have to consider that the major demand for energy is made by the transportation, commercial, industrial and residential sector (World-crisis, 2008). Therefore, the government has to boost up activities in these sectors to improve demand conditions. While the developing countries assure of demand for oil backed by their ongoing development process, the services and commercial sectors in developed economies have to be boosted by the government. References Incantalupo , T. (2013). Gas, oil prices restrained as shale crude tapped. Retrieved from http://www.newsday.com/classifieds/cars/gas-oil-prices-restrained-as-shale-crude-tapped-1.5461628 International Energy Agency. (2013). Highlights of the latest OMR. Retrieved from http://omrpublic.iea.org/ Jacob, S. (2013a). Crude Oil Gains Ahead of Federal Reserve's Policy Decision. The Wall Street Journal. Retrieved from http://online.wsj.com/article/BT-CO-20130618-707198.html Jacob, S. (2013b). Crude Oil Slightly Lower After Fed Statement, Inventory Data. The Wall Street Journal. Retrieved from http://online.wsj.com/article/SB10001424127887323393804578554723793006396.html Meyer, G. (2013). US crude oil exports rise sharply. Retrieved from http://www.ft.com/cms/s/0/09ae9bb8-b0f0-11e2-80f9-00144feabdc0.html Nakanishi, T. & Komiyama, R. (2006). Supply and Demand Analysis on Petroleum Products and Crude Oils for Asia and the World. Retrieved from http://eneken.ieej.or.jp/en/data/pdf/349.pdf Oil Price. (2013). China Overtakes the US to become the World’s Largest Oil Importer. Retrieved from http://oilprice.com/Energy/Crude-Oil/China-Overtakes-the-US-to-become-the-Worlds-Largest-Oil-Importer.html Reuters. (2013a). UPDATE 7-Oil ends modestly higher, weak demand outlook weighs. Retrieved from http://www.reuters.com/article/2013/06/12/markets-oil-idUSL3N0EO0RW20130612 Reuters. (2013b). UPDATE 3-Rise in shale oil boosts global crude supply estimate -U.S. EIA. Retrieved from http://www.reuters.com/article/2013/06/10/global-shale-idUSL2N0EM1KM20130610 World-crisis, (2008). World Oil Crisis: Driving forces, Impact and Effects. Retrieved from http://www.world-crisis.net/oil-crisis.html Read More