The Impact of Oil

1
The Impact of Oil

• Presented by
• Lisa Haakonstad, Alf Vennataro,
• Danjel Lessard

2
What is oil used for?

• 96 used for Energy
• Synthetic fabrics
• Synthetic Rubber
• Gas and gas prices

3
Affect of the Price of Oil

• In order to understand what affects the prices of
  oil have on anything, it is important to
  understand what affects the price of oil.
• We will begin by examining the top three factors
  that affect the price of oil
• Supply and Demand
• Inflation
• Price of Gold

4
Supply and Demand Affect on Oil Prices

• Supply and Demand affects are generally viewed as
  seasonal
• Summer seasons, for example, are especially high
  demanding seasons (particularly from the driving
  aspect) pushing the price of oil up).
• Supply of oil itself is declining
• Fossil fuels are finite resources, and humans are
  highly dependent on them for energy
• Industrializing countries, especially in Asia,
  are driving the demand for Oil skywards.

5
Rate of Inflation on Oil Prices
Oil is a highly volatile commodity second only to
Gold, although, with the current state of the oil
market, maybe second to none.

• The graph shows a positive correlation between
  inflation rate and oil prices
• Because oil is so volatile, slight increases in
  inflation rate equate to huge fluctuation
  increases in price of oil, and vise versa

6
Price of Gold Affect on Oil
Gold and Oil are the two most powerful
commodities in the markets today. It makes sense
that they track each other.

• When scatter plotting Gold price affect on Oil
  price, and vise versa the R2 are identical at
  .8147.
• It is difficult to say which commodity is more
  influential in todays markets

7
Affects of the Price of Oil

• Now that we have seen some of the most
  influential factors that drive oil prices we can
  begin to understand how oil prices themselves
  affect different aspects of the financial arena
  in the form of
• Securities Markets
• Value of the US Dollar
• Political Decisions

8
Oil Affect on Value of Stock Markets
After seeing how well the price of oil tracks
with the price of gold some inferences must be
made
SP 500 (Pink) Oil Prices (Blue)

• In Financial Portfolios hedge funds are used to
  reduce the systematic risk of the market
• Gold is a commonly used hedge fund because it
  tracks well with the market with a negative
  correlation
• Regarding this fact, oil can be used in the same
  way - when the market is up oil prices are down
  (generally) and vise versa

9
Oil Affect on Value of US Dollar
Generally the value of the dollar tracks with the
successes and failures of the valuations of the
markets, and, accordingly, the price of oil
mirrors the valuation of the USD. In the next
slide this anomaly will be explained in more
detail. During the past calendar year the price
of oil has hit new heights almost every day. To
go along with that, the devaluation of the
dollar, especially with regards to the Euro, has
been the topic of much discussion.
10
Integration of Afore Mentioned Variables

• The rate of inflation has high impact on the
  whole situation
• Inflation drives the price of oil, positively and
  negatively
• Inflation drives interest rates (an important
  point)
• Higher inflation equates to lower interest rates
• Higher interest rates result in higher bond
  market valuations because it is less expensive to
  borrow money
• Bonds, like oil and gold, are excellent hedge
  funds, and work with markets to keep them in
  equilibrium
• This results in lower market valuations and lower
  dollar values
• Summarized High periods of inflation, result in
  higher oil prices, lower dollar values, and lower
  market values
• It is important to recognize how all the
  components affect each other in order to
  understand the whole picture

11
Oils Affect on Political Decisions

• It is important to understand that the US is not
  a major producer of oil - this puts us in a
  unique, subordinate situation
• US holds somewhere between 3-6 of the world oil
  reserves, and at the same time is the worlds
  biggest consumer of oil
• The US is in a disadvantaged situation having to
  import more than 60 of the oil they consume.
• Much of the US oil comes from countries either
  engaged in conflict with them or close to it
• Dont bite the hand that feeds you
• Oil definitely has an affect on the political
  decisions made

12
The Oil Countries

• OPEC
• Control the Oil Price by controlling production
• Stability in region important for price

13
Norway and Oil

• Found Oil in 1970
• Government regulated extraction to benefit
  Norwegian companies.
• Oil influences politics today.
• Creates a false sense of security for the
  Norwegian markets and government

14
The Future of Oil Consumption

• From now to 2020, world oil consumption will rise
  by about 60.
• By 2025, the number of cars is estimated to
  increase will increase to well over 1.25 billion
  from approximately 700 million.
• The problems of oil consumption in the future
  revolve around two factors
• -Population
• -Increasing oil use from developing
  countries

15
The Future of Oil Consumption Continued

• China and India have the highest cosumption
  growth rate in oil
• China's oil consumption is expected to grow at a
  rate of 7.5 per year
• Indias 5.5 per year
• This Compares to a 1 growth for the
  industrialized countries

16
Natural Disasters and Oil

• Hurricane Katrina
• -The normal rate of production in the Gulf of
  Mexico is 547.5 million barrels
• -7.1 million barrels of oil were shut in.
• -Production of oil in the Gulf of Mexico fell
  by 1.4 million barrels a day and accounted
  for 95 of the daily production of oil.

• Recent earthquake in China
• -The rebuilding needed after the huge
  earthquake will mean a sharp increase in
  diesel fuel
• - Leading to higher oil prices