Research Articles Base: Crude Oil Price Increase

AN ANALYSIS OF THE IMPACT OF CRUDE OIL PRICE INCREASE ON PAKISTAN

1.0  Title The working title of this research is initially drafted as – An Analysis of the Impact of Crude Oil Price Increase 2.0  Background of the Study The recent waves of oil price increases have profound effects on virtually all industries. Crude oil prices have risen to a record high, and resulted in price increases for basic commodities and services. Economic theorists and business analysts figured that the soaring oil prices which grow by over 50% from 2004 will negatively influence the world economy. According to Hong Kong Trade Development Council, this is because oil prices remain to be a significant indicator of global economic performance. As such, oil prices that are determined by supply, demand and speculation as well as taxes will affect the consumers and companies on material and psychosomatic levels.             The petroleum industry classifies crude oil based on its geographic location where it is produced and its sulfur content. Crude may be considered light or heavy depending on density; or may be referred as sweet or sour based on its sulfur substance. In lieu with this, light and sweet kind of oil is preferred since it is easier and cheaper to refine. Nonetheless, the crude oil supply is highly dependent on world oil-exporting nations, collectively known as Organization of the Petroleum Exporting Countries (OPEC). Prior to the actual price increase, crude oil passes through a supply chain and value proposition strategies that contributes to the price and its eventual increase or dwindling.       3.0  Statement of the Problem The study intends to investigate the effects of run-up in crude oil prices in Pakistan. Specifically, the study is set to answer the following questions: 1)     How crude oil prices are determined? Why are global oil prices high? 2)     Why are gas prices across the countries different? What are the factors that affect gas pricing in different countries? 3)     What are the influences of OPEC in determining gas prices in Pakistan? 4)     How dependent is Pakistan to oil-exporting nations? How responsive are Pakistani markets to changes in international crude oil prices? 5)     How crude oil prices increase affect the economic performance of Pakistan? How the price increases affect the consumers, GDP and employment in Pakistan? 4.0  Research Hypotheses The paper will work on the following assumptions: §         Tax policy plays an important role in determining prices of crude oil in Pakistan. §         GDP, consumerism and employment is highly volatile with respect to the movement in international crude oil prices. §         The demand of crude oil in Pakistani is very high, making the Pakistani petroleum market as highly-dependent to oil-exporting states. 5.0  Research Plan The research will adopt a positivism view wherein the researcher prefers to work with an observable social reality in order to come up with law-like generalizations similar to those produced by the physical and natural scientists. Also, the study opt for a deductive approach which will follow the sequence of deducing a hypothesis; expressing the hypothesis in operational terms; testing this operational hypothesis; examining the specific outcome of the inquiry to either confirm the theory or indicate the need for its modification; and finally, modifying the theory in the light of the findings (if necessary) (Robson, 2002). In addition, the research design for this study will also focus on a multi-method research strategy using semi-structured interviews and the survey methods of research. A multi-method research strategy will be useful for this study because the methods will allowed the researcher to gain more in-depth understanding of the phenomenon of the impact of international crude oil price increases to country-specific increase on oil prices and the uses of these methods for data collection within one study will ensure that data are clear, valid and reliable. This research would employ telephone interviews which allow the researcher to have a contact to participants with whom it would be impractical to conduct an interview on a face to face basis because of the distance and restraining costs involved and time required to conduct the interview. Data gathered using these instruments will be collated for analysis. Data analysis will primarily be characterized by comparative and statistical approach. Afterwards, the researcher will summarize all the information, make a conclusion based on the hypotheses posited and provided insightful recommendations the topic.   src=”http://pagead2.googlesyndication.com/pagead/show_ads.js”> Credit:ivythesis.typepad.com

AN ANALYSIS OF THE IMPACT OF CRUDE OIL PRICE INCREASE ON PAKISTAN

1.0 Title The working title of this research is initially drafted as – An Analysis of the Impact of Crude Oil Price Increase 2.0...

SCENARIO OF CRUDE OIL PRICES

SCENARIO OF CRUDE OIL PRICES   I. Background Australia has seven major oil refineries only capable of light crude oil requirements ( 2007).  The trend in the oil refinery industry in the country is to minimize the capabilities of plants to produce heavier crude oils (e.g. from light to getting lighter).  In addition, importation is more lucrative as heavy crude oil is abundant while cheaper prices are offered compared to domestic produced.  Crude oil is prominent in future markets where the common motivation is not to assure crude volume rather for risk distribution.  These markets would then take part in supplying the necessary information about future prices.  Believing that economic theories are in maximum usage in the country, this is not so because of lack of exchange intermediary and high trading relationship with Asia.            It becomes a practice for regions to acquire “marker crude” (e.g. Brent, Dubai and Oman) to maintain market availability and determine competition among global players.  The existence of derivative market limits the capabilities of economic theories applicable in the behavior of crude oil prices.  For example, the fourth relevant issue in oil price watch is the stock level ( 2006). However, the data that will operate the theory (e.g. small or large stocks) is observable in the volume of future contracts being traded where no physical production or distribution really happened.  In contrast, Asia and Australia do not have future exchange of crude oil that limits the capability of economic theory particularly supply and demand to recognize price.  Tapis, their crude maker, implements independent panel approach to producers, refiners and traders to settle crude prices.        II. Short-run, Medium-run and Long-run Prices II. A. Determinants of Supply III. A. 1. Price of Crude Oil When the price of a good rises, the quantity supplied will also rise.  In the short-run, the theory may not be applicable to pure producers due to the presence of retailer’s bargaining.  Alternatively, a vertically-integrated producer will also be haggled by end-users as reduction in operational cost (e.g. logistics) due to the absence of retailers would be justified.  According to  &  (1998), bargaining is an adaptive behavior used by human interactions to satisfy their needs ().  In the long-run, however, increasing the price of crude oil may not exist and not exercised by buyers and sellers because of the eminent familiarity and customer satisfaction that may defer any price increases.  In effect, incentive to produce more does not essentially precedes increase in price.   II. A. 2. Price of Other Commodities  When its price increases, the supply for a good will decrease, if not, become obsolete as producers would tend to shift to the former.  However, this will depend on whether producers have enough inputs like machineries, technology, and entrepreneurship to shift business.  But when a product life cycle is studied closely ( &  2001), it is hard to determine when the producers will be ready for the lucrative shift.  In case they will shift, they will become too vulnerable in the introduction phase, may not maximize the growth phase and too embedded in the mature stage.  Perhaps, the shift may be possible in the decline stage where profits fall or the industry becomes saturated by competitors.  The paradox of the shift, however, is that at the time of decline phase, producers may not engage the price incentive of business shift as the market for other commodities is already saturated by the early birds.  Market saturation may deter increasing prices and halt any shift incentives for the remaining spirants.   II. A. 3. Cost of Production  The general rule is that when this will rise, producers will cut back on product leading to decrease in supply.  However, the evidence of the price-sensitive oil and exporting industries continuing their businesses is a primary exemption to the rule.  The existence of learning curve, oligopolistic market structures and risk diversification of large international firms has the ability to absorb price shocks to the cost of inputs, technology, organizational changes and government polices (e.g. taxes).  As observed, there is an eminent presence of rationality exemplified by these producers.  Since they have the financial, structural and strategic depth, they enter an industry which has dynamic and unpredictable cost of production.  In this way, they may have financial loss from time-to-time, but long-term gains will be pervasive due to the opportunity to dominate the market.       II. A. 4. State of production technology  When production technology is high, production will become more efficient that can lead to increase in supply.  However, technology is not the only factor of production existing in the producer’s plant.  There exist more complex interrelationships between these factors to be able to exploit the improved efficiency of one.  The most crucial of all is governing human resources.  Without proper guidance from the leaders of a firm, production efficiency will not hold because of resistance, de-motivation or just a plain technological ignorance.  Technology is not 100% automated and human intervention as well as errors is inevitable.  In addition, technology may also be intended for a specific segment of the industry, say, large corporations.  As such, aggregate supply may not necessarily increase because small entrepreneurs who cannot afford to buy the technology cannot contribute in increasing supply.   II. B. Determinants of Demand II. B. 1. Price of Commodity  When the price of a good rises, the quantity demanded will decrease.  However, this is proved not true by another economic model that distinguishes normal to inferior good (,  &  2002 ).  In addition, this may not hold for buyers who resell the product to profit from market pegged to end-users.  Retailers are known as the primary cause of substantial increase in pricing especially in Japan where buyer-manufacturer links are so diverse with several middlemen.  In effect, the tendency of demand to follow this assumption will continuously be flawed as long as there is incomplete information from end-users regarding transportation costs, mark-up and warehouse price of such goods in which retailers tend to exploit.            II. B. 2. Price of Other Commodities  When the price of other commodities increases, the demand for a product will also increase.  This is existent in substitute goods but absent on complimentary ones (. 2002 ).  However, even this classification is disputable.  Take for example substitute products to crude oil.  In the perspective of manufacturer producing a hybrid of the two in one product, they are complimentary goods.  In effect, the assumption does not hold for business customers who have the ability to transform inputs into outputs. However, for end-users who have no other things to do with the product, the assumption redeem its significance because end-users will not spend their time and money to act as hybrid manufacturers.  They will just consume the product and follow the original assumption.       II. B .3. Income of consumers  As income rises, the demand for the good also increases.  This is true for normal goods but inconsistent to inferior goods (. 2002 ).  However, there are cases that this may not hold for both kinds of goods.  Rich as well as working and poor people have variety of investments and savings is also their priority.  In effect, even though their income or wealth may increase, their consumption for wither normal or inferior goods will not necessarily happen due to being conservative on spending.  In the long-run, the deferred demand due to increase in income would now be unpredictable.  This is because investments and savings are pegged to risks, economic uncertainties and individual people strategy.  As a result, there is a possibility that any wage increase pose by the government will not significantly affect an economy under recession.    II. B. 4. Consumer Tastes  This may be the psychological side of economics which gave it a very challenging position as a determinant of demand.  Partially, this can only be the determinant that can directly affect economic behavior; however, the result is also ambiguous and embedded on the “brains” of individuals.  Consumer tastes can determine the level of demand through advertising and market research ( 2002 ).  As long as producers focus their resources towards informing consumers, providing quality and protecting its reputation, desirability of its products will pull more demand.  However, competitors also have their own strategies to counter any industry actions.  In effect, this makes a heavily competitive industry under uncertainty.   Bibliography Books Journals   Electronic sources Credit:ivythesis.typepad.com

SCENARIO OF CRUDE OIL PRICES

SCENARIO OF CRUDE OIL PRICES I. Background Australia has seven major oil refineries only capable of light crude oil requirements ( 200...

The Global Liquefied Natural Gas Market: Status and Outlook

The Global Liquefied Natural Gas Market: Status and Outlook World LNG Market Structure The structure of the international LNG market influences current and future LNG trade. Key issues include differences in history and pricing mechanisms between the Atlantic and Pacific Basins, recent market changes that increase flexibility in LNG trade, the declining trend of LNG costs throughout the value chain, and the addition of new participants to the market. <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> LNG trade evolved differently in the Atlantic and Pacific basins, and this continues to affect import volume, pricing systems, and contract terms. Importing countries in the Pacific Basin are almost totally dependent on LNG while countries in the Atlantic Basin use domestic supplies and pipeline imports as well as LNG to meet natural gas demand. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Recent changes in the LNG market have trended towards increased flexibility. Contracts have loosened terms on both price and volume, and can be negotiated for shorter periods of time. Additionally, flexibility in LNG shipping has led to an increase in short-term contacts. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Costs of liquefaction, shipping, and regasification have declined over time, lowering costs to producers. Since the LNG market is primarily driven by long-term contracts with pricing mechanisms pegged to petroleum products, however, lower operating costs do not necessarily translate into lower LNG prices, at least in the short term. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Buyers and sellers have been taking on new roles. Buyers have been investing in the upstream, including liquefaction plants (e.g., Tokyo Gas and the Tokyo Electric Power Company have both invested in the Darwin liquefaction plant in Australia). Traditional sellers, such as BP and Shell, have leased capacity at terminals and are extending their role into trading. New buyers have been emerging, including independent power producers in Puerto Rico and the Dominican Republic. </li> </ul> Atlantic and Pacific Basins Differ <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> In the 1980s and early 1990s, indigenous natural gas supplies were abundant for most countries in the Atlantic Basin, and pipeline gas readily available. It was difficult for LNG to compete and, as a result, LNG imports into the Atlantic basin grew very slowly. </li> <li class="MsoNormal" style="color: black; text-align: justify"> LNG still makes up a small portion of the natural gas market in the United States and Europe, and competes with domestic supplies and pipeline imports. </li> <li class="MsoNormal" style="color: black; text-align: justify"> In contrast, the LNG importers in the Pacific Basin – Japan, South Korea, and Taiwan – have little or no domestic gas production and no pipeline sources for natural gas imports. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Because current LNG importers in the Pacific Basin did not have access to domestic or piped imported gas, LNG imports into the region increased rapidly in the 1980s and early 1990s as these countries sought alternatives to oil. Security of supply was a more important consideration in the Pacific Basin than price. </li> </ul> LNG Pricing Around the World <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> LNG prices are usually expressed in U.S. dollars per million Btu (MMBtu). Prices can be calculated on a free on board (f.o.b.) or delivered ex-ship (d.e.s.) basis. Today most new contracts are f.o.b., since buyers see this as giving them more control over the landed price and allowing them to trade surplus LNG cargos. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Gas “hubs” involving both LNG and pipeline gas are emerging in the United States, Belgium, and the United Kingdom, presenting opportunities for price arbitrage and eventual convergence of price. </li> <li class="MsoNormal" style="color: black; text-align: justify"> LNG prices have historically been higher in the Pacific than in the Atlantic Basin, averaging about US/MMBtu in the former and US/MMBtu in the latter over the past 10 years. </li> <li class="MsoNormal" style="color: black; text-align: justify"> The rapid growth in Middle East LNG supply may contribute to a convergence of the Atlantic and Pacific prices. So far, the quantity of LNG flowing from the Middle East into the Atlantic Basin has been relatively small, but several projects in the Middle East are aiming to supply European and North American markets. In addition, if LNG import terminals are built on the North American West Coast, Pacific Basin suppliers could gain greater access to the U.S. market. </li> </ul> Atlantic and Pacific Basin LNG Pricing LNG prices are benchmarked to competing fuels. There have been three distinct and relatively independent markets for LNG, each with its own pricing structure. Price risk is inherent in each pricing structure, although the degree of risk differs among the markets. <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> In the United States, the competing fuel is pipeline natural gas, and the benchmark price is either a specified market in long-term contracts or the Henry Hub15 price for short-term sales. Importers and exporters involved in U.S. LNG transactions are exposed to a significant level of risk given the high degree of price volatility in U.S. natural gas markets. </li> <li class="MsoNormal" style="color: black; text-align: justify"> In Europe, LNG prices are related to competing fuel prices, such as low-sulfur residual fuel oil. However, LNG is now starting to be linked to natural gas spot and futures market prices. </li> <li class="MsoNormal" style="color: black; text-align: justify"> In Asia, prices are linked to imported crude oil. The pricing formula typically includes a base price indexed to crude oil prices, a constant, and perhaps a mechanism for the review/adjustment of the formula. Asian prices are generally higher than prices elsewhere in the world. </li> </ul> Recent Market Changes: Contracts and Pricing Although long-term LNG contracts are not likely to disappear, importing companies are seeking increased flexibility and better contract terms. According to the Groupe International des Importatuers de Gaz Liquefie (G.I.I.G.N.L.), contracts covering the sale of nearly 30 million tons per year to Asian countries will come up for renewal over the next decade. <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> Traditional LNG contracts focused on security of supply for the buyer. Contracts were long-term (often 20–25 years) and rigid. Take-or-pay clauses shifted the volume risk to the buyer. LNG was generally shipped d.e.s., that is, the LNG was transported in designated tankers. Contracts also contained “destination clauses” that prevented buyers from reselling the cargos to third parties. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Changes to this situation have been underway since the mid-1990s. LNG suppliers offered more favorable terms, including substantially lower prices, to new importers in India and China, which led traditional LNG buyers to seek lower prices when renegotiating their contracts. Some examples: </li> </ul>     — Owners of Australia’s Northwest Shelf project agreed to sell LNG to China for a price reported to be around per million Btu when crude oil prices are per barrel (with the actual LNG price varying with the price of crude oil). Existing contracts with Japanese buyers are reported to be about 20 percent higher than the Chinese contract.16     — When Japanese utilities renewed an expiring 20-year, 360-Bcf-per-year (7.4-million-tpy) contract for Malaysian LNG, they reportedly obtained a 5-percent price reduction, a two-tier contract arrangement whereby 58 Bcf (1.2 million tons) per year is sold for 4 years and the rest for 15 years, and an agreement that about one-fourth of the volumes will be sold f.o.b., which will increase shipping flexibility and reduce freight costs for the buyers. The contract also covers short-term purchases17 <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> In the U.S. market, LNG prices are linked to Henry Hub prices, which have been steadily rising. Prices for natural gas in the United States are expected to remain in the to per million Btu range, which would reduce the LNG price differential between the Pacific and Atlantic markets. Meanwhile, the European Union is insisting that LNG sellers remove destination clauses from their contracts. </li> <li class="MsoNormal" style="color: black; text-align: justify"> The changing market is boosting short-term LNG sales, which accounted for a record-high 8 percent of traded LNG in 2002. The short-term LNG market was virtually nonexistent until a few years ago, and few LNG facilities were built until sales contracts were signed for the entire capacity. Recently, some projects have gone forward with capacity unclaimed. Spare capacity and more flexible contracts should lead to increased short-term sales. </li> </ul> Recent Market Changes: Growth of the Short-Term Market <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> One very significant result of this changing environment has been the emergence of a short-term LNG market. All cargos not traded under long-term18 agreements are here described as short-term sales. This includes cargos traded under 1-year contracts as well as individual cargos of LNG that are bought and sold. </li> <li class="MsoNormal" style="color: black; text-align: justify"> Several factors continue to drive the short-term market: </li> </ul>     — Uncommitted production capacity, as some new plants are being built (e.g., Malaysia Tiga) without committing the full production volumes.    — Market demand for more LNG, especially in Spain and the United States, where receiving terminals have excess capacity, and Korea, which needs greater volumes in winter.    — The availability of ships not committed to projects.    — Greater contract flexibility. <ul type="disc" style="margin-bottom: 0in"> <li class="MsoNormal" style="color: black; text-align: justify"> The short-term market has grown from virtually zero before 1990, to 1 percent of the LNG market in 1992, and to 8 percent (400 Bcf or 8.4 million tons) in 2002. In 2002, 32 companies traded 218 shipments of LNG either as short-term transactions or as swaps. The leading short-term sellers in 2002 were Algeria, Oman, Qatar, Trinidad and Tobago, and the UAE. Short-term imports were dominated by the United States and Spain, followed by South Korea and France. </li> </ul> Short-term trading is projected to continue to grow, especially in the Atlantic Basin, and could reach 15 to 20 percent of LNG imports over the next decade. However, whether LNG will ever become a true commodity is still a matter of debate. What is LNG? Liquefied natural gas, or LNG, is natural gas in its liquid form. When natural gas is cooled to minus 259 degrees Fahrenheit (-161 degrees Celsius), it becomes a clear, colorless, odorless liquid. LNG is neither corrosive nor toxic. Natural gas is primarily methane, with low concentrations of other hydrocarbons, water, carbon dioxide, nitrogen, oxygen and some sulfur compounds. During the process known as liquefaction, natural gas is cooled below its boiling point, removing most of these compounds. The remaining natural gas is primarily methane with only small amounts of other hydrocarbons. LNG weighs less than half the weight of water so it will float if spilled on water. where A majority of the world’s LNG supply comes from countries with large natural gas reserves. These countries include Algeria, Australia, Brunei, Indonesia, Libya, Malaysia, Nigeria, Oman, Qatar, and Trinidad and Tobago   Credit:ivythesis.typepad.com

The Global Liquefied Natural Gas Market: Status and Outlook

The Global Liquefied Natural Gas Market: Status and Outlook World LNG Market Structure The structure of the international LNG market infl...

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