petroleum economics assignment help

petroleum economics assignment help

Petroleum Economics: Analyzing the Economic Aspects of the Oil Industry

1. Introduction to Petroleum Economics

The oil industry involves the search, exploration, development, analysis, production, storage, refinery, and distribution of by-products through weak and partial regulation by governments around the world. This industry is formed by companies whose main objective is to perform these stages, seeking to increase productivity and contribute to the economic development of the planet. The way these companies are organized is quite different, and this organization is directly related to the different stages of this industry. The price is formed through the exchange between oil producers and industry companies. The price of a barrel of oil is formed through the combination of different factors. However, the characteristics of supply and demand provide individuals and companies, whether for speculative purposes, the power to influence this value.

This chapter presents an overview of the economic aspects of the oil industry, showing the stages of the industry and the aspects that need to be considered in an evaluation of the projects. It presents the different tools, such as financial indicators and the interest rate, used to analyze these investments, and finally presents the topics addressed in this book. It also presents some economic concepts, such as working capital, profit, revenue, and cost drivers. These two sets of costs are those most often used to analyze projects in the oil industry. It is the concept of petroleum economics that seeks to better understand the different stages of this industry and understand which ones are viable to invest in from an economic point of view. It also seeks to suggest possible opportunities for substitution or reduction of costs in the different stages of this industry. This chapter is just the first attempt to present some topics that will be applied throughout the chapters and also an invitation to study them in more depth.

2. Factors Affecting Oil Prices

Demand Push: Any decline in the world economy immediately impacts the demand for transportation by reducing the demand for crude oil since more than 95% of transportation energy is derived from oil. Random oil supply features make the brokered spot market more volatile and, therefore, crude prices closely track the demand for transportation. Demand has an important role to play in the long term crude oil prices. It is not the demand of the developed world, which has shown consistent decline, but the demand of the developing world, led by China and other Asian countries, that has been the new driver of crude oil prices since the turn of the century. Another round of demand push driven higher prices should happen once again when advanced technologies, alternative energy sources, and electric vehicles significantly reduce the demand for and dependence on oil in transportation in the long run.

Cost Push: Unlike for most other goods, sellers set the price of oil. The seller may reduce production or supply of a product (a cartel reduces the supply) to push up prices. Buyer would do the same in the futures market, that is, buy the commodity and store it to push up prices. However, expectation of a stronger or weaker market is needed to make it worthwhile for anyone to store the commodity when the carrying and storage costs are onerous, and that is not the case with oil. Sellers can raise or lower prices by controlling production through the quota system of the OPEC to a great extent by adjusting the production cut to the quota of an individual country.

Price of a barrel of crude oil is driven by a number of factors. WTI was selling at around $91 a barrel when the oil trade sanctions were lifted from Iran on 16 January 2016. However, prices fell rapidly to $29 a barrel on 18 January 2016 and have been on a roller coaster ever since. This was not expected; lifting of sanctions on Iran was expected to cut demand for crude oil by 1 million barrels per day (mbpd) and even the Organization of Petroleum Exporting Countries (OPEC) had estimated in its November 2015 secretariat report that Iranian production will increase by only 500,000 barrels. However, Brent traded above $50 a barrel on news of OPEC member countries discussing production curbs in April 2016. The moves in the oil market are no surprise to the initiates in the oil futures market. Nevertheless, we know that the effects of the events that bring about these changes generally last for a few months for short term contracts and a year or two, or longer, for longer term contracts. What drives crude prices in the longer term?

3. Cost Analysis in the Oil Industry

There are several definitions related to the oil industry. In regulatory terms, crude oil is defined as a naturally occurring, unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Petroleum products are obtained by processing crude oil by use of either thermal or catalytic cracking. The Petrochemicals Industry Association of China (PCIC), in Petrochemical Engineering, calls crude oil a mixture of hydrocarbons containing from 5 to 95 carbon atoms. Petroleum, the product derived from refining crude oil, is defined as an energy product of known quality that has been refined and is well below the flash point. This definition confirms that petroleum is a flammable and explosive substance formed by dissolved organic materials; its formation is affected by living things, similar to coal, and is also widely used in human production and life.

The cost analysis in the oil industry is important to determine the most significant areas for reducing operation costs. The following sections briefly define and explain the key terms associated with the petroleum industry. Next, the concept of cost in the petroleum industry is examined. The methodologies and theorizations associated with cost analysis in different petroleum industries are then reviewed. Our discussion includes the cost of drilling, crude oil production, and other relevant costs that occur in the crude petroleum process.

4. Government Policies and Regulations

Historically, policy directed towards the petroleum industry was aimed at protecting domestic markets and stabilizing prices. This policy aimed to expand the activity of the refining sector in order to endow the country with more and more mobile and efficient refineries; it is underpinned by antitrust protection and by agreements linked to the international oil market. This policy has generally led to the implementation of measures aimed at limiting imports and whose origin is found in political decisions aimed at inducing rapid economic growth. EIA also predates the establishment of policies aimed to regulate the production and protection of prices. During the Carter Administration, a number of legislative measures were put in place to this end. For example, the Oil Conservation Act aimed to reduce the inequality of royalties between states and to increase the production of Federal leases. The Emergency Petroleum Allocation Act, on the other hand, led to the establishment, for the first time in the history of which 7, not only of supply ceilings but also of a rationing of demand, which caused the advent of an allocation market.

Economic implications of government policies for the petroleum industry: The policies of governments around the world, covering a wide range of subjects, include the full scope of oil business activity, including exploration, drilling operations, field development, transport, refining, and downstream sectors. As in other spheres of human activity, the policies pursued by the government have economic implications that manifest with greater or lesser virulence depending on the economic climate and the overall sustainability of the oil business. Some political scientists argue that the history of oil has been the history of a few men who discovered it, and others who fought for it, of the natives that lost it, of the financiers who understood it, and the intrepid who risked everything and their objectivity to bring it to financial reality… Oil is almost always the product of political forces in action and it is above all a political weapon.

5. Future Outlook and Investment Opportunities

The forecast of investments related to the development of the oil and gas E&P considering sources and taking into account in particular the offshore deepwater resources. For the timeframe 2012-16, investments will increase by 43%, reaching a level of 2.4 trillion dollars. The sector that shows the higher growth rates concerns the gas E&P sector, with an increase of 59% in investments. The increased mobility of the gas sources in the field of E&P relates to several factors. In response to the rapid decline of the North American unconventional gas production, the price of natural gas in the US has reached the lowest levels for more than 10 years, showing one-time advantages for unconventional gas production. The increasing US natural gas production is also slowed down by the increase in the demand for US gas and the increase in LNG exports from the country.

The market for almost all fuels is increasing at around 3% per year. Despite the fact that several international organizations are presenting ideas to reduce the use of liquid energy, the principles for transportation will continue to be built up by liquid sources. Also, some recent advances in renewable sources (particularly biofuels) and investment in refineries allow a constant growth in this direction. Petroleum will remain the most important source of the future and will continue to play a significant role in transportation and the economy. Concomitantly, it is required to present an alternative that is able to fill up a substantial energy development. This potential is in the deepwater resources. The Gulf of Mexico (GOM), Brazil, and Angola are the areas that have the biggest production growth expectation over the next five years. The US Gulf of Mexico is far ahead of Brazil, but in the following years will come close to Brazil, until the gap in deepwater projects will be progressively reduced. These trends drive the investments in the deepwater E&P all over the world.

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