The Hong Kong Polytechnic University School of

Professional Education and Executive Development

2015/2016 Semester 2
SPD 4421 Money and Banking Group Project
Analysis Topic:
1.What are the reason of Prices Collapse in Oil Market?
2.How the sharply decline of oil prices affect the Russian Economy?

Group B01
B01B

15013225S CHENG Chung Ting

B01B

15023220S CHIN Kin Wa

B01B

15010825S DENG Huang

B01A

14012568S LAU Tsz Hang

Outline
Reason of oil prices collapse
1. The Prices War launched by Saudi Arabia
2. The increases of shale oil Output
3. The shortage of global oil demand
4. The Geopolitical issues
5. The Strong growth of U.S. dollar
. Why the influence of oil prices leads to
threat of Russia Economy

Oil Prices War

Saudi Arabia--Organization
of the Petroleum Exporting
Countries
1. Strongly Relying on oil
Production
. 85% of exports
. 45% of GDP
2. It possesses18% of the
worlds proven petroleum

 The majority competitors Russia Oil

supply
China
in Market
Consequently,
15 the market share dropped
dramatically
.
% from 19% to
South
Angola
and Nigeria Intense
African
competition in

Market

losin
g

30
%

As a results,
almost
(Original 53% share)
United
Stated

market

Shale oil boom

reducing import
14%Saudi
( Historic
of the petroleum from
Arabia

Marginal cost of
producing one new barrel
of oil
Regions

Low oil prices strategy

Continually
enlarging their oil
supply per months

Dollars per
barrel
($/bbl)

Arctic

115-122

Brazil
Ethanol

63-69

Central and
South
America

29-35

Deepwater
Offshore

54-60

Oil Sands

89-96

US Shale
Oil

70-77

Russia
Onshore

15-21

EU Ethanol

98-105

US Ethanol

80-87

Comparison
The cost of US shale oil
$70-$77
The cost of Petroleum
$10-$17

Expansive

Price War aims

Drive competitors
(Shale Oil )
Out of the market

Relatively

Become the oil

market leader again

Resource
s

Techniqu
es

Supply of shale
oil increases

Oil Price
increases

Policies

Supply of Shale Oil

1. Abundant Resources
abundant in America
can be mined easily
distributed in the large areas with
disperse populations-->good for
operations of machines

Supply of Shale Oil

2. Advanced Techniques
inadvanced techniques-->costly to mine
advanced techniques:
horizontal drilling
hydraulic fracturing

investment of companies

Supply of Shale Oil

3. Government Policies
government investment on the
techniques development
tax reduction policy
subsidies to companies operations
free market on oil

Geopolitics - Overview
Formation of petroleum
geopolitics pattern
1. Geographical distribution of the world's oil
supply and Consumption

Determinants of petroleum
geopolitical
structure channel
2. Space transportation
1.The national
2.The regional
3.The international

Geopolitics - Middle East Oil

Geopolitics

Saudi Arabia pushes down oil

prices to hit Iran
Opposing
Iran -> Shia
Saudi -> Sunni
Suppress the expansion of
religious dominion
increased
oil output

lowered the
oil market
price

decreased
Iran oil
export
income
(80%)

Geopolitics - Battle for North Pole

Resources

Background on North Pole

Melting sharply + Storing huge oil

Five North Pole

Russia
United States,
Canada
Denmark
Norway

1. Authorized Shell
by US gov.
2. Oil exploration
3. increased the oil
supply
4. Dropped the oil

Geopolitics - Saudi jointly with US

suppresses Russia
Russia with the world's largest oil producer
The reason for objections from Saudi and US
Supported Syria Arshad by Russia
Invaded Crimea by Russia

The impact on financial sanctions

I.
II.
III.
IV.
V.
VI.

Increased oil supply and underselling

lowered the market oil price
reduced foreign exchange earnings
Fallen Solvency
Lowered credit
Devalued currency

Reference

yeungwailung post. Retrieved April 16, 2016 from:

https://zh-tw.facebook.com/yeungwailung/posts/908625262512654 OPEC
Annual Statistical Bulletin. Retrieved April 16, 2016 from:
http://www.opec.org/opec_web/static_files_project/media/downloads/publicati
ons/ASB2015.pdf
Sina, (2015).Obama behind Shell's Arctic oil exploration: the protection or
development?, Retrieved April 16, 2016 from:
http://tech.sina.com.cn/d/n/2015-09-14/doc-ifxhupir7097437.shtml
baidu, (2014).Five Arctic, Retrieved April 16, 2016 from:
http://baike.baidu.com/view/11583343.htm
The wall street journal, (2009).Norwegian Oil Firm Goes to Energy's Last
Frontier, Retrieved April 16, 2016 from:
http://www.wsj.com/articles/SB123448074396979659
facebook, (2013).Lung Yingtai Cultural Foundation, Retrieved April 16, 2016
from: https://zh-tw.facebook.com/civictaipei/posts/584488331567409
The world's largest oil-producing countries - Russia. Retrieved April 16, 2016
from: http://www.csghs.tp.edu.tw/~jueiping/index.files/student/issue/Asia15_21_26.pdf
Sina, (2014).Under the drop in oil prices OPEC does not cut the mystery,
Retrieved April 16, 2016 from:
http://finance.sina.com/bg/economy/xinhuanet/20141202/18261170508.html
5 Year Crude Oil Prices and Price Charts. Retrieved April 16, 2016 from:
http://www.infomine.com/investment/metal-prices/crude-oil/5-year/ Russia's Oil
Revenue: Shrinking Fast. Retrieved April 16, 2016 from:
http://www.forbes.com/sites/markadomanis/2015/04/06/russias-oil-revenue-sh
rinking-fast/#1eeaf74464ee

Reason of decreasing crude

oil :
Exchange rate

The relationship between

exchange rate and price of
crude oil

The relationship between

exchange rate and price of
crude oil

nearly 80% of trading is using US dollar as

unit of accounting
Countries need converts their currency into
U.S. dollar

Inverse relationship
between US dollar exchange rate and price of
crude oil

Strong growth of US
dollar
Fed decides to increases the interest
rate in 2014

Higher interest make the price level decreased.

Price level of US goods decrease in price
quicker than other countries goods (cheaper
than others)
US goods become more competitive and
demand for US exports will increase
High demand for US dollar
Result: US dollar will appreciate

The relationship between exchange rate and

prices of crude oil
exchange rate

Strong growth of US
dollar
US cancel to implement quantitative easing
(QE) monetary policy
One of type of open market operation

Cancelation of quantitative easing:

Make money supply decreased, interest rate
increased
U.S. dollar will appreciate

The relationship between exchange rate and

prices of crude oil
exchange rate
price of crude oil

Summary of Part
one
Price

1.
2.

Global oil Market

3.

Shale oil increase

Prices war by oil supply
increase
Geographical political issues

P
1

1.

2.

The economic
slowdown
Strong US dollar

D2

Q Q
1

Q
2

D1

Quantit
y

Russia economy structure

Economy and foreign exchange
earnings are relying on oil industry.
$2.1 trillion GDP, among $365 billion came from the oil
export.
relying on natural resources mainly.
most of the oil exports to US (5%) and EU (84%)

Economy imbalance

Export structure of Russia

Oil export
- are captured 68% of the total export,
- 50% of Russia's federal budget revenues,

Oil price is closely related with the

price of commodities.
The price of oil will decrease as the price of
commodities decrease.
China as largest commodities buyer (overcapacity and
growth rate slow down).
demand of commodities and crude oil both decrease.

Factors of ruble depreciation

Lower demand for Russias oil
Global economys production activities slow
down eg.China
Political issues. eg. Ukrainian crisis and Crimea
crisis let western put sanctions to Russias
economy.
Oil supply increase and Euro region imports oil from
other countries eg. Iran

Impact of ruble depreciation

high inflation rate (12.91%)
high unemployment rate (6%)

Russia's overall economic

Price

LRAS

SRAS2

SRAS1
P2
P1

AD1
AD2

Y2

Y1

Nominal
GDP

Intere
st rate

Ruble
M
s

R1

R2

Md
2
Intere
st rate

Q
1

US
dollar
Ms Ms
2

R2

R1

Md
1

Md
2
Quantit
y

Md
1
Quantit
y

Conclusion:
Russia economy and ruble
- Oil price and ruble are positive positive correlation
-That why ruble will fluctuate with oil price

-Too rely on oil exports

-Political issues are affecting the oil price always