Introduction "Oil prices aren't just rising, but the volatility is also worsening-fluctuations are more pronounced than

they were in the 1990s, creating unpredictable consequences." These were the opening lines from the conference "Oil Price Volatility, Economic Impacts, and Financial Management: Risk-Management Experience, Best Practice, and Outlook"-Washington D.C. March 10, 2008. Oil represents one of the most important macroeconomic factors in the world economy and the crude oil market is the largest commodity market in the world. What makes oil price changes even more interesting is not only their direct impact on economic activity, but also the changes in oil prices might reflect or even forecast changes in the intercontinental stability. As a difference from other commodities oil is probably one of the few or the only production input that can affect both positively and negatively economic growth, to an extent that it might even lead to a recession. Oil price volatility dampens growth through different channels, from an increase in production cost to inflation expectations. According to the Energy Information Administration (EIA) Global economic performance remains highly correlated with oil prices. Overall, an oil-price increase leads to a transfer of wealth from importing to exporting countries through a shift in the terms of trade. The magnitude of effect of a price increase depends on the contribution of the cost of oil in the national income, the degree of dependence on imported oil and the power of enduser to reduce their consumption and move away from oil. According to Hamilton & Herrera (2003) inexpensive oil is crucial for the world's demand for energy but its availability is scarce, therefore volatility in supply will have substantial economic impact. That volatility in supply can be translated into "Peak oil". With the ever growing demand of oil OPECs production capacity in the 2000s was not enough to satisfy the world demand so the price of oil skyrocketed from 11$ a barrel in 1999 to all time high in history 147$ a barrel in august 2008. About Crude Oil Oil has been known since long times and was chiefly used as a medicine or liniment, not as a fuel. Other common uses were dressing wounds and caulking boats. It was only by 1850s when the refining process was developed that oil started getting used as a fuel. Earlier, black oil came out from natural springs in several localities such as Western Pennsylvania, but no one knew how to extract it until Edwin Drake, in 1859 constructed the first make-shift oil derrick. The well was 70 ft deep and produced about 15 barrels per day. The area boomed quickly, and the modern oil industry was born. But its original uses of rock oil, according to a Yale chemistry professor's report at the time, could be refined and employed for illumination, lubrication, and other uses.

Crude oil is a naturally occurring, flammable liquid found in the rock formations of the earth. It consists of a complex mix of hydrocarbons of a range of molecular weights and other organic compounds. Under surface pressure and temperature conditions, lighter hydrocarbons (methane, ethane, propane and butane) occur as gases, while heavier ones (pentane and above) are in the form of liquids or solids. Crude oil varies greatly in look which depends on its composition. Typically it is black or dark brown (may be even greenish or yellowish). Types of Crude oil Crude oil can be classified on different parameters A) Hydrocarbons: According to nature of hydrocarbons they contain, crude oil roughly classified into three groups a. Paraffin-Base Crude Oils: This type of crude oils contains higher molecular weight Paraffin. Due to the high weight Paraffin are solid at normal room temperature. They also do not contain asphaltic (bituminous) matter. These crude oils are useful to produce high-grade lubricating oils. b. Asphaltic-Base Crude Oils: Under this type of crude oil we can find huge proportions of asphaltic matter with little or no Paraffin. Some of them are predominantly Naphthenes (cycloalkanes). Hence it produces lubricating oil which is more sensitive to temperature compare to paraffin-base crudes. c. Mixed-Base Crude Oils: The gray area between the above two types known as mixed-base crude oil. Both paraffins and naphthenes are found in this crude. Also some amount of aromatic hydrocarbons is mixed with them. Most crudes fit into this category. B) Specific Gravity or API: In petroleum business the standard scientific measure of specific gravity is altered by a standard formula to yield American Petroleum Institute (API) gravity. API moves opposite to standard specific gravity, means the higher the API gravity, the lighter or less dense the crude oil. a. Light Crude Oil: Light crude oil is liquid petroleum. It has a low density and it flows freely at the room temperature. It has a low viscosity and specific gravity but high API gravity due to presence of a huge proportion of light hydrocarbon fractions. Generally it has low wax content. Light crude oil gets a higher price than heavy crude oil on commodity markets. This is because it produces a higher percentage of gasoline and diesel fuel when it is converted into products by an oil refinery. Crude oil having an API gravity more than 31.1 degrees is taken as light crude oil. b. Heavy Crude Oil: Heavy crude oil is a type of crude oil. It does not flow easily and is referred to as "heavy" because of its density or specific gravity which is higher than that of light crude oil. Activities like production, transportation and refining of heavy crude oil present huge challenges as compared to light crude oil.

Crude oil of API gravity less than 21.5 degrees is considered as heavy crude oil. c. Medium Crude Oil: Crudes with a grade between 21.5 and 31.1 is known as medium crude oil. C) Sulfur: Crude oils contain certain amount of sulfur as an impurity. Crudes can be divided on the basis of percentage of sulfur content. a. Sweet Crude Oil: Petroleum is considered "sweet" if the sulfur content is less than 0.5%. Sweet Crude oil contains very small amounts of hydrogen sulfide and carbon dioxide. High quality (low sulfur) crude oil is used for processing into gasoline. It is in high demand, particularly in the industrialized nations. Light sweet crude oil is the most demanded version of crude oil. It is termed sweet because of the low level of sulfur which provides it a mild sweet taste and pleasant smell. b. Sour Crude Oil: If the total sulfur level in the oil is greater than 0.5 % the oil is considered "sour". Impurities need to be removed before this lower quality crude can be refined into gasoline to increase the cost of processing. This produces a higher-priced gasoline than that made from sweet crude oil. Thus sour crude is processed into heavy oil such as diesel and fuel oil rather than gasoline to reduce the processing cost. Crude Oil Benchmark Crude oil benchmarks are the reference points for various types of oil that are available in the market. These were introduced in the 1980s having the aim of setting a standard for the world's most actively-traded product. WTI: This is the benchmark for light sweet crude in the US. WTI crude oil has sulfur content of 0.24%. It has an API gravity of 39.6 and the specific gravity is 0.827. WTI crude is considered as high quality. The primary use is in the production of gasoline. Brent Blend: Light sweet crude found in the North Sea is taken under the Brent Blend oil marker. Its sulfur content is about 0.37, with an API of 38.06. It is good for producing gasoline. Dubai Crude: It is the crude oil benchmark for light sour crude obtained from the Persian Gulf. Its sulfur content is of 2% and the API is 31. It is used for pricing the crude which is0020exported to Asia. Isthmus: It is the crude oil benchmark for Mexican light crude. Its sulfur content is around 1.45% and the API gravity is 33.74. OPEC Basket: It is the pricing data which is formed by collection of seven crude oils from the OPEC nations (except Mexico). OPEC introduced it on June 16, 2005. It is currently made up of the following: Saharan Blend (Algeria), Iran Heavy (Islamic Republic of Iran), Girassol (Angola), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Oriente (Ecuador), Bonny Light (Nigeria),

Arab Light (Saudi Arabia), Murban (UAE),Qatar Marine (Qatar), and Merey (Venezuela). Oil Refining Refining process depends on the separation of the crude into preferred and undesired components. The refining process is classified into three steps: (1) Separation, (2) Conversion, (3) Chemical Treatment. 1. Separation: It is the first stage of petroleum refining. It is able to divide the crude oil into some of its fractions but not all. Additional processes needs to be undertaken for further separation: a. Solvent Extraction: In this method chemical is added to dissolve the unwanted substances. Main solvents which are used are benzene, furfural and phenol. Quality of lubricating oils is improved by solvent extraction. b. Fractional Distillation: It uses the concept that dissimilar parts of the oil will boil at different temperatures. For e.g. petrol boils at around 24 degrees Celsius, but some other heavy oils have boiling points higher than 300 degrees Celsius. Refineries convert the desired fractions into vapour which is then siphoned from the base oil. c. Crystallization: It is mainly used to remove wax and other semi-solid substance from heavy fractions. Those fractions are cooled to a lower temperature. This causes them to solidify or form crystals. They are then put through a filter that separates them from solid particles. 2. Conversion: Petrol accounts for almost half of the petroleum products used in most countries. In order to improve the yield of desired products from petroleum, several methods have been developed. These methods aim to convert less useful fractions to more useful ones having more demand. These are categorized into two main groups: a. Cracking Processes: It converts the heavy fractions into the lighter ones, mainly petrol. These processes increase the quantity and quality of petrol obtained from oil. b. Combining Processes: It does the opposite process of cracking. Simple hydrocarbons are combined to make more complex fractions. Due to which many gases are produced and converted into fuels and valuable chemicals. 3. Chemical Treatment: Almost every fraction is chemically treated before sending them to the consumers. The treatment method depends on the crude oil type and its end use. These treatments eliminate impurities like sulphur compounds that damage machinery and pollute air. a. Hydrogen Treatment: Hydrogen is generally used to remove impurities like sulphur compounds. Various fractions are mixed with hydrogen. It is then heated and exposed to a catalyst. Sulphur combines with the hydrogen to form hydrogen sulphide and is later removed using a solvent. Major Products: Petroleum products are usually grouped into three categories:

1. Light distillates a. LPG b. gasoline c. naphtha 2. Middle distillates a. kerosene b. Jet aircraft fuels c. diesel 3. Heavy distillates and residuum a. heavy fuel oil b. lubricating oils c. wax & tar Oil Demand and Supply History Demand: The introduction of the internal combustion engine (engine of cars) provided a demand for petroleum products that has sustained the industry to this day. Since then scientists discovered many different products from oil that are important many industries and manufacturers. Crude oil market is the largest commodity market in the world today. Throughout the eras of industrialization, in different parts of the world, demand for oil has always increased. In fact today it is seen as impossible to stop increasing demand. A first indicator of the economic growth is considered rapidly increasing oil demand or consumption. Oil demand comes mostly from developed and fast growing developing countries like USA, EU countries, Japan, China and India. Between 1950 and 1972 the world oil industry grew at a rate of increase of 10% per year. During that time period, the world produced over 2.4 billion new motor vehicles, half of which in the United States. In 1950s the global demand for oil was 11 million barrels per day (mb/d). The number increased to 57 mb/d in 1970s and to a little more than 80 mb/d currently. The U.S.A consumes 20.7 mb/d. World demand has recently grown very rapidly since the economies of China (6.5 mb/d) and India (2.3 mb/d) have developed and growth has increased 10 per cent annually. Still United States remains the largest consumer. China's oil consumption has grown by 8% yearly since 2002, doubling from 1996-2006. India's oil imports are expected to become three times from 2005 levels by 2020, rising to 5mb/d. The US consumption includes four major sectors: transportation, electricity generation, industrial and residential/commercial. Transportation accounts for almost 70% of all US oil consumption, of which two thirds is motor gasoline. The overall world crude oil demand grew an average of 1.76% per year from 1994 to 2005, with a high of 3.4% in 2003-2004 and is projected to increase 37% over 2008 levels by 2030 (118 million barrels per day from

86 million barrels), the largest part of increase in demand will come from the transportation sector. Supply: Supply of oil is crucial, when we look at its role everyday life. Petroleum usage in industries originated in Europe and USA. First oil wells were drilled in Europe, Russia and USA. However European countries were never big oil producers till hydrocarbon reserves were discovered in North Sea during the1970s. Earlier kerosene was driver of the petroleum industry; however a big production need became apparent after the Fords method of automobile production made it possible to buy cars for many ordinary people. There have been three supply shocks in the recent history. 1973 Arab oil embargo: The Arab-Israeli Conflict caused a series of political and economic crises. In response to Western support of Israel, the Arab countries of OPEC placed an embargo on oil supplies to the United States on October 16th, 1973. 1979 Iranian revolution: Khomeini who is the religious leader came to power after protesters overthrew Shah, monarch of Iran. During that time Iran was producing 6 mb/d, which reduced to almost half. 1991 Gulf war and Soviet Union collapse: Saddam Hussein invaded Kuwait. Big oil producers, created crisis of supply but for a shorter time than in previous one. Soviet Union was one of the biggest producers collapsed and so it too decreased supply. The five biggest American companies created an oligopoly in union with the three European firms. Smaller companies also entered the market but they never competed the scope of the pioneer companies. The oligopoly made up legal and business systems for extracting oil and controlling supply. But the situation did not persist. Huge profits hindered the interests of reserve owner countries. This started to create a lot of agitation among people. In response to the growing industry, the producing countries formed the Organization of Petroleum Exporting Countries (OPEC) to oppose them. Its aim was to change decision taking centers from west to the resource owner's territory. No real country or organization today effectively influences or controls supply as did "Seven Sisters". What explains historical oil price volatility? Most experts say that increased crude oil markets and price volatility can be due to unanticipated economic developments. Chinese and Indian unforeseen heave energy demand and the declining weighted value of the U.S dollar can be recent examples. From the figure below it is obvious that first oil shock was the beginning of the era of the price instability that made world economic growth slower. Throughout the history many factors caused price instability but recent frequent volatility is something that world never experienced. We can say

that there are two kinds, economic and noneconomic reasons of increased oil price volatility. Some of the economic causes are economic growth followed by high growth of demand for oil in developing countries was not offset by sufficient supply, under investment to new prospective projects caused by resource nationalism, recent skyrocketed price of exploration technology, maturing old oil wells, depreciation of dollar value against world currencies. Short term big price fluctuations are mainly affected by news of US economic performance and petroleum and gasoline inventory data. Long term volatility is affected by more fundamental demand and supply forecasts and long term world economic performance. Noneconomic factors are mostly politically motivated. For example countries with big oil reserves do not reveal real oil data for investors, so they could be sure of profitability of their investment projects. Countries manipulate oil data for the benefit of their political influence and consider it national security matter. This uncertainty keeps most of the investors reluctant from investing in big perspective projects, which could secure steady supply. Instability in the regions of oil producing countries caused by wars for resource control and week protection of investor's rights in resource abundant countries caused by different political uncertainties also noneconomic reasons. Political games were so intensive last decades that investments to new projects, which provides steady supply, were totally ignored and as a result so called "spare capacity"3 of oil producers disappeared. International Energy Agency, Europe's energy agency, was created to protect western importers interests, accuse OPEC for not pumping enough oil to meet the demand, which causes price volatility. But OPEC mainly brings problem of not enough refinery capacity of the world and says that it can increase production any time but it will not calm down the instability in the markets. There are many reasons for price instability but in the long run, more than one year period, price is affected by estimations of world economic performance. As historical data shows that in recessions period price of oil drops and vice versa. For example during the last quarter of 2008 we witnessed remarkable drop in oil price from highest 147$ per barrel to lowest 45$ a barrel in world markets, mainly due to global economic crisis and forecasts of very low demand for 2009. This creates another dangerous circumstance as low prices can make investment in new oil projects not profitable as prices fell below the marginal cost of production. Later when world will recover from crisis, there can be less supply than demanded again and it can contribute for future high price volatility again. Main Factors behind Current Oil Prices U.S. Dollar and Crude Oil

The dollar and oil tend to move in opposite directions. This is partly to be expected if the price of oil is in US dollars. If dollars depreciate then commodities priced in dollars will tend to rise. The International Monetary Fund (IMF) has identified three channels through which a change in the value of the dollar can affect a broad range of commodity prices, including the price of oil. A change in the value of the dollar can affect commodity prices through: 1) Purchasing power and cost channels; 2) Asset channels in which changes in the value of the dollar affect the return on dollar-denominated financial assets; 3) A combination of effects, including changes in monetary policy. As a result of these three effects, the IMF also estimates that among various commodities, the linkage between changes in the value of the dollar and changes in commodity prices is especially strong for oil and gold, because they are more suitable as a "store of value," or as a hedge against inflation. Another consideration is that the value of the U.S. dollar is falling. It was after a long period of strength Which was due to a flight to quality and security as investors perceived that US was stronger and would solve the financial and economic challenges sooner than other countries. On research, it was found that there was largely an inverse relation between the US dollar value and oil prices. During most of 2000-2002, the value of the U.S. dollar was above 100 so the oil prices were weak (in the $20s). As the dollar started to fall, oil pri ces began to climb. The dollar fell to about 80 at the end of 2004 and oil prices got stronger. During 2005-2006 the dollar rose in value while crude oil prices also climbed higher - this is a period when there was a direct relation as opposite to the normal pattern. In 2007, the dollar's value began to decline falling to the 70 range and the crude oil prices rose. The bottom in the value of the dollar was coincident with the $147 peak in oil prices in July 2008. From that point forward, the dollar stabilized and began to rise in value. As the value of dollar rose, crude oil prices along with the prices of almost all commodities fell. Now we can observe the inverse of that pattern. It is because the U.S. dollar has been weakening as global investors become concerned about the impact of the magnitude of money being injected into the U.S. banking system and the huge increase in federal government spending due to the economic stimulus bills. Organization of Petroleum Exporting Countries (OPEC) The Organization of Petroleum Exporting Countries is a cartel of twelve countries made up of Algeria, Angola, Kuwait, Libya, Nigeria, Ecuador, Iran, Iraq, Qatar, Saudi Arabia, the United Arab Emirates, and Venezuela. Principal goal of OPEC is to determine the best means for protecting the cartel's interests both individually and collectively. OPEC also pursue ways to ensure the stabilize prices in international oil markets with a view to

eliminate harmful and unnecessary fluctuations; giving due regard to the interests and necessity of securing a steady income to the producing nations; regular supply of petroleum to consuming nations, and a fair return on capital to those investing in the petroleum industry. OPEC's decisions have had substantial influence on the international oil prices. For e.g. during the 1973 energy crisis OPEC refused to ship oil to the western countries that supported Israel in the Yom Kippur War, which was fought against Egypt and Syria. This denial caused a four times hike in the oil prices, that lasted five months, starting October 17, 1973 and ending March 18, 1974. OPEC nations agreed, on January 7, 1975, to raise crude oil prices by 10%. Evidence suggests that OPEC acted as a cartel while adopting output rationing in order to maintain price. Global strategic petroleum reserves Global strategic petroleum reserves ("GSPR") means the crude oil inventories that is held by the government of a particular country and private industry, for the purpose of providing economic and national security during an energy crisis. According to the United States Energy Information administration, approximately 4.1 billion barrels of oil are held in strategic reserves, of which 1.4 billion is government controlled. Presently the US Strategic Petroleum Reserve is one of the largest strategic reserves. Other non-IEA countries have begun to create their own strategic petroleum reserves where China is the largest of these new reserves. Current consumption levels are neighboring 0.1 billion barrels per day. It is suggested by some peak oil analyst that in the case of a dramatic worldwide drop in oil field output the strategic petroleum reserves may not last for more than a few months. Russian Supply Factor In 2007, Russian GDP grew nearly 8.1%, which made it the country's 7th consecutive year of economic expansion. The country's growth during the 2000-2007 period was mainly driven by energy exports, provided the increase in Russian oil production and relatively higher world oil prices during this period. Russian economy is heavily dependent on export of oil and natural gas. IMF and World Bank estimated that the oil and gas sector generated about 60% of Russian export revenues, and also accounted for about 30% of all foreign direct investment (FDI) in the country. About 70% crude oil from Russian production is exported, while the rest of 30% is refined locally. Crude oil export through pipeline falls under the exclusive jurisdiction of Russian state-owned pipeline monopoly, Trans neft. Fluctuations in oil price are a significant concern for Russian economy because it funded a significant portion of the economic boom in Russia. So as to cope with the price fluctuations, the government established a stabilization fund in 2004. By 2007 end, the fund was expected to be worth $158 billion, or about 12% of the country's nominal GDP.

When oil prices increase rapidly, Russia's economy initially flourishes. Yulia Tseplayeva, the chief economist for Merrill Lynch, Moscow, believes that per dollar increase in the oil price, Russian govt. earns about $1.69 billion a year. Russian history saw two periods of most intensive economic change which were preceded by long slumps in oil prices. Its dip from an 8% growth in 2008 to a 6.5% contraction in 2009 is considered the "most extreme of any major economy in the global slowdown". Falling prices of oil are bad for Russia. Major part of the country's GDP comes from exporting the vast store of crude oil and gas. Falling prices of oil may have several other severe consequences for Russia, For e.g.: a possible devaluation of the ruble, a severe drop in living standards. The fall in oil price from $146 (2007) to below $50 (2009) generated a large hole in the govt. budget calculations. Now it is facing a $149 billion shortfall in its spending plans and so far is has cut the expenditures in 2009. Crude oil from Russia is mainly sold to European and U.S. markets. Both these countries were hit severely by the recession, govt. taxation and substitution policies to reduce oil consumption. This led to Russian expansion of its oil production to Asia-Pacific, where energy demands are increasing rapidly. Even the nearness to big emerging economies such as Japan, South Korea and China make crude oil from Russia prized for its quality and efficiency in trade to those growing markets. Chinese Demand effect China is the world's most populated country. It has a very rapidly growing economy. In 2008, China's real GDP is estimated about 9%, while the country has registered average growth of 10% between 2000 and 2008. Most analysts have predicted a growth of less than the government's target of 8% for 2009 as a whole. However, the second quarter 2009 grew at 7.9% year over year. In November 2008, China introduced a 4-trillion Yuan ($586 billion) economic stimulus package which is focused on boosting China's domestic consumption and fixed asset investment, improving industry value chains and energy conservation in order to decrease its dependence on an export driven economy. Analysts anticipate that the fiscal stimulus will translate into economic development in the second half of 2009 and 2010. It may also generate a moderate increase of domestic consumption and demand for energy commodities. Despite the economic slowdown in the past year, China's energy demand remains high. China has emerged from a net oil exporter in the early 1990s to the world's third largest net oil importer in 2006. Coal supported the majority (70%) of China's total energy consumption requirements in 2006. Oil was the second-largest source (20%) of the country's total energy consumption.

In 2008, China consumed an estimated 7.8 mb/d of. This makes it the second-largest oil consumer in the world after the United States. In 2008, China's net oil imports were 3.9 million bbl/d, making it the third-largest net oil importer in the world after the United States and Japan. According to EIA 's forecasts China's oil consumption will continue to grow during 20092010, with oil demand reaching 8.2 million bbl/d in 2010. Biofuels Biofuels are produced from living organisms or from metabolic by-products (organic or food waste products). In order to be considered a biofuel the fuel must contain over 80 percent renewable materials. A recent publication by the European Union highlighted the potential for waste-derived bioenergy to contribute to the reduction of global warming. The report concluded that the equivalent of 19 million tons of oil is available from biomass by 2020, 46% from bio-wastes: municipal solid waste (MSW), agricultural residues, farm waste and other biodegradable waste streams. Ethanol could be used in petrol engines as a substitute to gasoline; ethanol could be mixed with gaso line to any percentage. Most of the existing automobile engines (petrol) can run on blends of bio ethanol with petroleum/gasoline up to 14.9%. Gasoline has a greater energy density than ethanol. It makes it take more fuel to produce same work. The benefit of ethanol is that it has a higher octane rating than ethanol-free gasoline available at roadside gas stations. It allows an increase in an engine's compression ratio for increase in thermal efficiency. In high altitude areas, certain states mandate a mix of ethanol and gasoline as an oxidizer in winter to reduce atmospheric pollution emissions. Global biofuels production for 2009 has been revised up by about 20 kb/d, based on stronger-than expected 2Q09 output from US ethanol and European biofuels, which offset weaker Brazilian ethanol expectations. Our estimate for 2010 global production has also risen, by about 15 kb/d. US ethanol production rose to 670 kb/d in May, up from 640 kb/d in April. Since mid-June, corn prices have trended downwards, aided by a favorable US Department of Agriculture acreage report and good weather. As a result, US ethanol margins rose to 2009 highs and we see rising production continuing through 3Q09. Though utilization rates and margins remained weak in Europe, stronger-than-expected European biodiesel and ethanol production reported in 2Q09 has prompted an upward revision to European supplies by 15 kb/d for 2009 as a whole. The production situation has become less optimistic in Brazil, by contrast. Feedstock costs have risen significantly as sugar prices soared past the 20 US cents/pound mark, driven by drought in India and excess rain in Brazil's Centre-South. The high sugar prices incentivize sugar production versus ethanol and the weather conditions will likely hurt overall sugar yields. IEA revised down our 2H09 production estimate by only 5-10 kb/d with the start-up of new mills in July providing some offset. Still, production risks lie to the downside given

the combination of weather, sugar prices and the continued negative impact of the credit crunch on production operations. Refining Technology & Equipment: A very Important Role for Refiner's Future The known oil reserves in the world are roughly 1.19 trillion barrels. Experts estimate that there is 4.59 trillion barrels of heavy oil reserves. Currently U.S. consumption rates predict that 10% to 15% of these hard-to-refine oil reserves would last about 70 years. With the declining quantity of light crude, oil companies such as Chevron have started to invest in new refining technology that could convert oil with low hydrocarbon levels (known as heavy crude) into light clear gasoline. As the price of light crude rose to $147 per barrel during July 2008, many Oil Majors began investing in technology capable of producing and refining comparatively cheap heavy crude oil. However, technology designed to process heavy crude is expensive, and the cost-benefit ratio is largely dependent on the price differential between heavy and light crude. With the rise in light crude's price, companies with considerable cash on hand will be able to improve or modify their refineries in order to extract more valuable, light refined products per barrel of low-valued heavy crude. Companies with these capabilities include Chevron Corporation, Exxon Mobil (XOM), Valero Energy, British Petroleum and Royal Dutch Shell. Oil prices and equity market Crude oil is a very integral part of the economy. Crude oil prices can affect companies, sectors, and even the whole economy to a great extent. The sudden rise in crude prices was the best example in recent times. It affected many companies, sectors and nations, positively and adversely. Following are a few factors pertaining to Crude oil which have a direct or indirect impact on the bottom line of companies, thus eventually affecting their share prices on the bourses. Input costs: Input costs have a direct impact on the profits of a company. An increase in the input costs affects the bottom line of the company negatively, while a reduction in them will have a positive effect on the earnings of the company. Effects on alternatives: This is when a rise in the price of one commodity leads to a rise in price of another commodity. This happens generally in cases where the second commodity is an alternative to the other. For instance, oil and natural gas can be used as an alternate to each other, as fuel. So if the price of oil moves up, prices of natural gas will eventually follow, as there will be a shift from oil to natural gas, thus creating a demand for the latter. The effect of Government control: Generally in a crude oil price upswing, companies producing or selling that oil make huge profits. But there may by stray cases where a rise in the price of a oil may negatively impact the profits of the company marketing it, due to Government controls on the

selling price. The oil marketing companies such as HPCL, BPCL and IOC are the best examples for this. These companies do well when the oil prices are down and underperform when the prices spiral. Conclusion Short Term Prediction The severe economic recession that spread worldwide in the past year took a severe toll on the oil demand. Green shoots of economic recovery is clearly seen but the demand is not picking up accordingly. However, despite the improvement of some economic indicators in few country, the most can be said is that the global economy may be stabilizing - but even if this is confirmed, it remains far from evident that growth will resume strongly before the next year. Crude oil prices are currently hovering around $60 to $70, bouncing back from a low of $34 in February. Considering supply to be ample and demand as weak, the chances of oil going up is quite low. But those factors are over whelmed by a huge relief that it is not going be something like the Great Depression. IEA holds the opinion that world oil demand would grow at an average rate of 0.6%, or 540,000 bpd, annually over the period from 2008 to 2014, reaching 88.9 million barrels a day by 2014. In the short term it seems to be fluctuating around $70 to $80, due to the strong demand from developing countries like India and China. Weak dollar also give support to the high oil prices. The upper limit will be kept in tab with the continuous supply from non OPEC countries like Russia. Long Term Prediction Though the short-term outlook for oil seems gloomy, the long-term viewpoint for crude is still strong, due to the weakness of the U.S. dollar and the chance that demand will ultimately return. IEA estimates that oil demand will strengthen in Saudi Arabia and India this year, in spite of a 3% decline in global consumption. China has been using low commodities prices to stock up on resources, plans to increase strategic crude oil reserves by 160% to 270 million barrels during the next five years. Nikkei English News, in accordance to Chinese National Energy Administration, said that Beijing would spend $4.37 billion (29.94 billion Yuan) on stockpiling facilities with a capacity to hold 168 million barrels of crude oil. With the employment of expansive monetary policy by the U.S. Federal Reserve, the worth of the dollar seems certain to retest the lows it reached in 2008. Due to the current improvement in economy oil could be around $119 by 2014. But an aggressive investment in development in alternate fuel can spoil things. The improvement in exploration technology would be interesting when the cost of production will become relatively low

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