Sri Lankan Oil Market 1 MN 3040 Business Economies and Financial Accounting

1. Introduction And Background Of Oil Market

1.1. What are crude oil

Crude oil is a naturally occurring liquid composed mostly of hydrogen and carbon. It is usually found underground but can also be found above ground in oil seeps or tar pits. Crude oil is used to produce fuel for cars, trucks, airplanes, boats and trains. It is also used for a wide variety of other products including asphalt for roads, lubricants for all kinds of machines, plastics for toys, bottles, and food wrapnandacomputers. Crude oil is believed to have been formed from very small plants and animals that lived in ancient seas and oceans a very long time ago. As these plants and animals die, they sink to the bottom of the sea where they mix with mud, sand, and clay. This mixture of mud and organic (once-living) material is rich in hydrogen and carbon, the building blocks of crude oil. Year-after-year more mud and sediments are deposited on the sea floor. Over millions of years this layer of organic-rich mud becomes buried thousands of feet deep in the earth. 1.2. World oil market One of a most popular topic in the entire world is Oil market. The reason of this is mainly based on higher demand due to lot of important and critical reasons. Today world is running on crude oil because of no other power option same as this. It is not only crude oil is a limited and compulsive
Chart 1 : Variation of price of oil in 2011

resource today world. Therefore, Price of

oil barrel change in day today and it is not constant in even small time period ( see chart 1 ). The diagram is shown variation of oil price in 2011. Main Suppliers of the oil market is specially distributing in Middle East. such as Saudi Arabia, Iran, Arabic League and etc. United state, Russia, China Mexico and
Figure 1 : Countries which import crude oil in large scale

Sri Lankan Oil Market 2 MN 3040 Business Economies and Financial Accounting

Canada also share to oil market of the world. Figure 1 is shown in oil distribution and distribution of crude oil importing courtiers. Following chart and diagram shows Production crude oil as a percentage in a total production. Crude oil production country
Russia Saudi Arabic United states Iran China Canada Mexico United Arab Emirates Brazil Kuwait Venezuela Iraq European Union Norway Nigeria Algeria

Production as a percentage
12.01 10.06 8.91 4.77 4.56 3.90 3.56 3.32 3.05 2.96 2.93 2.85 2.81 2.79 2.62 2.52

Algeria Nigeria Norway European Union Iraq Venezuela Kuwait Brazil United Arab Emirates Mexico Canada China Iran United states Saudi Arabic Russia 0 15

Chart 2 : World Oil Production

Table 1 : Oil Production countries

This diagram ( Chart 1 and Table 1 ) based on information about only large amount of crude oil production ( import ) countries ( Crude oil production is greater than 2.5 in total production ). These crude oil suppliers mainly handle world oil market and lot of other counties. Following chart 2 and figure 2 is shown place of Sri Lanka and main buyers in world oil market. These diagrams are really good for understand place of Sri Lankan crude oil market which compare with world oil market.
Figure 2 : Place of the Sri Lankan oil market

Sri Lankan Oil Market 3 MN 3040 Business Economies and Financial Accounting
10,000,000 9,000,000 8,000,000 7,000,000 6,000,000 5,000,000 4,000,000 3,000,000 2,000,000 1,000,000 0 Canada Turkey

Singapore

Netherlands

Australia

Italy

India

France

China

Spain

Belgium

Taiwan

Thailand

Brazil

Germany

Korea, South

Chart 3 : Oil importing countries and amount

This graph ( Chart no. 3 ) is based on information about oil importing amount of barrels per day in oil importing countries. 1.2.1. Reasons for increasing demand of crude oil in world oil market The demand for the oil resources are increasing dallies due to lot of reasons. This is compulsive and limited resources in entire world because of no other reliable and suitable power option for lot of industries and day today working conditions. Today all the countries try to find another solutions for power and to replace with crude oil. But main problem is those are not suitable and reliable as crude oil. This is a one of a most important and critical reason for high demand of crude oil. Crude oil is a limited resource therefore, it is difficult to supply crude oil which necessary to world requirement. Supply of the crude oil resources reducing dally and due to this reason demand goes up and comes to equilibrium at the high amount of price. Due to limited resources of crude oil suppliers try to reduce their supply to increase demand of the crude oil market. Environmental break down ( Ex: Tsunami situation, and hurricanes etc ) and political problems ( Ex: terrorism ) also affect to changing the demand of petroleum. Due to these reason also supply of the crude oil is decrease and demand is increase of the crude oil due to inelastic property of this market because of difficulty to reducing of petroleum at the industrial application and other day today power required purposes. Due to this kind of reasons demand of the oil market get very high value and it is directly affected to economic of all the countries.

United Kingdom

United State

Sri Lanka

Sweden

Japan

Sri Lankan Oil Market 4 MN 3040 Business Economies and Financial Accounting

1.3.

Sri Lankan Oil Market

Sri Lanka is a one of a small customer in front of the world oil market. That is Sri Lankan oil market is not a strong character front of the world oil market. But Sri Lankan oil market is a strong and critical character at front of the Sri Lankan economic. Because today all the price of the good and services of Sri Lanka is mainly depended on price of petroleum ( Specially price of the petrel and diesel ). CPC had lost 89.879 billion rupees in 2011, on top of a 24 billion rupee loss in 2010. If Brent crude remains around 115 to 120 a barrel in 2012, the firm would still lose 63,684 million rupees. The CPC sells petrol, on which the government charges a 25 rupees excise duty, far above cost, but most other fuels including diesel and furnace oil was sold at a loss. Sri Lanka abandoned a monthly automatic price formula for fuel from early 2004, which helped keep inflation low and the exchange rate stable, exposing the country to high inflation and balance of payments trouble. The automatic price formula was devised after a balance of payments crisis in 1999/2000 to help stop rulers from creating another one in the future. 1.3.1. Crude Oil Suppliers for Sri Lankan oil market Sri Lanka generally petroleum import from Iran and Saudi Arabic rest of the required import from India. Crude oil supplies to Sri Lankas one and only refinery in Sapugaskanda which refines nearly 50,000 barrels per day mainly comes from Iran. Making matters worse the countrys sole refinery is only able to refine Iranian crude oil and the Saudi Arabian light. However as of now, Sri Lanka only imports a single consignment from Saudi Arabia per year amounting to 135,000 metric tons of crude, an insignificant quantity compared with the total crude oil amount the country refines every year. Sri Lankan can be refined only 50 000 barrels per day. Therefore, Sri Lanka has to import refined petroleum from India to fill the rest of the oil requirement of the country.

2006 2005 2004 2003 2002 2001 1850000 1900000 1950000 2000000 2050000 2100000 2150000 2200000 2250000

Chart 4 : Imported crude oil in MT during 2001 2006 time period

Sri Lankan Oil Market 5 MN 3040 Business Economies and Financial Accounting

1.3.2. Consumption and exporting oil in Sri Lanka

Sri Lankan Oil Market 6 MN 3040 Business Economies and Financial Accounting

2. Inelastic Behavior Of Sri Lankan Oil Market 2.1. Elasticity and Inelasticity of economic

All the good and services can be classified as which helps to elastic demand and inelastic demand. Demand for goods and services some times change due to price of that item also sometimes it does not change so much. This is the main reason for Elasticity and Inelasticity of economic. Elasticity Inelasticity : Percentage change in demand is grater the percentage change in price : Percentage change in demand is grater the percentage change in price

2.2.

Inelastic demand of Sri Lankan oil market

Petroleum is a compulsive good for entire world and same as the Sri Lanka. More than 99.5% vehicles are running by using petroleum fractions ( today small percentage of vehicles are use another power options such as electrical power ). Therefore, Sri Lankan Transportation completely depends on petroleum resources. Lot of industries and sectors in Sri Lankan economy is running on petroleum. More than 50 present of electrical power is generated by using fraction of crude oil. More than 90 present of industries in Sri Lanka fill their power requirement by using either crude oil or electricity. Due to these reasons petroleum become a compulsive good in Sri Lankan economy. Due to high price or other reason customers or any other person or at the industry they have no any other option to replace petroleum. Therefore, even at such a situation they have to buy necessary crude oil amount. Otherwise they have to find a another power option ( Low cost ) or stop there production. This is not possible for all the sectors. At the transportation it is very difficult to leave to another power option thus no one can stop there transportation purposes. At the electrical power generation another power options are depend on useable rescores of the country. Sri Lanka has lot of rescuers such as rivers, sea, wind, sun light and etc, but the problem is it needs high capital cost and such option should be highly reliable. These two conditions are difficult to satisfy due to economical and environmental situations. Due to this kind of reason demand of the petroleum never change. Demand does not reduce in a measurable value. This is the inelastic property of Sri Lankan oil market and hears we try to give brief introduction about this property.

Sri Lankan Oil Market 7 MN 3040 Business Economies and Financial Accounting

3. Behavior of Sri Lankan Oil market

Petroleum is a one of most critical and important good for all the industries and other sectors. Therefore, it is very important to study about behavior about Sri Lankan oil market.

3.1.

Sri Lankan Oil market which affecting fields

Transportation, industries ( more than 90% of industries running on petroleum ) and Electricity generation are the main field which affect to the effect of oil market.

3.1.1. Transportation
This is mainly distributed as transportation within country and outside of the country. Internal transportation includes transportations of peoples transportation of products from manufacturing factories to market. This is includes as compulsive of the country.
Price
Ideal Inelastic Behavior Inelastic Behavior of Sri Lankan oil market Elastic behavior

Therefore, quantity and quality of this serves should not be depend on any factor which affected to this field. A one main factor which affected this field is oil price. With increase demand Because of price of not petroleum decrease. is a

should of

transportation

compulsive service of the country. Day today work of peoples, all the transportation industrial purposes of the chain

Demand Chart 5 : Inelastic Sri Lankan Oil Market

manufacturing

directly depend on the oil resources. With increase price of oil value or price which above mentioned have to be increased otherwise they have only two potions. Those are; 1. They should stop there services 2. Have to be found or develop another power option with reliable and most suitable as petroleum. First option is not possible and suitable in front of the type of services and industrial factors. No one can stop their day today transpiration purposes. Also manufactures cannot stop their manufacturing purposes. Because of reasons of their privet and other regulation.

Sri Lankan Oil Market 8 MN 3040 Business Economies and Financial Accounting

When we consider about second factor, this is somewhat suitable but not be possible and reliable than petroleum. Due to other option they have to replace all the power generating machine and manufacturing cycle. This is not only they have to go for highly risky investment such as development of power rescores, replacing manufacturing cycles. Also they have to take higher risk about supplying services. These are the factors which affecting leaving from the second option. Therefore first and second options have to be rejected. Demand of the oil does not change due to increase of the price. That is Sri Lankan oil market in front of the transportation act as an inelastic economical factor. This behavior is shown in chart 5 under ideal condition. Actual situation does equal to ideal situation. Practical behavior is shown in next graph ( see chart 5 inelastic behavior ) Under practical condition demand change in small amount with price. It is not completely promotional to the market price of oil. Rations for practical inelasticity vary from ideal situation This can be discussed under following reason. Replacing power option is suitable at some kind of situation Today some motor vehicles ( Light vehicles ) are developed to use another power options such as electrical power and solar power. Therefore, this reason helps to reduce small amount of demand in Sri Lankan oil Market. All the transportation purposes are not essential Peoples are transportation purposes are done for fill their compulsive needs and enjoyable things. With increasing of price in services factor people try to reduce their enjoyable transportation purposes. Therefore, final reason is reducing small amount of demand in Sri Lankan oil Market. Replacing to fuel economical vehicle and fuel economical method Today lot of technological concepts has been introduced to reduce fuel consumption such as Hybrid technology. It is not only peoples try to reduce their fuel consumption during transportation such as Using a one bus is a more economical than using several privet vehicles. Therefore, final reason is reducing small amount of demand about oil in Sri Lankan oil Market. Breakdown of non compulsive services All the services are not compulsive. With increase of price in such services will stop. Therefore, this kind of things helps to reduce the demand in small amount of percentage. These factors are affected to reduce the demand in small percentage. It helps to vary from ideal inelastic condition but it is not stronger to bring oil market into elastic behavior. Therefore, practically we can observe given type of variation.

Sri Lankan Oil Market 9 MN 3040 Business Economies and Financial Accounting

3.1.2. Industries

3.1.3. Electricity generation

Sri Lankan Oil Market 10 MN 3040 Business Economies and Financial Accounting

REFERENCE
http://www.salem-news.com/articles/february142012/lanka-iran-oil.php http://www.lankabusinessonline.com/fullstory.php?nid=2138182224 http://www.colombopage.com/archive_11A/Jul24_1311477498JR.php