Oil Analysis in Saudi Arabia

Introduction

This article ought to talk about and dissect the information and figures of oil in Saudi Arabia from 1990 till 2014. The paper will consider different components and results to satisfy its motivation. Saudi Arabia is thought to be the world’s biggest maker and exporter of oil. In 1933 King Abdulaziz receptacle Abdulrahman Al-Saud issued Standard Oil of California (Socal), renamed Chevron, the privilege to prospect for oil in the new Kingdom. Be that as it may, in 1938 Socal discovered vast amounts of oil close to the Arabian Gulf referred to today as the territory of Dammam.

In the late 1940s, Socal went into a consortium with other American oil organizations and was renamed the Arabian American Oil Company (Aramco). Besides, in the 1970s, Saudi Arabia had turned into a real maker and exporter of oil in the globe. Aramco possession was accepted entirely by the Saudi government in 1980 renaming it Saudi Aramco that without a doubt hugely affected the oil business in Saudi Arabia. The organization started investigating in territories that had never been touched and found vast stores of high-review unrefined petroleum. Saudi Arabia keeps on discovering new fields –, for example, one found 175 miles southeast of Riyadh on April 20, 2005(Alkhathlana,2014),

Aim of the paper

Saudi Arabia is resolved to adhere to its strategy of pumping enough oil to secure its worldwide piece of the overall industry, regardless of the money related agony delivered on the kingdom’s economy. Authorities have told the Financial Times that the world’s biggest exporter will create enough oil to take care of client demand, showing that the kingdom is in no inclination to change tack in front of the December 4 meeting in Vienna of the makers’ cartel Opec().

“The main thing to do now is to let the business sector carry out its occupation,” said Khalid Al-Falih, executive of the statepossessed Saudi Arabian Oil Company (Saudi Aramco). “There have been no discussions here that say we ought to cut generation now that we’ve seen the agony.” Saudi Arabia shook oil markets last November when Opec ruled against generation reductions, clarifying that the kingdom was surrendering its arrangement of diminishing supplies to balance out the cost. From that point forward, the oil price has given way from a high of $115 a barrel a year ago to $50 a barrel. Worldwide oil organizations, which have put many billions of dollars of speculation on hold as an aftereffect of low costs, will be baffled by the Kingdom’s position.

The impact on business notion has started household feedback of the piece of the pie approach built by Ali al-Naimi, the oil serve, and concurred by both the late King Abdullah and the present King Salman, who was crowned sovereign a year ago and climbed the throne in January. Authorities in Riyadh say their strategy will be vindicated in one to two years when restored interest swallows the worldwide oil excess and costs start to recuperate. They contend that previously, Opec yield slices raised prices to levels where more costly generation, for example, shale and foreign ocean oil, could prosper. Pushing forward, Opec — drove by Saudi Arabia — arrangements to pump as much as it can towards taking care of worldwide oil demand, leaving higher-cost makers to make up the rest of $100 oil was seen as an assurance of no danger for speculation(Alkhathlana,2014).

Presently, the protection strategy that has been sans given of charge by Saudi Arabia does not exist anymore – Khalid Al-Falih, director of Saudi Aramco For higher-cost makers, “$100 oil was seen as an insurance of no danger for speculation”, said Mr. Fa. “Presently, the protection strategy that has been without given of charge by Saudi Arabia does not exist anymore.” Mr. Falih, who is additionally wellbeing priest, estimate the business sector would come into equalization in the new year, and after that request would begin to suck up inventories and capacity on oil tankers. “Ideally, be that as it may, there will be sufficient venture to address the issues past 2017.”

Different authorities additionally evaluated that it would most likely take one to two years for the business sector to blow over the oil business sector access, permitting costs to recoup towards $70-$80 a barrel. The fall in government incomes has pushed Saudi Arabia’s oil-subordinate economy into a monetary crunch. For the legislature to subsidize the current year’s financial plan deficiency of 20 for every penny of GDP,it is plunging into its enormous budgetary stores. Authorities are additionally taking a shot at a more practical system to diminish spending, which has swelled as of late. Postponing framework activities, for example, the Riyadh underground, and upholding a spending crush crosswise over government offices has gotten a log jam the private area(alex 2015).

Senior authorities reject the household feedback of the oil approach, saying different makers would have immediately supplanted any Saudi creation cuts with new yield. Oil costs fell in November 2014 when OPEC chose to keep up generation despite an oversupply, and it is sudden that there will be a movement in prices, given the ebb and flow economic situations, because of the worldwide economic lull. The monetary retreat, particularly in China, which is dispatched a key driver of the global economy(Alkhathlana,2014).

In this article, we ought to discourse about our point of the connection between utilization of oil and three free variables, the cost of petroleum, and (GDP). So we can gauge from the over that the relationship between the utilization and the cost in the coming years are an Inverse connection that implies any diminishing in the oil cost will expand the usage. And with the development of the populace there will be growth in use, and, in addition, expanding the GDP will build the utilization.

Data analysis and model building

Consumption =average oil price +population + gdp

From simple linear regression model, we have

But from the data collected, the model can be represented as a multivariate linear regression, hence

Where

Expressing the data in its general form, then

Thus C is the vector of less constants, is a vector of parameters, P is the design matrix made up of explanatory variables and 1s for constants and is a vector of independent normal variables with

Using the least square method,

Using stata, the attached data was obtained.

Where

DISCUSSION

Thus, from the data obtained, consumption can be easily determined given which ever values for the variables in subject. That is by using the relationship

Oil consumption= -163161.5298- 13537.60081 average oil price+ 33.0947063 GDP

Where we take to be normally distributed with mean 0 and variance . We used multiple linear regression model since the research involved more than one predictor variables whose relation was linear as expressed by the regression module. For the log-linear model, the log function is mainly applied when we want to measure the elasticity of the response variable in relation to the predictor variable and in most application, it occurs when the regression model is of the form

Which is non linear.

But from the data given, when the log function was introduced, the coefficient for the price and the GDP were statistically insignificant at 5% and 10% level of significance thus proven to be of little use in coming up with a standard hypothesis. Thus from our data, only multi-linear regression was applied and  the log function was rendered insignificant for this hypothesis.

For a model to give significant results, the variance between the data points must be constant, which is usually one of the basic assumption for a linear model.

Ordinary least square method was used to find the values of the unknown constants such as the intercept and the gradient, and for this to be possible, the equation had to be linear ie in the form:

Hence from the results got from variance, we were able to come up with a percentage confidence interval which is vital in coming up with a conclusion on how the oil prices and GDP for Saudi Arabia relate to the consumption.

The large set of data used was significant in determining the trend for the oil consumption in relation to price and GDP. By so doing, the variance between the data was reduced. For a model to be significant, the variations between its points must be small as possible so as to reduce the standard error.

When plotting a graph of consumption (demand) against production of oil, we noted that it tended to increase exponentially thus indicating that the two variables are correlated. This can be seen from the graph attached in the excel sheet.

We noted that an increase in consumption in oil triggered an increase in supply/production of oil in Saudi Arabia which follows the normal demand and supply curve.(an increase in demand triggers an increase in supply).

The slope for the graph of production against consumption was found to be units

In conclusion we noted tat even though oil production in Saudi Arabia determined the consumption level, its effect was less as compared to the other predictor variables which were used to form the model,

 

Conclusion

From the regression, we find that

Price has a negative relation with consumption and the coefficient price is statistically significant at the 1%, 5% and 10% level of significance. This is an agreement with the consumption theory which predicts an inverse relationship between consumption and price.

Our results also confirmed the theoretical prediction between consumption and the income proxy by the GDP. We obtain a positive relationship between consumption and GDP and our coefficient is statistically significant at 1%, 5% and 10% level of significance.

The overall model indicates that price and GDP explains about 94% variation in consumption

as evidenced by R Square (94.61%) and the adjusted R Square(94.2%).

Recommendations

Since when the price is increased the consumption decreases, it would be advisable to maintain the price at an average rate so as not to affect the consumption. This will also help to maintain the GDP which is also affected by the price.

Bibliography

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Lawler, Alex. “ANALYSIS-Saudi Arabia’s New Oil Policy Works in Reclaiming Market Share.” Reuters UK. September 30, 2015. Accessed December 17, 2015. http://uk.reuters.com/article/saudi-oil-idUKL5N11G21520150930.

Alkhathlana,, Khalid, Muhammad Javid, and Dermot Gately. “Analysis of Saudi Arabia’s Behavior within OPEC and the World Oil Market.” Analysis of Saudi Arabia’s Behavior within OPEC and the World Oil Market. 2014. Accessed December 17, 2015. http://www.sciencedirect.com/science/article/pii/S0301421513009543.