| I. Introduction | | | | out of total world consumption in the year 2007. |
| Crude oil is the most important form of energy for all | | | | Whereas the total share of the world oil consumption |
| the countries, mainly for developed and developing | | | | for China, India and Turkey was only 13.4% in the |
| countries. The importance of crude oil is such that it | | | | year 2007 with China 9.3%, Indian 3.3% and Turkey |
| is used in day to day activity of individual as well as | | | | 0.8%. |
| the economic development of the nation. Of late, the | | | | Many experts stated that oil price changes and |
| GDP of China and India reveal that the economies of | | | | shocks have direct or indirect effect on the |
| both these countries are growing at faster pace and | | | | economic activity. Mehmet (2009) states an increase |
| are the big consumers of crude oil in the world | | | | in oil prices leads to an increase of cost of production |
| market. Therefore the increase in oil prices | | | | which decreases the growth of output and |
| inadvertently affects the GDP and economy of the | | | | productivity. The increase in oil price leads to increase |
| countries. During 2008 world witnessed the growth in | | | | in demand of money, increase in inflation rate, |
| the prices of crude oil reaching a new high | | | | decrease in investment and decline in GDP. |
| threatening the world economy at large, thanks the | | | | In view of the increased global demand and political |
| financial crisis, the recession has brought it down | | | | insecurity in oil rich countries, concern about global |
| again. It may be exaggerated that increase and | | | | warming are the force behind changing oil prices |
| decrease in the oil price effects the world economy | | | | which may help spur the greater demand and supply |
| which is makes it necessary to study its impact on | | | | of alternative energy. The development process |
| the world economy and how it effects the | | | | leading to industrialization has increased the |
| alternative energy resources. | | | | concentration of CO¬2 levels in the atmosphere |
| | | | which has significant effect on oil price movements. |
| Some reasons for upsurge in crude oil prices | | | | Such developments in the trends of oil price, its |
| Many elements have led to this volatility in crude oil | | | | consumption and increased level of CO2 in the |
| prices. Keeping aside the demand and supply | | | | atmosphere makes it critical to understand the |
| elements, fluctuations in the dollar value has been the | | | | development of alternative energy in the years to |
| main cause for increase in the prices of crude oil. Ray | | | | come and effect of oil prices on the stocks of |
| and Olga (2004) reported that oil prices are the | | | | alternative energy companies.(Henriques and |
| source of major developments in the world economy | | | | Sardosky, 2007) |
| that can trigger inflation and recession as in 1974 and | | | | Auto Regression Analysis |
| 1979 which resulted in slowdown of world economy. | | | | The aforementioned points of discussion reveal that |
| According to Chandrasekhar (2005), the primary | | | | oil prices have a definite impact on the alternative |
| cause of increase in the crude oil prices is the rapid | | | | energy. To know the impacts, many analyzes were |
| development of United States of America, China and | | | | carried out by many research scholars. Henriques and |
| India, forcing the industry to extract and refine more | | | | Sadorsky (2007) through vector autoregression |
| oil from the reserves. It is also reported that global | | | | (VAR) empirically investigated the relationship |
| demands have risen by 2.7 million barrels per day | | | | between stock prices of alternative energy |
| during 2004, highest since 1976. Some factors that | | | | companies and oil prices. The WilderHill Clean Energy |
| have helped the price upsurge include US occupying | | | | Index (ECO) was used to measure the stock |
| Iraq, Saudi Arabia being attacked by terrorist | | | | performance of alternative energy companies. The |
| temporarily affecting oil supplies, speculative | | | | Arca Technology Index (PSE) was used to measure |
| investments by financial investors. | | | | the performance of technological companies. The |
| Decline in OPEC's Surplus Oil Production Capacity | | | | researcher, for the ease of comparison set the |
| Increases in global demand for the crude oil have | | | | starting point as 100 so the changing price trend and |
| forced the oil producing nations to produce more | | | | its effects can be measured. From the below figure, |
| crude oil in order to meet the demands. The above | | | | it could be clearly understood that though there is |
| figure shows that there has been drastic decline in | | | | rapid, drastic and high increase in oil prices from |
| the oil production of OPEC countries; this demand | | | | January 2001 to April 2007, the stock prices of |
| supply factor is the main reason for increase in crude | | | | technology companies (PSE) and alternative energy |
| oil price touching $140 per barrel.(Hiromi Kato, 2005) | | | | resources (ECO) are not affected at all and are |
| As per the BPs Statistical Review of World energy | | | | unchanged. |
| for the year 2007, it is revealed that demand for the | | | | The findings of Henriques and Sadorsky revealed in |
| world touched 83.7 million barrels/per day or 3.9 billion | | | | the figure explains that ECO correlated with PSE with |
| tons/year which is equal to five times the annual | | | | coefficient of 0.83 and correlation between ECO and |
| household water consumption. The above figure | | | | oil prices is 0.43. In another VAR analyses, consisting |
| shows that the increasing demand has led to upsurge | | | | for four variables ECO, PSE, U.S. West Texas |
| in crude oil price which rocket from mid 2005 till 2008. | | | | Intermediate Crude Oil Futures Prices (OIL) and the |
| As per the figure, oil price didn't had any upsurge till | | | | Interest Rate (RATE). The researcher in order to |
| late 2000 but due to increased demand in Asian | | | | lessen the confusion named the above variables in |
| countries, the crude oil price escalated. | | | | natural logarithms as LECO, LPSE, LOIL and LRATE. |
| Trends in Oil Prices | | | | Granger Casualty tests using LA-VAR showed that |
| Roncaglia using Hotelling theory explains that the | | | | alternative energy stock prices are explained by past |
| equilibrium price of the scarce resource net of | | | | movements in oil prices, technology stock prices and |
| extraction costs rises over time at the rate that is | | | | interest rates. The tests indicated that lagged |
| equal, year after year, to the interest rate. It is | | | | interest rates showed some significant impact on oil |
| understood from this statement that price of the | | | | prices as a result of increased economic growth. |
| scarce commodity increases at the rate year after | | | | Henriques and Sadorsky (2007) through the four |
| year with the added interest rate. The crude oil is an | | | | variable VAR model, it was found that oil price |
| important ingredient in the growth of world economy. | | | | movements were not important once the investors |
| It is learned that commodity traders are responsible | | | | had confidence in alternative energy companies as |
| for oil prices who bid on oil futures contracts by | | | | similar to technological companies. It shows that one |
| looking into current supply of oil in terms of output, | | | | standard deviation shock to the interest rate variable |
| oil reserves as to know what is available and demand | | | | had a positive and significant impact on the |
| of oil, mainly from United States.(Kimberly Amadeo) | | | | alternative energy stock prices and one standard |
| According to OPEC Monthly Oil Market Report | | | | deviation shock to energy stock prices had same |
| released for August 2008, it is highlighted that OPEC | | | | effect on technology stock prices. The simulation |
| Reference Basket (ORP) rose to $2.89/b or 2% | | | | results in vector autoregression analyzes carried out |
| during July 2008 to $131.22/b with US dollar | | | | by Henriques shows that stock prices of shocked |
| weakening and geopolitical tensions dominating the | | | | alternative energy companies had impact on |
| upward trend. | | | | technological companies stocks, but it did not showed |
| However due to weakening economic conditions, | | | | any impact is occurred due to shocks to oil prices. |
| recovery in US dollar and increased OPEC oil exports, | | | | Rafik and Sonia (2008) attempted to assess the |
| the price came down to three month low of $109/ b. | | | | relationship between oil prices and macro economy |
| According to OPEC, the world economy will grow at | | | | by analyzing the impact of recent oil prices fluctuation |
| 3.8% in 2009 as against 3.9% in 2008. It also reports | | | | in Tunisian economy through VAR model from |
| that developing countries growth rate remains | | | | 1993Q1 to 2007Q3. In his findings it is reported that |
| unaffected at 5.6%. India's growth is up at 7.7% as | | | | oil price didn't had any effect on economic activity. |
| against to unchanged China at 9.2%.( The graph | | | | The main cause for economic shock was |
| represents the trends in crude oil prices from 2006 to | | | | governments spending which led to economic |
| 2008. The figure indicates that an oil price in 2006 | | | | recession, allocated subsidies made the oil price |
| was $50 to $70 per barrel as compared to $50 to | | | | shocks as the principal source of violability. The |
| $90 per barrel in the year 2007. | | | | findings in his report stated that impact of oil price |
| The increase in oil price can be seen from fourth | | | | shock on economic activity is indirect. |
| week of August 2007 which touched $90 per barrel | | | | Kilian (2007) argued that regressions of |
| at the end of 2007. This trend continued in the year | | | | macroeconomic aggregates on unanticipated energy |
| 2008 with the price touching to $140 per barrel mark | | | | prices are likely to mislead as they fail to account for |
| in second week of July. However, some controlling | | | | the declining share of energy in value added. |
| factors and increased export from OPEC suppliers, | | | | The analysis carried out by Kilian suggests that most |
| gave some relief with steep fall in crude oil price up | | | | oil price shocks have been driven by a combination of |
| to $118 per barrel during fourth week of August | | | | strong global demand for industrial commodities |
| 2008.( | | | | shifting the expectations from demand for crude oil. |
| Average Annual Growth of Oil Consumption | | | | It is also argued the shortage of crude oil is inevitable |
| As seen in the above table, China is the major | | | | under the circumstances of excessive future demand |
| consumer of oil at an overall growth rate of 6.0% | | | | of crude oil. Another finding by Kilian is that |
| from 1974 to 2003. The table shows that most of | | | | precautionary demand shocks driven by expectation |
| the nations have increased their consumption from | | | | shifts, unlike other oil demand and supply shocks can |
| 1974 to 2003, but overall consumption of world has | | | | have immediate effects on US economy. Another |
| increased by 1.1% during 2001-03 as compared 1.5% | | | | observation made in his work by Kilian was that the |
| during 1991-2000 down 0.4%. The total annual | | | | effects of energy price shocks have weakened |
| growth in oil consumption from 1974-2003 has | | | | resulting in total real consumption drops from-30% |
| increased by 1.1%. (Ray and Olga, 2004) Crude oil | | | | before 1987 to -0.08% after 1987. |
| prices affect the terms of trade as higher | | | | In another empirical effort, to study the impact of oil |
| dependence on oil imports raises the impact on | | | | price shocks on the stock markets in US and 13 |
| nations GDP, impact of saving and investment are | | | | other European Countries related to data on stock |
| greater, tax revenues and solvency are affected. | | | | prices, short term interest rates, consumer prices and |
| The rapid increase in the crude prices from 1973 to | | | | industrial production which are received from OECD. |
| 1981 was led by United States for its energy policy | | | | The researcher used unrestricted VAR model with |
| for post Embargo period. The crude oil prices | | | | four variables as first log difference of short term |
| plummeted due to 9/11 attack which weakened the | | | | interest rate (r), real oil price (op), first log difference |
| US economy and resulted in the reduction of quota | | | | of industrial production (ip) and real stock returns |
| by 1.5 million barrels per day. The figure explains the | | | | (rsr): VAR(r, op, ip, rsr) . (Jung Wook et.al, 2007) The |
| factors resulting in volatility of crude oil prices | | | | above VAR analyzes carried out by the researcher's |
| increasing from below $30 per barrel to $60 per | | | | show that shocks in oil prices do not have direct or |
| barrel during 2005-06.( Many factors have led to | | | | indirect effect of alternative energy stocks but |
| increase in crude oil price right from Iran - Iraq war, | | | | shocks to energy stocks had significant impact of |
| the great depression, Venezuela crisis, Gulf Hurricane, | | | | technological stocks. |
| increased demands, etc. It is necessary to assess the | | | | Conclusion |
| consequences on alternative energy resources due | | | | Crude oil is gaining its important as a lifeline to the |
| to increased oil price. | | | | world's economy in general and to some of the |
| According to the OPEC report, developing countries | | | | nation's economy in specific. It acts as a nutritious |
| maintained their demand for the oil at 71% of total | | | | diet so that its world economy can be healthy. |
| world oil demand growth in the year 2007. It was | | | | Increased oil prices have definite impact on world |
| also mentioned that OECD stocks declined by 66mb | | | | economy through employment, rising inflation, |
| to 4,111 mb by the end of 2007. (OPEC, 2007) | | | | decrease in dollar value all of which combine to |
| Effects of increasing oil prices on Stock Markets | | | | economic slowdown. Robert and Pavlos (2008) in |
| Oil price shocks effect the economies in different | | | | their working paper, have concluded that even |
| ways like supply, demand and trade. (Martin | | | | though there were similarities between oil market |
| Schneider) Basher and Sardosky (2006) look upon oil | | | | developments during 1970s and 1980s and the |
| as the lifeblood of modern economics.(Mehmet, 2009) | | | | current market, the oil prices are not likely to decline. |
| The world is globalizing in every aspect and people | | | | Henqriques (2007) suggests that governments can |
| are migrating in search of livelihood and employment. | | | | formulate some framework or policies to bring the |
| In this scenario, nations are responsible for providing | | | | alternative energies into the market through fiscal |
| them with employment and better living conditions | | | | policy that taxes carbon and subsidizes alternative |
| which means more urbanization and modernization. | | | | energy. This will encourage the producers to provide |
| Increase in population will automatically lead to | | | | carbon free energy so that they can have the |
| creation of more industries, houses, vehicles, | | | | benefit of subsidized purchase of alternative energies. |
| transportation, etc. which require oil as the primary | | | | The crude oil prices though have declined recently, |
| product to run the economy. It is reported by Basher | | | | but it is likely to increasing as the world demand is |
| and Sardosky (2006) that China, Turkey and India | | | | increasing day by day and more importantly Asian |
| are fastest growing economy and are expected to | | | | counties, China and India, most developing economies |
| demand and consume the most of the world's | | | | of the world, need it vigorously. Through the various |
| oil.(Mehmet, 2009) | | | | vector autoregression analyzes of the various |
| Oil Consumption for Turkey, China, India, USA and | | | | researchers, it can be assumed that the stock prices |
| World | | | | of alternative energy companies do not effect which |
| The above table shows that United States is the | | | | is beneficial to the investors. |
| most developed nation with 23.9% of oil consumption | | | | |