Oil Prices Fluctuations Causes and Effects - Coursework Example

Oil Prices Fluctuations Causes and Effects Name: Course: Tutor: Institution: Date: Part 1: Oil Industry Essay Introduction The global market is characterised by the forces of demand and supply control. In this case, in a normal perfect competition scenario, the forces of demand and supply establish market equilibrium. This is the market state at which there is a balance in the quantity demanded and the quantity available for supply. Moreover, the equilibrium state does not only include the market quantity, but also the prices for the products (Welch & Welch, 2009, p.64). Under this economic equilibrium model, it is assumed that the products market prices are bound to remain constant as long as the demand and supply of the products remain constant. However, in the international market, this scenario is often not the case, In this regard, besides the forces of demand and supply, additional external factors seeks to influence the market quantity and prices respectively (Shone, 2001, p.27). As such, additional factors such as substitute’s development and government regulations emerge as alternative approaches to influence on the prices in the market. This essay develops a critical analysis focus on the oil as a global market commodity. In this case, it evaluates the key factors influencing oil market prices, both in the factors of demand and supply, as well as through additional aspects in the market. Moreover, the essay explores on the key impact and outcomes of the oil prices fluctuations. In this regard, an oil price fluctuation is used to represent both the price fall and rise in the global market. Causes of Oil Prices Fluctuations Supply Factors The first element influencing the price of oil in the global market is oil supply rates and volumes. In this case, the supply of oil mainly comes from the MENA region. In this case, the region produces over 40% of the global oil consumed yearly. This means that the supply factors are bound to be based on this key region. On one hand, oil supply quantities are influenced by a series of factors. The first key supply influencing factor in the region is the OPEC organisation. This is the Organisation of Petroleum exporting countries. The OPEC bloc was formed and established as a consortium of 13 countries in the MENA region as a means of creating a collective bargaining voice for their products (Bret-Rouzaut & Babusiaux, 2011, P.40). Initially, prior to the formulation of the OPEC organisations, each of the oil supply countries supplied and decided on the oil quantity to supply individually. This led to many inconsistencies in oil supply as well as unreliability of oil supply in the global market. However, since its inception, the OPEC organisation established its core mission as to ensure that the cost of oil per barrel was always above $100. In order to achieve this rationale, the OPEC controls the supply of oil into the international market. As such, it ensures that there is no excess oil supply in the market (Valentine, 2014, p.11). Moreover, The OPEC as a bloc influences the determination of market prices. Thus, no individual nation can determine the price on its own. Instead, it is the OPEC that determines the oil price is that is reviewed on a regular basis. Through this approach, the OPEC and the 13 member countries ensured that there exists global market oil prices consistency and uniformity. The ability to speak up as a bloc ensures that the oil producing nations have a higher bargaining power and in turn this has led to a consistent rise in oil prices in the global market. However, although this organisation has been at the fore in trying to establish a consistent price for the oil in the global market, this has not always been the case (Beccarini & Gros, 2008, p.16). For instance, a review of the oil prices since the mid 2014 indicate declining oil prices. In this case, the OPEC member countries meeting failed to resolve on the challenge. As such, nations such as the UAE refused to reduce their oil supply quantities. This was a move aimed at ensuring the reduction of the global market oil supply, and hence facilitates a rise in the oil prices globally. The decline was a political decision that was aimed at ensuring that nations such as Russia do not benefit from such a decision, while the UAE would reduce its overall economic earnings from oil exportations (Smith, 2014). Thus, this review indicates that the overriding national interest of the individual members, which result to their acting outside the agreed systems result to oil prices fluctuations on the global market, as experienced currently. The second influencing supply factor in the oil industry is the element of political stability and instability. This can be described as the political situation in the Middle East and among the OPEC oil producing nations. Theoretically, there exists a direct relationship between a nation’s political stability and ability to engage in the international trade. In this case, political stability implies that there is a conducive working environment and as such exportation of items is effective in the market (Young, 2014, p.19). On the contrary, an unstable political environment implies that there lacks a conducive environment for a nation to export its resources. As such, this is the scenario in the OPEC countries. Where there is political stability such as in the UAE and Nigeria, the flow and supply of oil to the global market is consistent and uninterrupted. However, this has not been the scenario for all the OPEC country members. In this case, some of the nations such as Egypt and Iraq have faced political instability over the years. On one hand, for Egypt, the Arab spring uprising resulted to civil and political unrest in the nation. Moreover, for the Iraq nation, the ouster of Saddam Hussein by the USA created a political instability in the nation. In this regard, when there is political instability, much of the oil mining and exportation was halted in the nations (Al, 2011, p.250). As such, this implies that the supplied global oil quantities are less than the normal and demanded products. Theoretically, a declined supply quantity of oil means that there exists a global oil excess demand. Consequently, this causes a shift on the demand curve that essentially rises to adjust to the reduced market supply. Consequently, the ne equilibrium is attained at an increased oil prices. This can be illustrated through a series of examples in the global market. In this case, in the wake of the US attack on Iraq, the quantity of oil supplied in the global market declined. This led to overall oil prices to over $136 per barrel in the resulting months (BBC News, 2008). This serves as a clear illustration that there is a direct relationship between political stability and oil prices in the market. Demand Factors The second category of factors influencing oil prices fluctuations on the global markets are the demand based factors. In this case, these are the factors that are unique on the demand side of the oil supply chain. On one hand, the economic growth rates and trends in the market influence the demand for oil products. In this case, in the late 1990s and early 2000, the western market, especially the USA and China were at the apex of their market growth (Singleton, 2013, p.302). Thus, increased market activities and manufacturing led to a rising demand for energy generation. Consequently, this ensured that the nations imported much of the oil products from the OPEC nations. Consequently, this increased the overall market demand over the market supply, leading to a fluctuation and the rise of global oil supplies respectively (Turhan, Hacihasanoglu & Soytas, 2013, p.23). However, in the period between 2007 and 2008 the global market situation changed. In this case, the global market faced the global financial crisis. As such, this implied that the economic conditions of the markets globally changed (Beckmann & Czudaj, 2013, p.627). In this case, the situation worsened, and a number of the organisations in the manufacturing organisations scaled down or shut their operations down. As a result, this reduced the overall market demand for oil in the global market, leading a supply excess as compared to demand. This had the negative high implications of declining oil prices. Although this has changed in the late 2012 period, the prices are yet to recover fully (Batini & Tereanu, 2009, p.9) An additional oil demand factor is the existence of natural elements in the market. This could be analysed with elements such unexpected occurrences. For instance, in the USA, the Katrina led to massive destruction that reduced the nation’s economic activities in the market. As such, the occurrence of such activities in the demand ends results to changing and fluctuation oil prices in the global market (Bowler, 2015). Finally, the last evaluated demand element is the emergence of alternative sources of energy. An example is in the USA. The USA as a nation has started mining it own oil deposits. This means that a majority of the oil products that it initially sourced from the global market and the OPEC nations will now be available domestically, reducing the overall market demand (Lukawski et al 2014, p.9). On the other hand, similar to other global market leaders such as China have resulted to the use of alternative sources of energy. In this case, nuclear, wind, and solar energy sources have emerged as alternative sources of energy in the global market (Murray, 2013, p.4922). The key justification for the adoption of these energy sources is the element of sustainability as well as environmental conservation, as contrasted to the use of oil as a source of energy in the market. As such, a focus on the use of alternative energy in the global market has exponentially reduced the market demand for oil products. As such, this has been among the key reasons for the industry oil prices decline respectively. Impacts of Oil Prices Fluctuations Oil price fluctuations, especially the increase in oil prices have numerous global market implications. This section explores some of the challenges and impacts of oil prices fluctuations on the global market. The evaluation is focused on both the supplier countries in the OPEC region as well as the demanding organisation in the rest of the entire global market base. Impacts of Price Decline The impact of a price decline can be categorised into the supplier and demanding counters impacts. On one hand, for the global market base, a decline in the cost of oil means reduced operating costs. In this case, the manufacturing organisations and other energy reliant system have relatively lower operational costs. This means that the overall cost of production is reduced, which allows for the reduction in the overall market prices. This means that for the global market, a decline in oil prices implies a positive development (Roche, 2014, p.45). With declining product prices, the customers purchasing power increasing, thus exponentially expanding the market base for the global players which in turn improves the overall market growth rates in the market. This means that with low oil prices, there is stimulation for the overall market economic growth. However, this positive projection is not the case in the supplier organisations in the OPEC region. In essence, a majority of the nations have their main national resources as oil exportation. As such over 80% of their GDPs are supported by the oil exportation revenues. In this case, if the revenues form oil decline due to poor pries in the market, the resulting impact is a decline in the economic growth in the nations (IMF, 2016). This is well explained by the 2008 global financial crisis experiences in the MENA region. In this context, the GFC did not directly impact and influence the MENA region. However, the resulting impact was a decline on the global demand for oil, as the western market nations operations capacity declined. This meant that there was little oil demand from the OPEC region. As a result, this period was characterised by low economic growth in the MENA region. In this case, the MENA region overall GDP value declined simultaneously with the declining oil prices. This trend expanded over the 2008-2010 period, when the oil prices stabilised and acquired a positive price increase (COFACE, 2016). Thus, the above analysis illustrates that a decline in oil prices cause a positive development impact on the demanding global nations, while meriting a wide range of negative implications on the OPEC member countries especially in the MENA region A Rise in the Oil Prices Similar to the evaluation on the impacts of oil prices decline, this section divides the impacts into two main categories. The categories are the supplier nation impacts and the demanding nation’s impacts respectively. On one hand, for the supplier nations, a rise in oil market prices is a sign of development. As already discussed above, the oil exporting nations have a tendency to relying on the oil industry to advance their development agendas as well as support the other sectors. In this context a rise in oil prices implies that the nations GDP values increase as well as the creation of a positive growth and market expansion forecast development (IMF, 2016). In nation such as the UAE, the oil revenues obtained are used in the development of the other industries such as the labour force training and development as well as the IT industry. This is hedged on the understanding that the alternative industries will create a market operations and economic development sustainability in the event that the global oil demand for oil declines as new alternative sources of energy are explored and grow in popularity (Mitchell, Marcel & Mitchell, 2012, p.32). On the contrary, the situation is essentially different in the demanding nations. On one hand, a rise in oil prices implies a rise in the cost of operations across the industries. As such, in order to ensure that the organisations retain substantial profitability margins, the extra costs incurred in the production process is transferred to the customers as a price increase. Frewer (2001, p.349) argued that the process of price increase is based on the organisation desire to retain their pre-existing profitability margins. As such, rather than reducing profitability margins as a result of increased costs, the entre increased costs are transferred to the customers as a price rise margin Hence, this review analysis indicate through increased product cots, the consumers purchasing power is essentially reduced. This has a twofold impact on the economy. On one hand, a consistent rise in market price indicates a declining currency value in the market. In this case, the currency progresses to lose value as the amount that can be demanded by a specific currency declines with rising prices. This leads to the customer preference of storing their value in the form of assets rather than in the currency form. This is the representation of a rising inflation rate on the global market (Katz, 2004, p.38). As money and currency looses value, there is increased inflation in the global nations. If uncontrolled, such rising inflation rates have the potential for derailing economic development as well as the risk of negative economic development. The ultimate resulting effect for this trend is a decline in customers demand for product as well as the potential for loss in the markets. In this case, the high operational costs and low market demands make a majority of the organisational operations unsustainable. As such, most either scale down or shut down their operations all together (Venugopal, 2007, p.19). The second implication in the global market for rising oil prices is the loss of employment for most in formal employment sectors as well as the deterioration of citizens’ living standards. However, in the midst of this challenge, threes the tendency by the global nations to seek for alternatives. In this case, as the oil prices rise, the nations seek for alternative and sustainable sources of energy such as the solar and wind energy among other many alternatives. The use if these approaches reduce the overall cost of energy, thus relieving the nations of the reliance burden on the global oil supply (Lahn & Stevens, 2011, p.49). The above analysis indicates that although an oil price rise could be advantageous to the OPEC countries in the short run period, it is not sustainable in the long run period. This is because; in the short term period nations continue to rely on the oil supply, as they cannot adjust their investment capital investments. However, in the long run period, nations adjust their capital investments and thus can focus on investing in more accessible and cheaper sources of energy. Hence, this means that in the long run period reliance on the highly priced oil as a source of energy would be replaced by alternative sources. As such, this would lower its demand, decline its prices, and essentially hit on the OPEC nations economies that heavily rely on the earned oil revenues. Thus, the above analysis indicates that both a rise and decline in oil prices has lasting native implications on the involved stakeholders. As such, this assets that there is the need for the global oil industry stakeholders to develop a strategic systems for ensuring that the prices of oil supplies is hedged and its rise executed under a controlled environment to ensure that its supply in the global market remains steady and reliable into the future. Conclusion In summary, the essay has offered a strategic analysis of the oil industry. In this case, the essay focused on the causes and the impacts of oil prices on the global market. At first, it established that the causes of price fluctuations could e categorised into two main levels, namely the supply and the demand factors. On one hand, the supply factors include the functions of the OPEC organisations, which enhance the stabilisation and steady rise of the oil prices in the global market. The venture aims at consistently but gradually increasing the oil prices to benefit its members globally. Others include the overriding national interests, and political stability levels in the region. On the other hand, the demand factors include the global market growth rtes and trends s well as the existence of alternative sources of energy. Further, it establishes that oil prices rise and decline have both positive and negative implications, based on the stakeholders’ needs and consumption variances. However, a key realisation is that neither of the two is sustainable in the long run period. Hence, this essay recommends that proper prices control and stabilisation measures should be adopted into the future. References Al, A. I. 2001, United Arab Emirates: A new perspective, Trident Press, London Batini, N., & Tereanu, E. 2009, What Should Inflation Targeting Countries Do When Oil Prices Rise and Drop Fast?. Washington, D.C: International Monetary Fund. BBC News, 2008, Why the oil price keeps rising. [Online] Available at: < http://news.bbc.co.uk/2/hi/business/7431805.stm> [Accessed: 8th March 2016]. Beccarini, A. & Gros, D., 2008, At what cost price stability?: New evidence about the Phillips Curve in Europe and the United States, Centre for European Policy Studies, Brussels Beckmann, J., & Czudaj, R. 2013, Oil prices and effective dollar exchange rates. International Review of Economics & Finance, 27, 621-636. Bowler, T., 2015, Falling oil prices: Who are the winners and losers?, BBC News. [Online] Available at: < http://www.bbc.com/news/business-29643612>. [Accessed: 8th March 2016]. Bret-Rouzaut, N., & Babusiaux, D. 2011, Oil and gas exploration and production: Reserves, costs, contracts, Editions, Technip Paris COFACE, 2016, How the GCC Countries Are Dealing with Falling Oil Prices. [Online] Available at: < http://www.coface.com/News-Publications/News/How-Gulf-Cooperation-Council-countries-GCC-are-dealing-with-falling-oil-prices> [Accessed: 9th March 2016]. Frewer, L.20 01, Food, people and society: A European perspective of consumers' food choices : with 63 tables, Springer, Berlin IMF, 2016, Learning to Live With Cheaper Oil Amid Weaker Demand, Author. [Online] Available at: < http://www.imf.org/external/pubs/ft/reo/2015/mcd/eng/mreo0115.htm> [Accessed: 9th March 2016]. IMF, 2016, The Impact of Higher Oil Prices on the Global Economy [Online] Available at: < http://www.imf.org/external/pubs/ft/oil/2000/> [Accessed: 9th March 2016]. Katz, M., 2004, Lifting the oil curse: Improving petroleum revenue management in Sub-Saharan Africa, International Monetary Fund, Washington, D.C Lahn, G., & Stevens, P., 2011, Burning oil to keep cool: The hidden energy crisis in Saudi Arabia, Chatham House, London Lukawski, M. Z., Anderson, B. J., Augustine, C., Capuano, L. E., Beckers, K. F., Livesay, B., & Tester, J. W. 2014, ‘Cost analysis of oil, gas, and geothermal well drilling’, Journal of Petroleum Science and Engineering, 118, pp. 1-14. Mitchell, J., Marcel, V., & Mitchell, B., 2012, What next for the oil and gas industry?, Chatham House, London Murray, K. E. 2013, ‘State-scale perspective on water use and production associated with oil and gas operations, Oklahoma, US’, Environmental science & technology, 47(9), pp. 4918-4925. Roche, C. 2014, Pragmatic capitalism: What every investor needs to know about money and finance, Pilgrim: New York Shone, R. 2001, An introduction to economic dynamics, Cambridge University Press, Cambridge: Singleton, K. J. 2013, ‘Investor flows and the 2008 boom/bust in oil prices’, Management Science, 60(2), pp. 300-318. Smith, C., (2014) Oil prices in freefall as OPEC fails to agree output cut, Fortune. [Online] Available at: < http://fortune.com/2014/11/27/oil-prices-in-freefall-as-opec-fails-to-agree-output-cut/> [Accessed:9th March 2016]. Turhan, I., Hacihasanoglu, E., & Soytas, U. 2013, ‘Oil prices and emerging market exchange rates’, Emerging Markets Finance and Trade, 49(sup1), pp. 21-36. Valentine, S. V. 2014, Wind power politics and policy. Oxford University Press, New York, NY Venugopal, K. R. 2007, Growth, imbalance and Indian economy, I.K. International Publishing House Pvt. Ltd, New Delhi: Welch, P. J., & Welch, G. F. 2009, Economics: Theory and practice, Wiley Hoboken, N.J Young, K. E. 2014, The political economy of energy, finance and security in the United Arab Emirates: Between the Majilis and the market, Palgrave Macmillan, Houndmills, Basingstoke, Hampshire Part 2: Presentation Slides Review Week 8: I learnt that there exists a direct relationship between emerging technologies and economic growth. In essence, through the various and detailed examples used, I realised that emerging technologies enhance efficiency and effectiveness in the global market. As such, to me, the use of illustration and various sectors in the presentation was ample and satisfactory to ensure everyone understood the study arguments. Week 8-1: In this week, I learnt on the economic growth and recovery in the UE. Of interesting importance was the realisation that the nations, although under the EU umbrella, have their growth rates where Italy and Germany slowed down, France increased, and the UK remained constant. The presentation ending with recommendation on how to enhance uniform growth and recovery across the EU was very informative. However, I felt that linking this argument to the possible exit of the UK from the EU would have been increasingly beneficial. In this case, we could have reviewed how the exit would affect the current status quo. Week 10: In week 10 I leant that although the UK could have some merits and trade efficiency upon exiting the UE, there are almost equal potential challenges. However, I felt that the discussion was lacking in the manner at which it ruled out the possibility of An FTA for the UK with the EU upon exit. In this case, to my understanding, the UK has a chance of negotiating an FTA before it exists. Week 15: In this week I learnt on the role of a currency being included in the IMF SDR. To this effect I learnt that with the inclusion of Chinese Yuan in the SDR implies that China emerge as a key global and regional player, as this I an indication of its influence in global market operations. However, I felt that if the presentation presented an empirical illustration of the Chinese growth tend against other regional players, the assertion would have been clearer. Week 17: In this week I leant two main aspects. First, was the role of international partnerships and cooperation. Through the Chinese-UK partnership, the UK is bound to end its existing steel industry crisis. Secondly, I learnt that there is a direct relationship between government prioritisation and economic growth. A failure to focus on the steel industry has increased unemployment in the UK. However, I feel that the lecture should have illustrated where the partnership falls under the international trade supply chain. Week 19: I learnt that there is a direct relationship between nation’s population growth rates and the economic growth sustainability. This was the case in China where a high aged population increased dependency ration, thus reducing economic growth. The lecture used the relationship between the social and economic aspects model in a country to explain the details. This was a viable approach to link our immediate environment with the nation’s macroeconomic aspects. Week 21: The presentation was very clear and informative on the application and challenges facing virtual reality. In this case, I found it very interesting that virtual reality will be a key training tool in the future for employees and managers. This will not only increase the training process efficiency, but also improve on the overall reduction on training costs and timelines. However, I felt that the discussion was lacking in making it clear what VR involves and its basis. Maybe a detailed discussion on VR components and its emergence, possible evolution would have shed more light. Read More