Introduction Oil is one of the primary source of energy and strategic to the development of modern economy. Oil is an important resource which attracts interest by stakeholders in the management of the country’s economy. There is always hot issues whenever there is an oil price fluctuation and is discussed in the economic cycle and in the political landscape. Oil is a global commodity where its price fluctuation and uncertainty affects global economies of countries. This discussion will review the factors that determine the price of oil and its effect to a country’s economy. These price fluctuations pose risks and threats to governments and corporate organisations. The discussion will analyse the risks of oil price fluctuations and the threat to an organisation. The overall effect of the risks and threats can be minimised through the use of derivatives and enterprise risk management. The discussion will critically analyse the various tools and mechanisms to minimise the impact of the risks and threats posed by the fluctuating oil prices. The discussion will conclude with identification of some opportunities with oil price fluctuations. Factors Influencing Fuel Price Fluctuations • Crude oil hold major cost component of diesel fuel and gasoline prices. The international oil price is also influence by number factors. There are seven factors that influence and contribute to the crude oil prices according to the US Energy Information Administration. Production OPEC consortium contribute to about 40% of the world’s oil production and its export represents 60% of oil traded on the international market. Due to the size of OPEC, its actions on production and supply cuts lead to the world’s crude oil price fluctuations. When reviewing ... ... middle of paper ... ...s. In long paper contract, position makes money if the market rises and loses money when it falls whiles in short paper position loses money if market rises. Another hedging strategy available for the IOCs is the swap contracts where obligation is given to the parties to exchange on paper a fixed price in crude for a floating price. The swap providers makes the market so demanded and control the premium which is built into the fixed price offered and financial institutions act as brokers. Another hedging strategy available to IOCs to reduce risk against price fluctuation is put option where the IOC has the right but not obligation to sell over a given period of time or at a specific date in exchange for paying a premium. The key risks to be managed in dealing with derivatives for price risks are liquidity, credit, cashflow, basis, legal, tax and operational risks.
Simmons estimates crude oil prices to average $24 WTI for 2000 and $21 WTI for 2001, with 1Q00 at $28, 2Q00 at $24, 3Q00 at $23 and 4Q00 at $21. For 2001, they see 1Q01 at $22, 2Q01 at $20, 3Q01 at $21 and 4Q01 stable at $21. Their thesis, relying on inventory-price dependence, is as follows.
Crude oil is a strategic product, in the sense that it is a most necessary fuel for all industries of nations in the world. While crude oil is a most strategy input for productions, transportations, and national defends, whoever have control over this source of energy will dominate over other countries, so in addition to supply and demand factors that affect the price, consumers must pay attention to the producers and export countries that can use this product as a weapon. Such as during and after the 1973 Arab-Israeli War, the oil giant Saudi Arab, members of the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo against the United States and other Western European countries, which including the Netherlands, Portugal,
...oline is affected by many different factors. The biggest factor is crude oil, but the supply and demand of crude oil will ultimately determine the price of gasoline. The supply and demand of crude oil and gasoline are also affected by several factors. The price is continually increasing and the supply is becoming harder to produce and deliver. So it seems we, the United States, need to find a way to slow down our fuel consumption and decrease our demand. This may be the only way to bring down the price of gasoline. I know I would not mind, because then I could use the extra $40 to buy a couple more DVDs for the kids to watch while we are running around town in the Expedition.
According to the website of Oil-Price, today’s value for a barrel can be bought at the price of $41.25 this means that oil is not demanded as much as it used to be over the years, because of the awareness of the environment and also because it is a cyclical phenomenon, there’s no actual reason, but the price will eventually rise again. Since oil is used to produce gas, it would come with surprise if the price of gas is low since the oil cost are also low. Gas prices depend on oil costs and oil costs depend on
The unrest in the Middle East would be a valid disruption in normality of prices if the Middle East were exporting less oil than it did before the many revolutions. However, Saudi Arabia has said it will make up the difference in the supply if the supply were to drop of significantly (source). Other members of the Organization of the Petroleum Exporting Countries (OPEC) have vowed to “do more” if the region continues to become destabilized. Libya for example only accounts for 2% of the world’s resource of oil (source). Libya’s oil is special only because it contains 0% to .5...
The modern world of today runs on fossil fuels with crude oil being the live blood of industrialized countries. Though much of the twentieth century old was plentiful easily acquired and low in cost it has only been in the past thirty years that we have seen oil prices rise substantially. This can be attributed to many different reason. These price changes have challenged the industrialized world to become more creative with their techniques of both acquiring oil and using it.
Economist has analyzed the causes of decline in world oil prices. Typically, the price of oil is determined by demand and supply of the world market and forecast advance to invest in which level of demand depends on the level of economic activity and behavioral use of energy from humans. The oil price decline has a benefit for oil importers like China, India, Japan, Europe but unfortunately for oil exporters such as: Kuwait, Venezuela, Nigeria, and Iraq. Crude oil prices fell steadily in the past seems to be a result of two main factors being the levels of demand declining and a level of increased supplies (Economic, 2015)
The worlds usage of oil has had a major impact on political development. One major outcome was the creation of OPEC. The Organization of the Petroleum Exporting Countries was created during the Baghdad conference that took place in 1960 on September 10th to the 14th. This committee was founded by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Over the next few decades, other countries began to join OPEC. OPEC’s purpose is to watch over oil trades and work on policies with member countries. They make sure that prices from producers are fair and that consumers are getting their fair share of oil. OPEC is the outcome of the high dependence the world has on oil and there are conflicts that happen because of this commodity. One major conflict was the oil embargo set on the United States from OPEC in 1973. This was in retaliation to the U.S.’s choice to aid Israel during the Arab-Israeli war. Other countries affected were the Netherlands, Portugal, and South Africa because of their support of Israel. Since the US depended so heavily on foreign oil, the economy was impacted negatively.This sent the US into a crisis for the next year. These major politic...
In 1970 oil reserves became more scarce, leading to a decrease in production, while consumption continued to grow rapidly (Wright, R. T., & Boorse, D. F. 2011). In order to fill the gap between rising demand and falling supply of oil, the United States became more and more dependent on imported oil, primarily from Arab countries in the Middle East. (Wright, R. T., & Boorse, D. F. 2011). As the U.S and many other countries became highly industrialized nations, they became even more dependent on oil imports. With demand being higher than the actual amount of supply, prices kept rising reaching a peak of $140 a barrel in 2008. (Wright, R. T., & Boorse, D. F. 2011).
The increase in oil prices can also effect the supply and demand for goods other than oil, Econ made clear that the prices to produce them increase causes more of a economic issue. This is causing economic fluctuations and no one is doing anything to stop it.
From 1970 to 1973 exporting countries increased their control over supply (with agreements and nationalizing production). The oil prices reach the same level then the refineries.
The participants in the derivatives markets are generally classified as hedgers and speculators. The hedgers use derivatives as main purpose to protect against adverse changes while speculators enter a derivative contract with attempt to profit from anticipated changes in market prices. One of the biggest questions in regard to the treatment of derivatives tools is whether actually they are used for hedging or speculation. (Adam and Fernando 2006)
The oil & gas sector faces specific risks affecting its financial performances. The main variables affecting the industry are political, geological, price, fiscal, supply and demand as well as cost risks. Given the specific risks, the demand for energy is still gr...
Oil is Important it makes more things possible than most people know. It has far reaching effects on countries. Crude oil is broken down into many everyday products. There are many products that many people don’t even realize are produced from oil being separated. The most important being gasoline. Gas is needed to transport all items that ride on trucks and all people drive. Gas Prices can affect how well off a countries economy is. A good economic situation can determine how help business flourish and give people money to help keep the economy going through consuming goods. Gas prices have risen and fallen through history and has affected everyone form OPEC (Organization of the petroleum Exporting Countries) to the average American consumer. Government policy, scarcity, and abundance can all effect gas prices. The price of Gas has many obvious effects and many effects that may remain unforeseen for quite some time. Gas Prices are important and have cause and effect variables that can be explained and regulated.
Oil and natural gas production has been exponentially multiplying since 2008, making the United States independent from foreign energy. This is important for the United States economy because in the last century a significant amount of GDP has gone to the importation of Oil and gas, doing so we have become victims of the rise and fall of the volatile prices set by OPEC, driving the United States to economic crisis, as it happened in the 1973 oil crisis where oil prices rose dramatically from $3.00 per barrel to $12.00 per barrel .