The Price of Oil and Its Effect on a Country´s Economy

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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.

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