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Dealing With Rising Crude Oil Prices Essay

Sensitive hedge funds went volatile with a buy decision recently in the USA. On a single day in February 2008, oil prices broke the psychological price barrier of $100 a barrel, fed by concerns over the rising demand of oil. Amidst the general concern, resulting, European bourses also took a beating, with the prices of major airline stocks crashing. The rise climaxed a week of crisis in the US. Venezuelan president Hugo Chavez threatened to squeeze off oil supplies to America, in the middle of a legal problem with Exxon.

Just when this threat was looking like receding the blast at a smallish size refinery in Texas made hedge funds trading in oil stocks, go ballistic. The blast only served as a reminder of the widening demand supply gap in oil production. This reminder was obviously too acute for the markets, triggering panic buying by investors. The ongoing credit crisis in the US prompts prices to go up even at the slightest rise in prices. Prices are forecast to continue rising before they level or fall.

Aim & Objective The aim of the research is to deal with the ‘n’ number of variables, that when identified after the research would surely make

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way to the most proper and nearly flawless method of oil price indications and forecasts. At present, the calculation of oil price is based on the supply of oil from OPEC and Non OPEC sources. Apart from that political influence and US, oil price policies certainly affect the standard oil price rate and forecast becomes difficult. Literature Review

Literature in the realm of research performed on the advances in sales and marking and their use would be quite numerous and diverse in their content and methodology. In the different separate studies located, only few would have spanned a period beyond a decade. The majority of research pieces, which focus on the inclusion of theoretical and technological advances in the international price computation process, would actually focus on the overall market segments through fundamental evaluation levels.

The fact that there are not very many advanced research items specifically directed toward the security system related to oil price formulation would be the main focus of this dissertation. The most effective method of discussion and understanding the multitudes of studies conducted on oil price formulation inclusion of theories and technology would be in the fact that we must first divide the process into manageable segments. These segments are self-divided within the research itself. Those pieces include divisions between scholars, stakeholders and general population and through corporate operations.

The vast majority of the literature would be concentrated from the year 2000 through to the present, more than likely as advances in computer and other electronic technology has managed leaps and bounds in both affordability and availability of information. This is especially true for markets across the country and there is no reason why it would be not applicable for the UK market segments. The several research pieces brought into this literature review would in fact be between the years 2000 and 2006 and would focus on the ability for oil price formulation to enhance forecast in a variety of sales and marking settings.

One recognizable difference would be in the fact that literature which remains in the time span since the turn of the century would in fact be the speed, the accessibility and the overall development of systems and the internet itself. These elements, as they become more and more integrated into daily life outside of the consumers must be both understood by management and integrated into their sales and marking processes and procedures to keep the potential customers as well as the managements current in their information capacities.

To understand the nature of oil price it should be remembered that internationally, Nigeria and Iraq have rolled back production of crude substantially. Rebels in Nigeria have taken over the Niger Delta, kidnapping oil workers. This has forced a reduction of daily oil production by 10%. Secondly, American demand for oil has sunk to a low off about 50,000 barrels per day. The total US consumption is about 20 million barrels per day. However, Asian countries, particularly India and China have reversed the trend with increasing oil consumption. Amid rumours of a production rollback by OPEC, traders have been compelled to react.

(Berkowitz, 2006) Yet another cause for the rise in prices has been the depreciation of the dollar. The falling dollar tends to discourage investments by oil companies in new oil fields. This is because local costs and salaries increase in the currency of the country while dollar profits decline. In addition, foreign buyers are guarded from the full effect of price increases as their currencies buy more oil. The combined effect of the falling dollar and the credit squeeze also drives the investor to take shelter in oil. This leads to an increase in over speculation.

For traders it is always a good option to trade in dollar denominated products. The combined effect of market movements in international oil prices have of course, been taking a toll on people all over. Gasoline is now costly by over 5 cents a litre. Irate customers are bewildered by this while the analysts point out that OPEC is attempting a forced rise in prices. Legislators in Canada are considering action against oil companies for an inordinate rise in prices. It is accepted that even legislation is insignificant to stand up against powers, which can cause an unbelievable ascent of prices.

(Lamb, 2004) It seems a good point at which to discuss possible interventions in the light of what looks to be a recurring crisis both economic and life impacting. Policy Directions As oil prices increase all across the world, the situation is viewed with differing viewpoints. Some tend to take quite an amiable view, seeming to suggest that the situation is temporary. If prices have increased, it is due to a supply side imbalance, which can be corrected. Constraints within the supply chain are therefore behind the present situation.

A second, foreboding viewpoint is that the present crisis is due to a genuine supply problem with crude oil. The price hike is due to an increasing demand originating from newly emergent economies like China. If this is true, the truth is far more difficult to face. We are then to be confronted with a situation where oil reserves will swiftly dwindle. Logically, the second scenario seems to be more real. Evidence of this is seen everywhere, yet policymakers in government seem to be going about with the business as usual attitude. (Border, 2006) The availability of oil is finite.

Moreover, the search for alternatives outlived its usefulness several years ago. It is not pragmatic to blame the machinations of a few countries for this crisis. In the 1970’s, the presence of crude oil reserves in countries promised self-dependence and less reliance on imports. Gradually, reserves started dwindling in the face of seemingly endless demand. Now, some of these countries are back again to being reliant on oil imports, When new oil wells were tapped in some countries in the 70’s, prices were $ 2 per barrel; they are now $ 100 a barrel.

Though supply side economics can only partly explain the present situation, the problem is here to stay. Some even say that the end of the oil era is near. (King, 2005) Most countries depend upon imported quantities of crude petroleum, which is the main source for powering transport. There are great distances separating populations and the rising prices considerably add to the cost of goods transported. Further, if we believe that supply constraints are the main cause for the rise in prices of fuel, then we also believe prices are correctible by regulatory intervention.

The truth is that if there are genuine constraints on the supply of oil, then tweaking the situation a bit by levying taxes or excise is futile. The fundamental question we should be asking ourselves is should we continue to rely on oil. Knee jerk reactions will not lead anywhere and visionary leadership is required. Bold new initiatives in the direction of alternative fuels and energy sources can be combined with creative thinking on issue of transporting people and goods across vast territories. The search for sustainable alternatives which go beyond the cliched are staring us in the face; ethanol, bio diesel and natural gas.

They are quite capable of being adapted in the short even medium terms. Bio diesel offers commercial development potential, far more cost efficient than petroleum or even crude oil. It is poised for use in the automotive industry. It is a product derived from waste oil or oil seed crops. Jatropha, the plant from which this fuel is derived can be grown almost anywhere and is not very costly to cultivate. The costs of bringing bio diesel to market are not very prohibitive and it has been seen to be an alternative to petrol and can be used in commercial and luxury cars.

However, the initial tests have proved difficult mainly because of its limited market access. (Deb, 2005) Ethanol is a viable option as it can be environmentally sustainable. It is also an economically promising alternative. It can deliver up to 10% of our petrol needs and can be transported easily using available means. This looks to be a solution, which can be immediately put to use. Natural gas is possibly an exciting new alternative which has far greater possibilities than either ethanol or bio diesel.

In terms of volume, natural gas is more commercially capable of being converted to fit a large number of vehicles. Cooking gas can be used to fuel vehicles and can be refilled conveniently. It has the potential to run-to-run a fleet of buses or cars. It has the advantage of being environmentally sustainable. It is already in use commercially in some parts of the world, including some densely populated cities. LPG is the fuel driving vehicles there. In some cities as in New Delhi, the use of ethanol-powered vehicles is statutory.

This is seen as an environmentally less harmful element than petrol and even commercial vehicles are now fitted with ethanol. (Kar, 2005) A mix of these alternatives must now be made operational to be used at a pace matching the rise of crude oil prices. These must be viable and cost efficient. For example, ethanol and natural gas can be used in the energy bridge for bus and transport fleets. Bio diesel could be effective for powering hybrid cars and buses. The regulatory framework is in place for future initiatives as far as developing hybrid transport systems are concerned.

At the same time, it is also important on the research side, to develop hydrogen based fuel cell technologies. The costs of being dependent upon crude oil are high. Governments need to be realistic about the need for a transport system, which will look at future needs and requirements and come up with compatible solutions. Ultimately, pricing and taxation policies have a constructive purpose. This can only be achieved if there is a way to carry them into future environments. The need is to make alternatives available to all. Substance more than popular moves is crucial. (Dennis, 2006)

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