Managing Oil Price Risk with Derivatives - Coursework Example

This situation is further aggravated by the fact that oil production has remained practically static since 2004 despite a potential increase in demand. It is difficult to say whether this volatility will continue through 2009 or the things will revert back to the placid levels of the 1986-2003 periods. The governments and financial institutions around the world are trying hard to come out with the instruments and the devices to control the risks imposed by the oil price volatility in the contemporary scenario.

In the 21st century, oil prices are once again exhibiting an increased trend towards volatility since the last noticeable price hikes in the 70s and the 80s. There is no denying the fact that oil prices tend to be more volatile than any other commodity and thus could have a considerable impact on the economy of a nation. Therefore the developed and the developing countries are desperately resorting to all the strategies at their disposal, be it the price smoothing schemes, encouraging diversification, price control, or fuel tax manipulations to tame the volatile oil prices (Bacon & Kojimi 2008). Certainly, oil does not happen to be the only commodity that is vulnerable to price volatility, still, the governments tend to take the oil price volatility quite seriously owing to the pivotal role it plays in the national economies (Bacon & Kojimi 2008). Oil price volatility not only influences the transport sector but also has a direct impact on freight transport and passenger transport (Bacon & Kojimi 2008). A thorough examination of the commodity prices by Regnier (2007) between 1945 and 2005 led to the conclusion that the prices of crude oil and oil products were much more volatile than any other commodity sold in the US. According to Regnier, oil prices happened to be more volatile than the prices of the 95 percent of the commodities sold in the US and the prices of the 60 percent of the primary commodities traded in America (2007). In the last eight years, the oil prices have exhibited a more than average predilection for volatility.