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Transportation Cost Fluctuation Due to Changing Crude Oil Prices - Essay Example

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Transportation is considered one of the key sectors of economy as it facilitates the movement of goods, people, and animals from one location to another. For instance, for a person, good or animal to move from New York to Washington, they must use at least a mode of transport such as rail, vehicle, train or ship…
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Transportation Cost Fluctuation Due to Changing Crude Oil Prices
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Transportation Cost Fluctuation Due to Changing Crude Oil Prices

Download file to see previous pages... Consequently, for an individual to move from the U.S. to the UK, he or she must use either air or ship as a means of transport to reach the destination. Most of the modern modes of transport used usually depend on oil as a source of energy. Oil used in the transport industry comes in the form of petrol, diesel and other forms of petroleum products. Apart from the transport sector, other sectors of the economy such as industries also depend a lot on oil as a source of energy. In fact, over the past decades, there has been a steady increase in global demand for oil due to globalization and industrialization taking place all over the world.
Worldwatch Institute (8) notes that a substantial growth in energy demand in the world has began especially with China and India, which has the largest human population. He notes that from 2002 to 2004, world global demand increased by 5.3 percent with that of China alone increasing by 5.8 percent. Oil demand in other Asian countries increased by 5.8 percent combined. The increased demand is mainly attributed to the ever-increasing industrialization. Worldwatch Institute also reports that from 2002 to 2004, the US demand for oil increased by 4.9 percent, 10.2 percent with UK realizing a 6.8 percent increase. Other developed countries like Germany and Japan realized a drop in oil demand by 1 percent and 2.6 percent respectively. This prices are however not stable as they keep fluctuating depending on global demand. For instance, an increase in the oil demand usually leads to an increase in petroleum prices. Worldwatch reports that the increase in global demand for oil between 2004 and 2005 saw an increase in petroleum price from about $30 per barrel to $60 per barrel. Such a price fluctuation in oil price in turn affects the transport fares. The level to which fuel price fluctuations as affected by global demand for oil, which in turn affects transport costs can only be explained using supply and demand theories. This paper will discuss how fuel price fluctuation is affected by global demand for oil, which in turn affects the transportation cost. Surface Transportation Policy Project (1) argues that apart from the latest increase in gasoline prices, transportation cost mostly go unnoticed by an average America. This is despite the fact that an average American household spent close to 19.3 per cent per dollar in transportation in 2001. The report found out that it is the second largest expense category, which is three times more than heath care adding close to $7,633 per household every year just to get around. The survey found out that it is only housing that exceeds transportation in terms of expenditure. He notes that in recent years, transportation consume a larger share of family budget. As such, the proportion of household expense grew from below 10 percent in 1935 to close to 14 percent by 1960 and a further 20 percent since 1972 to date. It was also observed that the growth of expenditures on transport closely followed the decline in transit use leading to an emergence of sprawl development (Surface Transportation Policy Project 1). This explains the principle of demand, which states that the higher the price of a product, the lower the quantity demanded, and the lower the price, the higher will be the demand for a product or service. In this case, the law of demand plays out in that the increase in household expenditure lead to a decrease in transit use which in turn lead to emergence of sprawl. This shift was due to the fact that it the only next cheapest alternative to the transit as a means of transport. Surface Transpo ...Download file to see next pagesRead More
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