Fundamentals of the Oil Industry - Research Paper Example

Fundamentals of the oil industry The global economy has over the past decades depended on oil as the key source of energy for domestic use and industrialization. Even in the current economic policies with alternative source of energy in nuclear technology and the traditionally used coal, Oil still remain the primary energy source for the world. Oil industry remains unique and critical to the world economy and there attracts global attention with significant influence in economic policies and events. It is important to undertake a study on Oil industry from a bigger perspective ranging from production to supply and final consumption. The question that would equally be important to answer is the impact of alternative sources of energy on oil dependency and the aggregate global economy (Gudmestad,et al. 34). Oil industry is one of the strongest among other industries due to the significant power it wield in global economic activities. It is equally important to underline the geopolitical aspects of its production which is limited to some parts of the world. It is a common knowledge that the leading oil cartel is OPEC with a strong bargaining power in the international petroleum oil market (Omeje 168). The Dollar strength is significant shaken by oil prices and this is a key factor that proves the influence of oil industry in social, economic and political decisions made by governments and the private sector. There has been an increasing campaign for alternative source of fuel for powering vehicles and it is imperative that a critical analysis is undertaken to this effect to establish the possible consequences this would have in the economy and Oil industry. Recent Oil prices have shown a sharp volatility that began in 2008 across the world. In this regard, it is important to understand the basic facts in oil industry that explain the possible fluctuation of the commodity and the market trends. Socio-economic and political analysts have established that the oil market trend has outgrown the forces of demand and supply. This means that other factors like petroleum oil investors’ behavior in respect to prices is likely to affect the industry. To give light on the possibility of this scenario, past records and investigative analysis indicates that some economic strategies by oil firms is responsible for the fluctuation stint experienced in 2008. Since oil is such a precious commodity on whose wheels the global economy rides, most of the firms have resorted to hedging tactics to exploit the changes in international prices with a goal of maximizing profit. It therefore evident that some of the financial woes that have been experienced in late 2000s can be attributed to financial market shockwaves of oil firms malpractices. Due to the lucrative opportunities in the industry, most of the investors lead in speculative behavior by divesting funds through pension funds, hedging and investment banks which reflects on the experienced changes in the global economy(Omeje 178). This emerging scenario has made it difficult to predict oil market trends. The oil industry analysts are still debating on the level of significance of forces of demand and supply in Oil industry but one issue that comes out more challenging is the lacking sense of emerging reality in this industry by investors. A crucial aspect of Oil industry has been on the basis of absolute price dictation by OPEC countries but this has so far changed. Changing socio-economic and political landscapes has made oil market to behavior like any other commodity. It is therefore important to underline the diminishing monopoly based pricing style that was previously used by OPEC. The observed case of US exploring its oil has equally contributed to the shift in pricing strategy previously used by global producers. One observation across the world is that Oil products have become the most actively traded item. Despite market concentration noted in New York, Singapore and London in UK, both refined and crude oil has gained trading popularity across the world. In this regard, it has developed a close relationship with dollar strength for each nation and the world at large. The industry is now controlled by private sector and smaller government involvement which explains the volatility in its prices (Clo? 42). The fact that OPEC still influence supply of oil in the world cannot be ruled out due to the evident global market disturbance realized when the North African and Middle East Arab countries were caught up massive civil unrest. The dwindling oil supply and increased cost of production was reflected in international commodity prices. This is experience proved the influence of oil supply in global economic directions and this is a fundamental aspect of oil industry. In-depth analysis indicates that even the comparative prices of oil and gas does not reflect positive correlation (Gudmestad,et al. 45). This means that there are other extraneous factors that influence the market trend in oil industry rather than the conventional theory on demand and supply. The US Economic and political seeks to work on a way of withholding US gas and oil reserves which will translate to upward prices of the commodity. As oil remains critical in the energy sector, the two commodities are likely to exhibit positive correlation in terms of price and this is normal observation in petroleum industry. It is also worth noting that oil industry has been absorbed significantly into the “future contract” where buyers and sellers make arrangement of future delivery for a pre-arranged price. This means that the parties involved must ensure they gain by playing safe to stabilize prices. Since the oil traders are large multinationals, there effort to stabilize prices has been critical in the overall global economy and foreign exchange market. This means that Oil industry has indirect relationship with foreign exchange market (Clo? 122). Oil exits in a variety of grades but Brent takes lion share when it comes to pricing in the international market. It has been realized that OPEC basket and United States oil bench mark are the alternative of Brent but they are limited to the supplies and price swings in the market. This case presents the increasing pressure on the dollar in respect to changing oil prices. The emerging difficulty to forecast on future oil industry trends has initiated increased debate for alternative fuel. Although oil has been the primary energy fuel for many locomotives and cars in particular, it is becoming more unpredictable besides the issue of environmental concern. However, the efforts towards substituting oil with alternatives have possible economic repercussions that cannot be overlooked. Despite the increasing campaign to shift to alternative fuel for vehicles, Oil remains the major contributor to the global industrialization agenda. However, increased adoption of alternative energy like gas fueled vehicles is likely to shake its prices as even the use is likely to shift. The global Gross Domestic Product is still dependent on oil but the emerging alternative fuel powered vehicle technology has put the industry on decision fence (Clo? 76). There in increasing doubt on hedging since the future of oil prices are now a function of the increasing technology. This is reflected in possible stability of global economy hence the manipulative outcome. The increasing technological campaign for more fuel conserving cars is slowly increasing the use of gas. This culminates into gas fuel consumption trend beginning to gain influence in the value of dollar hence closing the demand gap in the oil industry (Victor 31). It is also possible that increased exhaustion of gas and oil wells by the US will significantly push the gas prices up as there will be a plan to import more and reserve the domestic stock and this has considerable effect on the current global economy. Comprehensive analysis of the discussed factors in oil industry is important for better policies that seek to improve the global economy and overall socio-political welfare of the society. Works cited Clo?, Alberto. Oil Economics and Policy. Boston [u.a.: Kluwer Acad. Publ, 2000. Print. Gudmestad, O T, A B. Zolotukhin, and E T. Jarlsby. Development of Petroleum Resources with Emphasis on Offshore Fields. Southampton: WIT, 2010. Print. Omeje, Kenneth C. High Stakes and Stakeholders: Oil Conflict and Security in Nigeria. Aldershot [u.a.: Ashgate, 2006. Print. Read More