What action might be taken by the government of the UK to reduce or limit price of fluctuation of oil - Essay Example

Number How prices of oil in UK have fluctuated? Fuel prices fluctuations in UK have been an occurrence that is common. This has been happening mostly on an upward change affecting mostly prices of diesel, petrol as well as other fuels. Oil prices in the United Kingdom consistently rose between the year 2002 and 2008. In the year 2006 petro price went through a £1-per-litre mark, as well as by early year 2008 petro prices rose to more than £1.30 per litre, however, they fell back in 2009 to £0.

90 as a result of the global slowdown in the year. The prices again rose again to more than £1.30 due to increase in world demand and in the late 2014 they fell to almost £115p per litre. Why oil Prices in the UK fluctuate Everyone in UK has had an experience of the shock for unexpected dramatic change in prices of fuel for instance fuel prices will unexpectedly sky-rocket overnight. Mostly it is the supply and demand case: there is a very high number of vehicles tapping oil and the supply is declining.

Various factors have been causing these changes with the main being the changes in supply and demand of oil (Economics Online Ltd, 2015). Changes in Supply of oil in UK Loss in in production that is mostly affected by global events such as gas shortages, wars, oil suppliers facing security threats Other major causes include taxes, seasonal demands, cost of refined oil and crude oil Elasticity- the oil market relatively inelastic since large increases within upstream investment does not any more produce concurrent increase in supply.

Even in the assumption that no obstacles are involved, whether political, weather or cultural as well as geographical challenges for the delay of exploration as well as production, still it takes very long to come up with a new field of oil. High prices in oil due to inelastic supply do not bring about new capacity since the suppliers are not able to increase production (Economics Online Ltd, 2015). Fig: a huge change in oil prices leads to a minor change in the supply of oil [Investopedia (Economics Basics: Elasticity)] Fig: There is little change in quantity with huge price movements [Investopedia (Economics Basics: Elasticity)] Challenges in Demand Oil demand changes in UK may not necessarily be changed by changes in prices but other factors: New technology that has resulted to alternative fuel sources as well as new vehicle types that has brought about lower demand for oil consumers in UK.

The price of substitute goods determines the level of demand for oil in UK (elasticity). The income of consumers determines how elastic the demand for oil will be. If oil prices go high and income remains constant then demand will reduce. If there is higher income for lower prices of oil the demand increases. Change in oil supply in UK are caused by loss of production. Without other sources of energy, then the supply of oil would not be enough since these other fill the gap that cannot be fulfilled by oil supply.

Events such as war, threats among others lead poor harvest of oil causing undersupply, which in turn leads to lack of surplus hence high prices. Various ways in which the government can intervene to create stable prices; Use of subsidies Subsidies – the government may provide consumption subsidies to oil companies so that the fuel prices may go down. Buffer stocks- the government may implement oil storage in order to stabilize oil prices especially when there are suppliers in supply. The stock may be supplied when there is a low supply in the market.

The government can encourage production and use of substitutes- this will reduce the demand for oil hence fuel prices will be stabilized due to lack of supply. Maximum / minimum prices- the government may implement rice control on oil as a way to stabilize price fuels. How effective are the different interventions likely to be? Government subsidies lead to high oil production, lower prices which leads to ability to purchase more hence increased demand. This leads to more carbon dioxide emissions.

Oil subsidies are worsening government budget resulting to deficits which result to burdening the tax payers (Economics Online Ltd, 2015). Buffer storage does introduce some minimum price encouraging the producers to produce more therefore creating the surplus for use as buffer stock. This brings about the major disadvantages of more oil production. Alternative substitutes for oil products are the best way to reduce carbon emissions and try to return the world to normalcy. They also reduce oil drilling and provide renewable energy (Economics Online Ltd, 2015).

Oil exports has brought about many benefits to UK citizens. Ban of oil exportation will deny citizens job opportunities. It will also boost the growth of the country’s economy as well as being quite beneficial to the global oil market. Through increased taxes on importation of oil government income will be generated. It will also increase the local oil demand. This does not mean stable prizes. It might even reduce supply. Price ceiling leads to undersupply of oil within the market. This results to reduced traders’ profits as well as being driven out of the market.

Price floors increases prices leading to high prices and expensive oil importation caused by taxation. The final result may be undersupply and inefficiency (Economics Online Ltd, 2015). Conclusion The United Kingdom has been facing changes and fluctuation in oil prices. Various factors, more specifically growth in technology which has introduced competitive alternatives to oil usage, market forces which involve demand and supply factors, as well as events and happenings which affect oil production and prices from time to time.

There are various methods that the government can use in order to stabilize oil prices in the United Kingdom. Most of these bring about other problems and more especially encourage more production of oil which is in turn harmful to the environment as well as other effects that have been specified. Low prizes on oil have their own disadvantages too. Oil is an important commodity which is widely used by everyone in the United Kingdom and without it, it is true that there may be major difficulties to deal with.

Its demand remains high despite changes in prices to very high marks. This may only be changed by technology and new sources of energy. As important as it is, its large production is harmful too. Reference Economics Online Ltd, 2015. Price stabilisation. [Online] Available at: http://economicsonline.co.uk/Market_failures/Price_stabilisation.html [Accessed 27 2 2015].