Factors Affecting the Fall of Oil Price - Example

Factors Affecting the Fall of Oil Price Introduction The oil market constitutes a key sector driving the economy of the world. Energy markets remain most competitive and yet crucial as investors continue pouring their millions of dollars to reap from the forgoing demand and supply of the very precious energy commodity. It is notable that 2014 indeed proved to be a momentous years for the oil industry and related markets as prices and the pricing factor continued to spark interesting rates of purchase (Nicolli, Johnstone & Söderholm, p 263, 2014). Consequently, the consumer perception to the changes in the market influenced the procedural developments in the industry accordingly. The observation is that indeed as the prices of the industry continued to fluctuate, this instability of the pricing, added to the demand of the precious energy commodity create worry over the externalities related to the industry. Moreover, the sustainability of the supply of oil in the short, medium and long term is also aspects of consideration in understanding the forgoing developments in the oil industry. Many factors indeed continue spanning the oil industry, leading to the notable observation of the fall of oil prices over the world (Bwo-Nung, p 9, 2014). The drop which was by near half is an interesting development, as well as, an economic trend influencing many other factors and aspects of the world economy. Key participants in the energy industry including the world’s largest consumers and suppliers of the oil commodity, all had a notable role in contributing accordingly to the fall of the oil prices. The governments continue to factor in these externalities to develop strategic approaches to sustain the oil industry and its impact on their individual environmental and economic sustenance. The economic problem of scarcity by using demand and supply factors relevant to the price of oil The key variables in the effect of the oil trajectory on the prices constitute a clear understanding of the impact of the oil problems via demands and supply in the industry. A key participant and influential element in the oil industry is the influence of the largest consumers of oil. Notably, initially the U.S. was the largest consumer of oil in the industry. However, since 2013, it is notable that China did surpass the U.S. as a leading consumer of the world oil (Bwo-Nung, p 17, 2014). China has the largest market scarcity for oil and this creates demand for oil for it to run its vast economy, consequently, making it the largest importer of liquid fuels. Thus, china has the largest market creating the highest demand for the product. Important to the understanding of the oil prices is the impact China and its vast economy will have on the consumption of the fuels over the coming years. In statistical projections, the expectation is that China will burn over 3 million barrels of oil per day by the year 2020 (Bwo-Nung, p 21, 2014). However, in review of the past consumption, China in 2012 used to consume almost a quarter of the global oil supply, which reflects the global demand for the oil over the given time frame spanning between 2012 and 2015 (Bwo-Nung, p 22, 2014). These observations are key in explaining the recent oil price impacts as the recent prices cap the lowest prices of oil in the past quarter of the century. Thus, the observation of the current economic positive trajectory of China is impacting the oil prices remarkably. The increased economy growth creates the increased demand, which in effect gives market scarcity for the established low prices of oil over the world currently. Another component to watch in the recent developments in oil industry is the supply of the precious commodity. In this respect, a notable constituent and participant that influences the pricing accordingly as well as the demand plus supply of this product is the American Shale. The American Shale company is a giant participant in the oil sector, being the largest producer and supplier of the precious commodity. The company by the end of 2013 was producing a total of over 9 million barrels of oil per day- a rise of over 80 percent since the year 2007 (Chaudary, Nisar, Talat, & Salvador-Adebayo, p 782, 2014). Therefore, it is notable the company output facilitated accordingly in the recent oil price fluctuations as observed. The vast supply of the commodity helped significantly in dampening the oil prices as observed in 4014. Consequently, this in effect was a significant shot to the U.S. drillers as the impact of the fall of prices affected their performance (Chaudary, Nisar, Talat, & Salvador-Adebayo, p 784, 2014). He counts into the continual fall of prices is in effect affecting the output of the fuel from such producers. The American Shell can opt to slash the output, which in effect will increase the demand for the commodity. Oil supply and Demand as quantity increases the demand decreases increase in demand increases prices Similarly, the option could also imply that when the company gains a steady output of the surplus oil in the industry, this will have an enormous impact on the international supplies and consequent pricing of the oil commodity. The American Shell alongside the other suppliers of the oil commodity contributed accordingly in these notable falls in the price. The surplus and steady production of oil will continue reflecting in supplementing the scarcity of the oil in the market; hence, creating enough supply reserves for the oil in the international markets (Hesary, Naoyuki, Abdoli & Farzinvash, p 573, 2013). Further, the producers of the oil will continue to impact the scarcity and supply of the commodity in the event they opt to slash their production, which in effect will create higher demand (Factors That Influence Oil Prices, p 134, 2014). Such developments in the market are worth noting in observing the factors leading to the recent fall of oil prices in the market. In statement released in late 2013, Saudi Arabia, a key constituent of the OPEC unit managing oil production and the oil market, it stated clearly that there was an incredible energy development in which they were keeping track on in past years (The EEAG Report on the European Economy 2015, 16, 2015). Thus, this could be the course observed where Saudi Arabia began the trend on depressing the oil prices even to the point of risking internal unrests in the country. OPEC as a notable unit in the industry presented a move that in effect was in agreement to the line of action that Saudi Arabia insinuated in the statement. Saudi Arabia is a core member of OPEC and as such, OPEC in acting towards the downturn of the oil prices gives it credit for the developments. However, the issue of scarcity arises accordingly since OPEC after undertaking this move; it did not initiate a change in the level of output from its constituent members (Goldthau, p 68, 2014). Consequently, as the prices drop, the consumption of the product rises accordingly, creating the notable demand for the product, notably, in OPEC, a leading factor for consideration is the firm stance by Saudi Arabia to maintain the production quotas is going to impact the decision regarding the oil price cuts. The overall performance in the next few years is heavily dependent on whether the stance not to increase production quotas will sustain the increasing demand for the oil in the market. Thus, in this aspect, the various stance as observed from OPEC and Saudi Arabia will continue affecting the course of the development for the established pricing factors in the market. The elasticity of demand is another concept worth explaining with respect to recent oil prices fluctuations, as well as, the demand and scarcity of the oil product. In the demand and supply equation of oil, the development that oil is selling at rock bottom prices is notable that it may not end retailing the same considerable low prices in various countries, particularly the developing nations (The EEAG Report on the European Economy 2015, 54, 2015). The effect is that the course for demand of the product will diminish the benefits of the low prices to the consumers. as prices and quantity shift, the equilibrium of the market prices shifts accordingly. The rock-bottom prices have in effect sparked an increased consumption of oil and gas. Consequently, the effect may lead to vast consumption rates, which will increase the demand accordingly. Observing the scarcity of the product, the law of elasticity of demand will effetely dictate that the oil prices rise again shifting the market equilibrium. Thus, it is worth noting that the factor of lowering the prices could be the spark for the prices to shoot higher than before. Therefore, the subject of scarcity is worth noting in evaluating the factors leading to the falling of the oil prices across the global markets. Moreover, the geopolitical flashpoint is another notable factor that contributed remarkably to the established fall in price of oil. The general trend in the past entailed that any small disruption in the regions of oil production and suppliers would effectively create a sky-warding rise of the prices Caporale, Ciferri & Girardi, p 79, 2014). Therefore, the subject of scarcity of supply of the oil commodity is in effect a subject of the geopolitical developments across the world. For instance, a span of disruptions in world peace through the Middle East region and northern Africa, which are key constituents of the oil industry, reflected accordingly in the pricing of the oil commodity. For instance, in Iraq, the ISIS control of the parts of the country producing oil saw an increased fear of supply shortages, which would threaten the prices to go up. The flaring violence in Libya in 2014 was the same course (Caporale, Ciferri & Girardi, p 79, 2014). It is notable that Iraq and Libya combined constitute the second largest producers and suppliers of oil, producing up to 4 million barrels of oil a day Caporale, Ciferri & Girardi, p 82, 2014). Such political statements in these countries influence the supply of the oil commodity in the market accordingly. Similarly, developments in Nigeria, a key constituent producer of oil caused an upward shot of prices of oil. The Saudi Arabia as a key component of OPEC took a firm stand to maintain the supply of the oil at unchanged volumes affects the demand and supply balance for the commodity. The U.S. as a key economic powerhouse has a notable say in the supply of the product and decisions regarding the circulation of the oil commodity Caporale, Ciferri & Girardi, p 89, 2014). Thus, observing from all these evidential establishments, it is notable that the geopolitical flashpoints and political developments are affecting the fluctuations of the prices. Consequently, it can notably impact the scarcity of the oil in the market, sparking an upward rise in prices. Nonetheless, the recent political standings contributed accordingly in facilitating the fall of price in the world markets. The externalities that may arise from the consumption of oil With respect to the externalities related to the oil industry and its production, there are both positive and negative impacts to the third parties in the economic transaction of oil. These third parties include the individuals, organisation, property owner or an entire community that receives impact from the economic activity in progress. Thus, the positive externalities are notable in the oil industry as it bears varied benefits to individuals and entire communities (Goldthau, p 67, 2014). It is notable that most merits in the consumption externalities of oil do benefit many people. For instance, the construction of healthcare facilities, and sessions organised to offer private treatment in the society for contagious diseases gives benefit to the society in reception of the services. Additionally, the oil industry does create a considerable benefit in the community through facilitating employment to the people of the community who have the required education and skills. This in effect helps the vast community in a vast way. Thus, unlike the negative externalities of oil industry, the positive externalities are worth encouraging accordingly. Further, with respect to the constructional developments entailed in the industry, the positive externalities impact the entire community accordingly. For instance, in terms of technology, a construction of the oil refinery for instance, or an oil reserve in a country incorporates vast technological investments, which in effect constitute development to the country and the region (Factors That Influence Oil Prices, p 137, 2014). The widespread benefits include the knowledge gained in managing this technology as well as the employment aspect in the market. Thus, indeed oil consumption does facilitate key positive externalities, which the government ought to continue encouraging. Unlike the positive externalities, which receive notable support, the negative externalities entailed in oil consumption should be discouraged accordingly. The producer and direct consumer constitute the first and second parties whereas the third party entails the individuals, organisations or communities the oil consumption affects indirectly. The spills over effects do have a considerable external cost to the parties entailed. Such externalities in the negative effect include aspects such as considerations of waste that arise from the consumption of oil, and the carbon emissions and releases that arise from the production processes (Goldthau, p 72, 2014). The externalities occur in the situations where there are rights over the assets or resources that undergo the impact from the consumption processes. For instance, it is negative externally when he releases of waste occurs into a water body or oil spill occurs in a given region creating pollution which in effect harms the community in that region. The external costs of incidences such as pollution from the production at the industrial level make the social costs to come higher than the private marginal costs Caporale, Ciferri & Girardi, p 94, 2014). Consequently, the social efficiency of the output is lower than the market equilibrium, affecting the overall benefit of the oil consumption in the given location. A negative externality may occur in the incidence where the production of the oil affects the well-being of the community or the environment. For instance, in the production of smoke through the carbon emissions, creates pollution in the air affecting the residents nearby. Consequently, the factory may suffer the clean-up costs, which may prove remarkably high (Bwo-Nung, p 31, 2014). Another aspect is where industrial release in form of waste spills into a dam or pond polluting the water, and affecting fishing expeditions. Such environmental economics affect the consumption in the oil industry remarkably. Oil spillage continues to affect the consumption of oil as recent occurrences reflect. For instance, in Nigeria, oil spillage is a key component creating worry in the management of the production and transportation safety of the oil and oil products (Nicolli, Johnstone & Söderholm, p 266, 2014). Thus, these aspects of the oil industry are key in the environmental economics and impact of the oil industry to the environment. What governments do to influence the consumption of oil to take into account such externalities The governments have a key responsibility to sustain the environment as well as the well-being of communities in their jurisdictions. With respect to the positive externalities, the government has the role to facilitate economic policies that promote and keep the positive externalities. The approach for the government in promoting these positive externalities includes the observation of the supply and demand for the related goods and services in the industry (García-Peñalosa & Turnovsky, p 439, 2014). The regime can ensure an augment in the demand for oil consumption in the given regions through giving subsidies and grants to the oil suppliers, which will in effect reduce the production costs and encourage more supply (Emerging Markets Monitor, p 13, 2015). This in effect will encourage the merits the industry gives through healthcare, education and social constructions. The externalities of public goods such as transport means can also occur through partial or full support from the industry players. Additionally, in encouraging the positive externalities, the government can also initiate a move that encourages the demand for the oil, giving better market demand. For instance, as regulators of pricing in the country, the government can reduce the price of the commodity to the consumers Emerging Markets Monitor, p 18, 2015). Reducing the prices of the given oil will create demand for the oil, encouraging the suppliers and producers of oil to participate actively towards impacting the society positively. In view of the negative externalities entailed in the effects of the oil consumption industry, the governments have a key role to undertake. In this respect, the governments can take the established channels, which include taxation. The governments can employ the pigouvian tax, which will aid the government to gain revenue from taxing the producers, which in effect the government can implement to address the concerns of pollution and other negative externalities (D. & Faure, p 56, 2014). Further, as the governments implement taxation procedures, they can also opt to establish environmental protection agencies. Notably, virtually all countries today have an environmental protection agency in place and these require regulations to facilitate action. Thus, the companies in the oil industry, which are at fault, will pay accordingly in facilitating the resolution of externalities such as pollution and emissions from the oil productions. Limiting the emissions will aid curb pollution; hence, addressing the externalities accordingly. Further, the legal system in the country can also aid the government in resolving the negative externalities of the oil consumption. Such procedures include the establishment of the law of tort; will give the environmental interest a better position in battling the oil companies that relate to the negative externalities. Environmental issues require the government to facilitate the ground for crusades against the negative externalities. For instance, considering the infamous Exxon Valdez oil spill, it is notable that having the crusades against such occurrences will encourage the companies dealing in oil to take better preventive measures to avoid bad publicity as happened to Exxon (D. & Faure, p 67, 2014). Thus, such establishments are notable measures towards addressing the concern of negative externalities. Lastly, the government can opt to implement the practice of internalizing costs. Internalizing costs are an efficient way of responding to negative externalities as they give a higher cost, which is higher than the social costs of the externalities. The price attained is employed accordingly leading to better and efficient allocation resources for the fight against these negative externalities. Thus, such measures will adequately address the concern for the given and arising negative externalities. Conclusion The subject of the oil prices and fluctuations in the market remains under keen watch of the market influencers. Recent developments affect the energy market remarkably and the fall in prices reflects in the developing stories accordingly, varied factors affecting the price falls remain notable. Additionally, observing the consumption of oil, externalities are worth noting and the governments have key role to play in addressing all the developments in the externalities. References Bwo-Nung, H 2014, Factors Affecting an Economys Tolerance and Delay of Response to the Impact of a Positive Oil Price Shock, Energy Journal, 29, 4, pp. 1-34, Business Source Complete, EBSCOhost, viewed 28 March 2015. 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