Oil Price Fluctuations Case Study Example | Topics and Well Written Essays - 3000 words

Oil Price Fluctuations - Case Study Example During 2008 world witnessed the growth in the prices of crude oil reaching a new high threatening the world economy at large, thanks the financial crisis, the recession has brought it down again. It may be exaggerated that increase and decrease in the oil price effects the world economy which is makes it necessary to study its impact on the world economy and how it effects the alternative energy resources. OPEC reports that the recent surge in the oil prices occurred at the time when there was absolutely no shortage of oil at all. The price upsurge accompanied with volatility has been recognized in all commodity groups including energy, metal or agricultural products with prices doubled since 2005. OPEC reports that it has increased the supply of crude oil by 4 mb/d since 2003 and further increased it by more 1 mb/d with absolutely no shortage of crude oil in the market. (World Oil Outlook, 2008)1 Many elements have led to this volatility in crude oil prices. Keeping aside the demand and supply elements, fluctuations in the dollar value has been the main cause for increase in the prices of crude oil. ... Some factors that have helped the price upsurge include US occupying Iraq, Saudi Arabia being attacked by terrorist temporarily affecting oil supplies, speculative investments by financial investors.3 Decline in OPEC's Surplus Oil Production Capacity Increases in global demand for the crude oil have forced the oil producing nations to produce more crude oil in order to meet the demands. The above figure shows that there has been drastic decline in the oil production of OPEC countries; this demand/supply factor is the main reason for increase in crude oil price touching $140 per barrel.(Hiromi Kato, 2005)4 As per the BPs Statistical Review of World energy for the year 2007, it is revealed that demand for the world touched 83.7 million barrels/per day or 3.9 billion tons/year which is equal to five times the annual household water consumption. The above figure shows that the increasing demand has led to upsurge in crude oil price which rocket from mid 2005 till 2008. As per the figure, oil price didn't had any upsurge till late 2000 but due to increased demand in Asian countries, the crude oil price escalated. Trends in Oil Prices Roncaglia using Hotelling theory explains that the equilibrium price of the scarce resource net of extraction costs rises over time at the rate that is equal, year after year, to the interest rate.5 It is understood from this statement that price of the scarce commodity increases at the rate year after year with the added interest rate. The crude oil is an important ingredient in the growth of world economy. It is learnt that commodity traders are responsible for oil prices who bid on oil futures contracts by looking into current supply of oil in terms of output, oil