What Actions Governments Reduce Limit Price Fluctuations Oil Essay

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Oil Price Fluctuation

Actions adopted by the government to reduce or limit price fluctuation

Oil Price Fluctuation iii

This report will focus on the actions adopted by the government to reduce the fluctuation in oil prices. A brief introduction is discussed in the assignment. The reasons are also described in the assignment for which the oil prices fluctuate. This assignment also puts light on the price stability and why governments need to intervene to reduce the volatility in oil prices. Strategies adopted by the government to stable the oil prices are also discussed.

Reasons of price fluctuation

Price stability

Government intervention to stable the oil prices

Energy conservation

Hedging

Strategic oil reserves

Adopt assistance

Conclusion

References

Actions adopted by the government to reduce or limit price fluctuation

Introduction

The prices of oil were increased in 2007 to 2008. The oil prices were highly fluctuating in 2007 between the months January to November. The oil prices are increased by 23% on an annual basis. Oil is a global demand of every country. If the demand increases, the production also increases outside the U.S. Oil is a non-refurbish able resource and is extracts from the physical machines. The whole economy of the world affects by the fluctuation in the oil prices. Therefore, government undergoes to get involve for reducing the variation in oil prices and should have to adopt some actions to resolve this issue. The governments should develop some strong schemes to manage the instability in domestic oil prices for their consumers. The governments should have to set the "price smoothing scheme." This scheme is used to set out the domestic oil prices in accordance with the past, present and future prices of oil. When the governments get thrive in order to reduce the fluctuating prices of oil, it means that the price smoothing scheme is successfully designed. To mitigate the fluctuation in oil prices, the governments of all developing countries should set the price-based policies (Bacoma & Kojima, 2008, p.35-36).

Reasons of price fluctuation

The rapid changes in oil prices came into subsistence because of the three facts;

1. Demand and supply,

2. The cost for refining oil,

3. The market speculation.

These are the facts which affect the oil prices. Hence, the price of oil fluctuates promptly in a very short period. In economically developed countries, if the demand is high then the supply rate would be relatively constant. On the other hand, if the rate of supply is high then the prices will go downward, and if the rate of supply is low and the demand is high then there will be an increment in the prices. Some other factors can also affects the oil prices such as geographic location, market competition and foreign exchange. In addition, energy is the only reason for the fluctuation in oil prices. The oil is considered as a commodity by the market speculators because they procure the oil and vend it in the period when there is instability in prices. To avoid from the sudden increases in the prices of oil, the market speculators purchase the "paper barrels" (non physical crude oil) and then sell it at the price to attain the considerable profit (Mouawad & Werdigier, 2007, p.1).

Researchers have analyzed that the market speculators invest in the future oil market. In fact, they invest $60 billion and withdrawn $39 of billion when they observe that prices of the barrels are increased from $95 to $145 billion. While the market speculators invest in the future oil market, prices of oil rise whether the change in the rate of supply and demand takes place or not. The government should have to take some step to curtail this act. Furthermore, the price of the barrel can also get reduced by withdrawing the large amount from the oil markets which is invested by the market speculators. This behavior of speculators helps in falling prices of oil at pumps (Gillman, 2008, p.2).

Price stability

Inflation and deflation are the main aspects which directly affects the economic condition of the country. Inflation means the prices increase and the purchasing power become low. On the other hand, deflation means when prices fall and purchasing power of consumers become high. When there is no inflation and deflation in the country, it means there is "price stability" in the country. Price stability means the prices neither increase nor do decreases, in fact, remain stable (European Central Bank, 2007, p.14).

Stability in oil prices is very important, because when the price increases, it reduces the buying power of consumers and oil importers. Researchers have been analyzed that the changes in oil prices affects the stability of the financial system of the whole economy. Stability is very important to sustain the stable financial market. The current oil price is nine times higher than the prices of period of 1973. The current price is U.S. $28.80, and in 1973, it was $3.23. There was stability in oil prices from 1986 to 2001, but after the recession, the prices began rises to $135 per barrel. As we know, oil is the core need of every industrialist. The rise and fall in the oil prices directly affects the production process of the organizations. They can face the difficulties because of the fluctuation in oil prices. When the price will become high, it creates the issue of demand and supply (Mabuhay, 2013, p.2). Therefore, stability in oil prices is very important. Stability in oil prices makes everyone happy. In 2009, the range of oil was $65 to $80 per barrel that has been approved by OPEC. That was the stable rate of oil prices. It has been decided fourth time within a year to keep the level of output constant. It has been imagined that may be during 2013 to 2014, the oil prices may fall at least 20$ per barrel. The reason is that the prices are very high.

This figure shows the variant changes in the pricing level of oil. In the year 1975, the price of oil is approximately within $10 to $15 per barrel. Then fluctuations in oil prices take place. Subsequently after recession, there is an enormous rise in oil price become in the market and the prices of per barrel were leading at approximately $135 to $138 (Conerly 2013, p.1-2).

Government intervention to stable the oil prices

In developed countries, when prices of oil rises and the people of low income were unable to bear that changes in prices than the governments of that countries should design some strategies to mitigate the fluctuation in oil prices. In 2008, Indonesia initiated a strategy to help to people of low income and make a decision to provide 19 million for low income domestic families. Similarly Pakistan also decided to provide 305 million for low domestic families. The governments should adopt some actions to reduce or limit the instability of oil prices. The report about the daily prices of oil is examined in U.S.. The rise and fall in the exchange rates is also examined on a daily basis in U.S.. Hedging is a strategy that is launched by the government to reduce the risk of fluctuation in oil prices which can create issues for oil buyer and seller.

OPEC is an oil cartel that actually sets out all the policies related to oil prices with the countries where oil is produced. The aim of the OPEC is to supply the oil to their consumers at affordable prices. The investors invest a large amount on the petroleum activities they actually increase their rate of turnover (UEMOA, 2006).

Government can adopt some steps to mitigate the fluctuation in oil prices.

Energy conservation

Different countries are implementing diverse ways to condense the consumption of energy. For the reduction in the consumption of energy, Argentina offers a number of financial rewards. The government of Thailand adopts the approach to endow with the loans to their residents in order to reduce to consumption of energy so that people can buy efficient household appliances. Rwanda and Ghana provide lamps in order to reduce the use of incandescent bulbs because these bulbs consume high voltage of energy. In order to save the energy, different countries also thrive to renovate the vacant buildings and replace those machineries which soak up a high level of energy (Kojima, 2009, p.6).

Hedging

Hedging is a strategy that is designed by the government to reduce the risk of movement of prices adversely on future basis. It can be a benefit for the purchaser or a seller. The government may hedge the oil exporters for the future returns. In the future oil market, the purchaser can lock the purchasing contract of barrels with the current price for the number of months. If the price of contract increase, then it means it will reduce the uncertainty of price and the purchaser will get the benefit. Other than, the purchaser will not able to get the benefit if the contract price will decrease. Among several countries,…[continue]

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