Research Paper: Rising Gas Prices

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¶ … rise in global oil prices and its effect on the global economy. We also discuss the possible reason of the rise in oil prices and the possible remedies. The specific effect of the increase in oil prices is also discussed. This is done according to specific industries. A conclusion is then provided

The issue of rising oil prices can be viewed from two perspectives. The first view by the producers is that it is the best scenario for profit making while the second view, that of the customers is that it results in a lot of financial burden. Through the years, the price of oil has appreciated at an unprecedented rate. The real question however is whether the global economy can really sustain the excessive hikes in oil prices. Consumers and businesses are therefore forced to adopt new changes in order to cope with the devastating effects of high oil prices in the economy.

Causes of the rise in global oil prices

There are several causes of the rise in oil prices. The main one being supply and demand. When the demand for oil is greater than the supply, then price goes up. There are several reasons that can affect the supply of oil. An increase in demand for can affect supply. Problems in the shipping and refinery can result in disruption in oil supply. There is an increase in demand for oil in the U.S. As well as other nations such as China and India. This increase in the oil demand has exerted too much pressure on the oil reserves.EIA (2008,p3) stated that an interruption of oil supply at refinery, pipeline or a reduction in the level of import may cause an unprecedented decline in general supply. This then results in a rapid drop in the gasoline inventories that subsequently cause oil traders (wholesalers) to bid at higher prices for the available gasoline supply as a result of concern over the future. The imbalance between supply and demand is therefore a major factor in the rise of oil prices. The other factors that may affect the production are threats to supply as well as the decision of Organization of the Petroleum Exporting Countries (OPEC).

The OPEC countries wield a lot of power in the global oil supply. They produce over 50% of the global oil. The Organization of the Petroleum Exporting Countries was formed in 1960 in order to regulate the global oil supply as well as the price of oil (EIA, 2008,p7).OPEC can be considered as an oil cartel and at times, they may refuse to pump oil for the fear of causing the oil prices to plummet further. The refusal by OPEC countries to increase oil production leads to a depletion of the available reserves and hence a reduction in supply with an increase in demand. The oil price then subsequently rises.

Conflict or war in the OPEC countries

Conflict and threat of war have been shown to lead to major disruption of global oil production as well as logistics. This then causes oil prices to escalate. Examples of conflicts that have led to a disruption of global oil supply are the attacks on the Nigerian pipeline such as the one that was aimed at the Royal Dutch Shell. The Iraq war also led to a disruption in oil supply as a result of attacks by the Kurdish and Turkish forces. Nigeria is the 8th largest oil producer and the main hindrance to its production capacity is the internal conflict that started in 2006. The separatists who are active at the Niger-Delta have led to a disruption in its oil producing capacity. This in turn affects the global oil distribution and hence causing an increase in oil prices (EIA, 2008). The most recent one is the 2011 Libyan civil war which caused the price of oil to rise up to $103 the moment the coalition forces started to bomb the Libyan forces (Gorondi,2011).

Speculation

Investor speculation has been noted to be one possible cause of rise in oil prices. American Drycleaner (2006) indicated that a report that was release by a group of Attorneys Generals for a rise in natural gas prices during winter was most likely as a consequence of unregulated speculation in the global commodity markets. This therefore pointed out the fact that some of the unprecedented rise in oil prices could be happening outside the influence of market forces (demand/supply).The attorneys suggested the need for an elevation of federal oversight for the entire energy markets to make sure that what the consumers actually pays for are a reflection of the demand and supply of oil quantities.

Hurricanes

The devastating hurricanes along the Gulf of Mexico have been cited to be have a direct effect on the American oil production. This is because it led to a reduction of supply to the American market be about 25% (BBC,2008).The oil spill along the gulf of Mexico also has similar effect.

The weakness of the dollar

Chinn (2007) tried to establish a correlation that exists between the value of the USD and that of crude oil. His argument is that the price of oil is denoted in USD. A weakness in the dollar results in a rise in the price of oil. This is due to the fact that dollar is used as the denomination for oil. The analyst argues that the weakness of the dollar makes it less expensive against other currencies.

Others say that the easily extractable natural oil is getting depleted. In countries outside Saudi Arabia, it is getting increasingly difficult and expensive to access the oil. These include places like under the oceans floors, under the sands (like in Canada) as well as shale oil that are found in Colorado. It has also been pointed that the shale oil that exists in the Utah, Alberta and Colorado oil reserves are much greater than the ones that exists in liquefied form in Saudi Arabia. The only solution therefore is to employ technology at extremely high price to extract the oils. This is economically not feasible.

Government controls/restrictions

It has been noted that several oil field have been undergone nationalization by various oil producing countries. Examples are Russia and Venezuela. This has been noted to result to certain short-term benefits. Poor leadership and political inclinations have caused countries like Venezuela to witness a decline in oil production from the time Chavez came into power. In the western world however, governments try to regulate oil reserves as a result of economic and environmental concerns. In America for example, the offshore drilling as drilling of wells is prohibited by the U.S. government. Some governments also try to use oil in the regulation of inflation. This is noted by Bradley Jr. (2006) as wrong since the market forces should always be left to cure themselves.

The ethanol mandate

Webb (2008) pointed out that the increasing reliance on the imported oil coupled with the environmental concerns have made several nations such as the U.S. And Australia to embrace the mandating of a blend of petrol and ethanol in the domestically produced oil. It usually involves the blending of 10% by volume of the ethanol. The purpose of the mandate is to advocate the security of fuel, reduction of the trade deficit as a result of low oil imports as well as regional and environmental concerns. A reduction in ethanol supply would result in oil prices since the market would rely on imported oil. The demand of oil is highly elastic meaning that a relative change of the demand of oil or its supply can cause a relatively large price change.

Why the prices of gas is high in America

The major causes of high gas prices comprise the increased demand for oil in the nations like China and India, very great gasoline taxes, civil wars in Venezuela, numerous wars taking place in the Middle East and political insecurity in nations like Nigeria. The demand will be kept high by individuals who favor the comfort and well-being of large trucks despite their inferior fuel economy.

Supplies of gasoline are obstructed by rules that need particular combination of gasoline for some regions of the different countries. Earlier, gasoline used to be fundamentally similar; however, there are several "flavors" of the gas that is presently in the market. Normally this causes the price of gas to be higher in and around big cities.

An additional factor that makes the price to be high is the political resistance to offshore drilling.

Another reason why there is an increase in the prices of gas all through the early months of summer is the crowd of people driving to their holiday destinations. A large amount of individuals are driving. Increasing fuel prices over the previous years have resulted into huge rise in the costs for public transportation agencies. Since the prices of fuel are continuing to move upward, the costs that are added are an important issue for the transport officials. A probable… [END OF PREVIEW]

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