Oil is one of the primary source of energy and strategic to the development of modern economy. Oil is an important resource which attracts interest by stakeholders in the management of the country’s economy. There is always hot issues whenever there is an oil price fluctuation and is discussed in the economic cycle and in the political landscape.
Oil is a global commodity where its price fluctuation and uncertainty affects global economies of countries. This discussion will review the factors that determine the price of oil and its effect to a country’s economy. These price fluctuations pose risks and threats to governments and corporate organisations. The discussion will analyse the risks of oil price fluctuations and the threat to an organisation.
The overall effect of the risks and threats can be minimised through the use of derivatives and enterprise risk management. The discussion will critically analyse the various tools and mechanisms to minimise the impact of the risks and threats posed by the fluctuating oil prices.
The discussion will conclude with identification of some opportunities with oil price fluctuations.
Factors Influencing Fuel Price Fluctuations
• Crude oil hold major cost component of diesel fuel and gasoline prices. The international oil price is also influence by number factors.
There are seven factors that influence and contribute to the crude oil prices according to the US Energy Information Administration.
Production OPEC consortium contribute to about 40% of the world’s oil production and its export represents 60% of oil traded on the international market. Due to the size of OPEC, its actions on production and supply cuts lead to the world’s crude oil price fluctuations. When reviewing the international oil price fluctuation, it is not hard to link it to Geopolitical instability or risk of oil rich producing nations.
Supply Non-OPEC represents 60% of the world’s oil supply without a spare capacity, referring to them as “Price Takers”, that is they don’t manipulate the market. They give OPEC the ability to further manipulate the market.
Global Oil Inventories Strategic reserves (Oil inventories) balance demand and supply. Excess supplies are stored when the production exceeds demand. When consumption exceeds demand, inventories are used to support the demand surge. In most cases market makers react to inventories build by price drop to balance the demand and supply.
Financial Markets Oil producers lock in prices for a specific period by selling future contracts. This is to hedge against future price fluctuations.
Demand The demand for world’s oil by OECD stand at 53% though there is slow growth rate (BP Statistical Review 2013).
Non-OECD Demand For the last decade, China, India and Saudi Arabia together has the largest growth in oil consumption among the non-OECD countries. There is a direct relationship between the rises of consumption to its economic growth and so it not a surprise to see China and...