Executive Summary: –
This study is a subsequence to the recent volatility in universe oil monetary values. It describes the possible causes get downing with improper universe ingestion information impacting monetary value equilibrium due to inadequate supply ; this in bend triggered guess chances for fiscal investors and speculators to boost the monetary value. Furthermore, planetary recession contributed to sudden retrenchment in universe oil demand and cut downing the monetary value to its lowest. Finally, the study concludes with some realistic redresss available that would ease out the fluctuations.
Crude oil monetary values ever swings in times of demand deficit or glut and it has been variable since the monetary value addition of 1970s and 1980s. In center of 2008, the monetary value of rough oil was at $ 140 a barrel. By February 2009, it stood at $ 34.57 and in recent yearss, it ‘s been fluctuating about $ 70 a barrel ( Figure 1 ) .
Is the oil monetary value header towards $ 150/barrel or $ 50/barrel?
- If so, what may be the grounds behind this volatility?
- What could be the possible solutions?
Possible Causes: –
The followers can be considered as the possible causes for oil monetary value responses to the planetary economic system: –
Improper information: –
The petroleum oil consumption/production information has non improved. When we consider the demand side, the oil ingestion informations is non certain and they are subjected to alterations with hold in publication. The information of developing states like India and China, which are turning out to be the major consumers of oil are less dependable and the job is going shoddier. While on the other side, i.e. the supply side, the OPEC production degree uncertainness adds to the oil production uncertainness. Therefore the uncertainness of demand and supply in the oil market has increased volatility due to oil spread and increased guess.
Guess can be considered as one of the chief causes of oil monetary value volatility. Future oil monetary value guess has led to the overshooting and undershooting of topographic point monetary values over the recent period. From figure 2, which gives the informations on volume of oil hereafters, it is clearly seen that oil hereafters have grown enormously. The mean intraday trading volume of oil hereafters in 2002 was four times the demand of oil per twenty-four hours. While, in 2008 this rose to 15 times the oil demand per twenty-four hours. The above facts can be taken as distinct grounds of the financialization in oil market late.
Global recession: –
Another most of import factor which has affected the volatility is the planetary recession. It is seen that there has been 6 planetary recessions ( Figure 3 ) within a period of 3 decennaries from 1970. The first two recessions occurred in 1974-75 and 1980-82 which did non instantly impact the oil monetary value but the other four recessions 1991-93, 1998, 2001 and 2008 had an immediate consequence and the monetary value of oil crashed down as it became apparent that planetary economic system was falling bluffly. ( Figure 1 and figure 3 shows positive correlativity between recession and oil monetary value volatility ) .The OPEC market power was really much stronger before the 1990 ‘s than that of now and it was easier for OPEC to forestall the volatility in the earlier period.
Let me reason off by saying once more that the recent bizarre volatility in oil monetary values is a natural response to an unexpected, singular alteration in planetary economic system. Fiscal tensenesss and economic defect have produced a caustic sentiment which could prevail to be a hazard to the planetary place. Even though, the planetary slack can be shortened with effectual execution of policy actions, consumer ‘s preparedness to pay the monetary value for this valuable trade good would ever be a factor which can non govern out oil monetary value volatility.
Solutions and Recommendations: –
The class of monetary value change has non been smooth over clip. During the recent old ages, there has been stages when monetary values declined by a immense border, merely to increase afterwards. Now so, Will these volatilities continue in future? “May be” or “may non be” ! However, we can implement some policies which could assist cut down volatility in oil monetary value and name a arrest to the brawny monetary value sways.
In my belief the undermentioned recommendations can be considered: –
- Appropriate, international, and accurate informations on the demand and supply of oil.
- The fiscal investors and market regulators need to lend to better the lucidity, execution, supervising and eventually the demand and supply balance, in the international oil markets.
- Reduce oil ingestion by bettering energy efficiency.
- Alternate beginning of energy demand to be the order of the twenty-four hours.
- Guess decline by doing crystalline dealing over the counter and modulating rigorous regulations to avoid guess.