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,...
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