Fuel Market

FUEL MARKET 1

FuelMarket

Fuelprices are highly affected by supply and demand a lot this becausethere is no alternative to oil and gas. Therefore, any change indemand and supply of oil and gas will subsequently result in a hugeprice change. At most times, prices act to stabilise the demand andsupply.

Factorsthat influence the demand for fuel include among many things weatheror even seasons altogether. During winter which is cold, the demandfor fuel increases since it is used to warm homes. When summer comes,the demand will also increase since the hot weather increases theneed to power air conditioning in the homes.

Automotiveindustry and taxes also influence the demand for oil and gas a lot.If there is an increase in the number of cars sold, the demand forfuel increases. The production of more efficient engines that requirelow fuel consumption decreases the need altogether. The increase inroad tolls, fuel tax and even air travel tax will lead to a reductionin demand for oil and also the price. Fuel tax increases the cost ofthe fuel though its demand will drop since the tax is more externalto the need for oil. Road tolls will cause a reduction in demand,therefore, a reduction in fuel prices altogether.

Ecologyalso has an effect on the demand for fuel this due to heavy use ofoil and gas having a negative impact on the environment. Climatechange and so much pollution are caused by the same. To try and solvethe issue alternative energy is being used. (Eydeland&amp Wolyniec, 2003). Therehave been a lot of awareness and also technological developments totry to improve the effectiveness of renewable sources. Effectivetechnology leads to a reduction in the demand for oil and gas. Whenpeople source for other alternatives to oil and gas leading toreduced demand, the prices of oil go down.

Theeconomy also has an effect on the demand for oil. The Globalrecession in 2008-2009 brought a reduction in demand for oil leadingto a drop in oil prices. (Roncoroni,Fusai &amp Cummins, n.d.)There is low demand for oil in a weak economy compared to a strongeconomy.

Supplyis on the other hand affected by factors such as OPEC (TheOrganisation of Petroleum Exporting Countries) which is anorganisation that consist of 12 countries and contributes around 40%of the world`s oil. OPEC can control the prices of oil by increasingor reducing its production within the member countries. (Publishing&amp Agency, 2010)Thoughthe non-OPEC produce more, they cannot control the supply and pricessince they do not have enough reserves. When OPEC reduces the supplyof crude oil, the prices of oil shoot up.

Politicsalso affect the prices of oil. If an oil producing country was facedwith political tension, production falls and this has an effect onthe overall supply of oil and gas. Examples of political tensionsthat has affected the supply and also the price of oil include the1973 oil embargo. In the recent years, war with Iraq and tensionsbetween the western world with that of the western. With all thepolitical tensions in place prices of fuel increases due its lowsupply.

Naturalexpiry of the fossil will reduce the supply of oil in the long runand its effect is an increase in the fuel prices. Fossils have anexpiry though many years and when that time eventually comes, crudeoil production will decrease which means that supply will decline.Natural factors can also lead to affecting the supply of fuel. Theeffect will increase in the prices of oil and gas.

Changesin the demand and supply of oil have a direct effect on the price ofoil. An increase in the need for oil will mean an increase in theprice of oil. On the other hand, a decrease in demand leads to adecrease in prices of fuel. An increase in the supply of fuel leadsto a reduction in the price of fuel while a decrease leads toincrease in prices.

Shortlythere are still factors that will be affecting the demand and supplyof oil and gas. These factors include technological advancements,OPEC, politics, restrictive registration, production, financialmarkets and exchange value of the dollar. Most have been explainedpreviously so will discuss the rest not already explained.

Intechnological advancement, today there is a lot of developments inthe use of renewable energy sources such as the wind and solarbringing down the demand for fuel. (Mitchell,Marcel &amp Mitchell, 2012)The production of fuel efficient cars have led to a decrease in thedemand for oil since cars such as the hybrid vehicles use less energycausing a reduced demand and most people are continuously opting forthem.

Restrictiveregistration in oil-rich countries has an effect on the production ofoil, therefore, lowering the demand for oil. Most of the world`sreserves are controlled by the government. Also, the global marketfor oil is also highly politicised. (Duffy,2007) Attimes, the government can ban oil exploration lowering its supply. Arepeat of what happened in the Gulf of Mexico can have an effect onthe provision of petroleum and increase the price of oil.

Theproduction also can affect the demand and supply of petroleum. Thisis because location of the reserve, geological formation, amount ofoil found and cost of extraction can affect its production andsupply. Also, a lot of investment is required to be in a position todiscover other reservoirs and utilise them. Some underdevelopedcountries may have the reservoirs but due to lack of capital leavethat unutilised hence will not help in increasing the supply.

Financialmarkets that affect the prices of oil by either increasing ordecreasing the prices have led to oil brokers to trade contracts thatare meant for future deliveries trying to lock down the prices.(Shojai,1995) Thisis when it`s known that prices will go up in the future so as tocaution themselves against loss of profits. They, therefore, lowercurrent supply increasing even the current prices.

Theexchange rate of the dollar is another factor affecting the demandand provision of oil since oil is traded internationally in USdollars. The depreciation of the dollar makes the demand for oilincrease and also prices rise. When the dollar appreciates, thedemand for oil decreases. Since the dollar will even in the futurekeep on fluctuating, the demand and supply of petroleum as well asthe prices will continuously vary.

References

Roncoroni,A., Fusai, G., &amp Cummins, M. Handbookof multi-commodity markets and products.

Publishing,O., &amp Agency, I. (2010). WorldEnergy Outlook 2010.Paris: Organisation for Economic Co-operation and Development.

Eydeland,A., &amp Wolyniec, K. (2003). Energyand power risk management.Hoboken, N.J: Wiley.

Shojai,S. (1995). TheNew global oil market.Westport, Conn.: Praeger.

Duffy,D. (2007). Gasolineprices.[Hartford]: [Connecticut General Assembly, Office of LegislativeResearch].

Mitchell,J., Marcel, V., &amp Mitchell, B. (2012). Whatnext for the oil and gas industry?.London: Chatham House.