Rising Oil Price Essay

accounting essay

Factors that Affect the Price of a Product

Introduction:

There are several forces that influence people’s daily lives. Some of these influences may or may not be directly experienced; they may affect a person in a manner that has one blame something completely different. An example of this could be the way that people blame their governments for rising prices. However, there are a number of factors that can be blamed for rising prices. The rise in prices can be propelled by the cost of fuel used to transport goods around. So, if the cost of fuel were to increase, it is likely that the cost of transporting good around would increase proportionally. Speaking of an influence like this, there are factors involved that cause prices to rise and also cause people’s lives to be influenced in some significant way. Focusing on the price of oil that influences people, it can be said that there are several factors involved. Similar to this major product sold on the international market, there are many others that are influenced by similar factors. Below are few major factors that influence the market prices of products.

Availability of raw materials:

In order to produce a product, raw materials are essential. If a country has its own raw materials, it can produce its products affordably provided that it has the means and tools to do so. If not, the raw materials might be sold as they are or other outside organization could be hired to process the materials. In places where raw materials are lacking, producing particular products is a difficult and costly task. However, in places where raw materials and technological knowledge are both available, the costs of products produced are lower than they are in other regions. This sets a low market price for a given product.

Policy:

To begin with, an example of a factor influencing market price of a product is ‘policy’. There may be policies issued over certain important products in the market. Examples of these kinds of products are medical items, especially drugs. Also, an example of an organization that is concerned with issuing policies on these products is the ‘Food and Drug Administration’ (FDA). Their policies are the kind that set the standard for authentic and approved drugs in the market. Hence, if their policies help differentiate between Pfizer’s Viagra and Generic Viagra, it is obvious that there would be a price difference between the two. This is in fact the reason why Generic Viagra is sold cheaper than the authentic Pfizer brand.

Consumption and Policy:

Some product sales may be directly influenced by the policies imposed on them. For example, if any organization has ruled that particular product is authentic, it might draw consumers to it. The cost of the item also plays a role in this regard; if the price is exorbitant customers may settle for cheaper forms of the product. Alternatively, if people can do without a particular product, they would, especially in the case of having alternatives that serve their purpose.

Economy:

The state of affairs regarding the economy of a region is important too when discussing market prices of products. If there are conditions such as inflation prevailing, then it is likely tat people would not be able to purchase a particular product. This could result in the price of a product being elevated because the overall cost of transporting it to a region will not be shouldered; the more people purchase a product, the more likely it is for the this cost effect to diminish. However, it must also be kept in mind that the price of an item could diminish if fewer people demand it, and this effect is propelled by the availability of the product and demand for it in other regions.

Political Conditions and International Relations:

Since political conditions are known to directly affect the economy, where there is political unrest it is likely that market prices would be influenced. If one looks at a region like Iraq as an example, political unrest in recent times has not allowed trade to take place; their economy is weak and products are expensive. However, once stability is restored, trade would take place uninhibited, and the economy would improve, thereby lowering market prices (Croissant & Aras, 1999, pp 31).

Consumption and Demand:

One of the factors that influences oil price fluctuation is ‘consumption’. The ‘consumption’ factor is one that influences all types of products for that matter. In fact, there are several factors that influence market prices of products in the same manner that oil is affected.

As an example of market price of a product, one can consider the level of dependency on a product such as oil. The more that a country is a dependent on oil, the more will be consumed. In saying this, it must be realized that there is immense dependency on oil today. The pace at which life moves today is far greater than it ever was, and more people are competing in the business arena. This automatically means that transportation is a major factor involved here, as businesses need communication and transport to support their efforts. The fast these two work, the greater the profits and encouragement to conduct business in any region.

In addition to doing business, people in general require fuel that comes from oil. This encompasses the average working man who drives to work daily and those who transport goods throughout the country. On an international level, a product such as fuel is required to transport cargo and people abroad.

Availability and Scarcity:

The struggle for resources in modern times has become a major concern. People have been worrying over when oil production would peak. In fact, this worrying has gone on since the early 1970s; people from then have not been sure how much oil is left to use, and whether there would be alternative sources of this raw product that could be converted to usable fuel. Technology has also played its part in this concern because cheaper means of extraction and conversion are also of great significance.

Looking at regions of the world that do not have their own oil, one can say that they are willing to purchase it from oil-producing nations, mainly in the Middle East. The Middle East is believed to have an abundant supply of oil. Converting is oil into other usable products is another process; much of this oil is exported to western countries for conversion, and is not purchased in the form of a complete product (Croissant & Aras, 1999, pp 31).

Oil purchased from the Middle East or extracted in one’s own country is measured by the barrel and the cost of the barrel. The fluctuations in the price of a barrel of oil have been interesting recently, considering that for quite a few years, this source of energy has been expected to run out. As mentioned earlier, since the early 1970s, this has been the case. In the light of political and economical conditions taking place from then on, the price of oil in the international market has fluctuated tremendously. It is interesting to view the Illustration 1 in the Appendix in order to understand these fluctuations (Croissant & Aras, 1999, pp 31).

The 1970s:

It is known that from the first major concerns for oil as a source of energy in the early 1970s till around 2000, oil prices have fluctuated significantly, varying between $ 10 to 40 per barrel. Between 1973 and 1982, the price of oil had risen from $5 per barrel to $ 40 per barrel. This particular period was believed to be the toughest economic period in the US. At this time, inflation gripped the country, and it was believed till that time that the rise in the cost of oil was related to inflation. This belief was inverted during this period, and since there was little control over oil prices, inflation and recession could not be considered mutually exclusive any more.

At this time, OPEC also adjusted prices. Prices of oil rose higher in spite of a slowing economy. This is why a new term occurred in the economy: stagflation. Though the economic enemies at hand were defined, it became difficult in deciding which one of them to tackle. Soon after deciding to tackle inflation in 1974, the recession that began in 1973 was accepted as the more devastating enemy. As the 1970s progressed, the cost of oil steadied upward. While this was the case, turmoil in the Middle East erupted, and oil prices suffered further. During this time, stocks also fluctuated a great deal before (Leeb & Leeb, 2004).

The 1980s:

After the torrid period from 1973 to 1982 when oil prices shot up, the prices of oil decreased considerably, coming down from their high of $ 40 per barrel to $ 10 per barrel. This lowest cost per barrel was recorded in 1986, reflecting a major change as compared to the previous decade. After this good news, the markets improved tremendously, and remained bullish for an extensive period. This was all incomplete contrast to what the 1970s saw before (Leeb & Leeb, 2004).

The 1990s:

In 1987, there were signs of oil prices rising again. Along with this, there were other commodities that rose in price. Along with this, inflation elevated to 4 percent. Stocks too that were doing well, began to lose their strength. However all this was not a signal of hard times to come. Instead, the following three years were economically sound. By 1990, stocks made up for what they had lost and gained more points ahead of their previous totals. The price of oil was down again, and profits were higher again. Of course, this period lasted until Kuwait was invaded by Iraq. During this time, the price of oil again shot up to $ 30 per barrel. Again, stocks were affected, and the economy suffered. During this time, Saddam tried to cripple the oil supply to the west. Setting many oil wells ablaze would not in fact cripple the oil production. Soon after Saddam was driven out of Kuwait, oil prices fell once again, and stocks went ‘bullish’ again. These conditions lasted from 1991 till 2000, and the stock market set a stage that was not seen before (Leeb & Leeb, 2004).

Beyond the year 2000, it is apparent there is more concern over the price of oil. This is because prices have increased steadily again till date, globally. Political conditions that affect everyone are of immense importance too. Intertwined in this concern are ventures with oil-producing nations, such as those in the Middle East. It is thought that the sooner political conditions improve the quicker oil prices will fall. However, it must also not be forgotten that this increase in prices was expected. This might have been expected because of the oil price pattern that has been experienced during the last two decades.

Conclusion:

Given that a great many things people do today are dependent on sources of energy. Hence, it is thought that the economy as a whole is related to oil prices. Since oil, as a major source of energy, particularly beginning in the 1970s, has governed people’s activities, a pattern for oil prices has developed. It can be observed that there is an increase for a few years after oil prices have been low. Corresponding with these prices are the stocks that seem to be bullish when oil prices are lower. Affecting the price of oil have been several factors that would affect the market price of any commodity. However, observing the oil price trend over the last couple of decades reveals that high prices in oil were followed by recession/stagflation and tumbling stocks. In contrast to this, declining prices have been followed by better times.

Finally, it can be asserted that oil is a commodity on which the world is greatly dependent because it is a viable source of energy. Its variation in price is most likely to affect every action we take. At the same time, it is governed by factors that influence any other commodity in the market, and its price is most likely to be affected by factors such as political disturbances change in policies laid down for it.

References:

  • Croissant, Michael P. and Bülent Aras, editors, 1999. Oil and Geopolitics in the Caspian Sea Region, Westport, CT, Praeger, pp 31.
  • Edgell, Stephen, Kevin Hetherington and Alan Warde (ed). 1996. Consumption Matters. Blackwell Publishers, Cambridge, MA. Pp 113-134.
  • Evans, M., O’Malley, L., and Patterson, M., 2004. Exploring Direct & Customer Relationship Marketing, 2nd edition, London: Thomson, 43-44
  • Fisher, Keith. 2002. A Meeting of Blood and Oil: The Balkan Factor in Western Energy Security. Journal of Southern Europe and the Balkans, Vol.4, No.1, May, pp.75-89.
  • Klare, Michael. 2001. Oil Conflict in the Persian Gulf, Chapter 3 in Resource Wars: The New Landscape of Global Conflict. Metropolitan Books.
  • Leeb, Stephen and Donna Leeb, 2004. The Oil Factor by Stephen Leeb and Donna Leeb. Available at http://www.twbookmark.com/books/60/0446533173/chapter_excerpt18117.html
  • Prices. Accessed on 10-19-2005. http://www.eia.doe.gov/pub/oil_gas/petroleum/analysis_publications/oil_market_basics/Price_text.htm
  • Wright, Ray. Dec 2003. Business-to-Business Marketing: A Step-by-Step Guide, Prentice Hall

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