Analysis of Oil Prices Variation in the UK

Introduction

 Oil and petroleum are considered as the pillar of bulk commodities. Oil and petroleum are basic attributes for the commodity, as it is known as a strong attribute for the financial and political growth. It can be observed that in the past few decades the prices of the crude oil experienced significant fluctuations or it can be stated that it faced significant ups and downs, where it also attracted the attention of the industrial communities (Khan, 2016).  The drastic fluctuations in the prices of the oil rates impacted the national economic power. According to the Mohaddes and Pesaran (2017); Ratti and Vespignani (2016), on the economic point of view the decline in oil prices has a positive output impact on the global economy and for the economy of United Kingdom and United States the decline in the oil prices had a positive impact after the global financial crises of 2008. The oil and petroleum are the fundamental factors for the economic growth and development change in the market structure contributes to organisations of petroleum exporting countries practice in the market power, and it can be observed that during the time period of global crises the demand and prices for oil and petroleum was doubled (Broad, and Cavanagh, 2015).

 On the other hand, it can also be observed that oil and gas also play an important role in the exploration technology factor side and the total oil rigs and gas rigs of the UK provide an approximate indication of the of the total level of production in the UK. There is also a strong relationship between the oil prices shocks and exchange rate of UK against currencies according to the investigation of Organisation of economic corporation and development (OECD) (Cashin et al., 2014, p.113).  Therefore, it can be stated that the fluctuations in the prices of the oil and gas can influence the growth and productivity of the nation and it can be stated that the prices of the oil and gas can also influence the exchange rate of an economy or a country.

Oil prices from 2009 to 2017:

 The proposed study is to discuss and evaluate the variation in the prices of the oil market. The data for the oil market of UK was obtained from the official site of the UK. The statistics of oil prices was plotted to analyse the variations and trend of the oil prices. From the (fig 1), it can be stated that the price of the oil is fluctuating from 1999 to 2017. The highest prices of the oil were in 2007 it can also be observed from the graph below; in 2007, the prices were increased due to the financial crises and low supply of the oil. From 2009 to 2013, the prices of the oil remained high and declined in 2015, but from the graph, it can also be observed that from 2017 the oil prices in the UK is again increasing. It can be stated that the prices of oil and gas increase when there is a high demand for oil and gas, but the supply is less (Basher et al., 2016, p.11).

Figure 1: Oil prices in the UK (Basher et al., 2016, p.11)

Demand and supply for oil:

 From the basic law of the supply and demand, it can be stated, “The increase in demand or a decrease in the supply cause an increased in the price and a decrease in the demand or increase in the supply decreases the price”.  The prices of the oil and gas reservoirs provide a reflection of the pressure of supply and demand in a specified time frame (Cunado, and de Gracia, 2014, p.365). It can be observed that whenever the demand for the products of oil is high the government to maintain the supply of oil and adjusts prices. The prices are increased with an increase in the demand in order to save the oil and other products for the future production because the decrease in the supply or the decrease in the reservoirs of the oil can influence the overall production of a nation such as the UK. The prices of oil and gases encourage the production, and it can be stated that the increase in eh level of supply decreases the prices of the products of oil and gas.  The global demand for the oil was recorded as 76 million barrels per day (bbl/day), and the current production of the oil was recorded as “86 million bbl/day, equivalent to 40,000 gallons/s or 31.4 billion bbl/year”. According to the research of “National Petroleum Council”, the demand of the oil would be increased by “103–138 million bbl/day, or 37.6–50.4 billion bbl/year, by 2030” (Cunado, and de Gracia, 2014, p.365). 

Figure 2: supply and demand curve of UK oil (Cunado, and de Gracia, 2014, p.365)

Fig 2 Indicates the supply and demand curve for the oil in the UK the blue line of the graph of the curve shows the supply curve for the oil while the red line indicates the demand curve of the oil. It can be stated from the curve that, as the demand for the oil increases the supply curve shifts to the right. In other words, it can be stated that the graph indicates that after the equilibrium point (where the supply and demand were equal) the demand increased for the oil, which caused a decrease in the supply for oil.

Factors which impact the oil pricing in the UK

 The price of oil is generally referred to the spot prices of a barrel for the benchmark oil. It can be observed that the prices of the oil are different in different economies and it depends on the oil grade of the oil determined by the factors such as the specific gravity of oil and sulphur content. In the UK the oil is traded above the price of US $ 100/ barrel mark from 2010 5to the mid of 2014. However, the prices of the oil were declined by 50% in 2015 (Jadidzadeh, and Serletis, 2017, p.66). A combination of the factors of supply and demand caused this sharp decline in the prices of oil in 2015. The factors, which influenced the oil prices, are as US shale production of oil decrease in prices of the oil by the Saudi Arabia and downturn to the economic recovery of Chain.

Figure 3: oil prices per barrel (Jadidzadeh, and Serletis, 2017, p.66)

From the fig 3, it can be observed that the after 2015 the price of oil faced a dramatic declined which helped the UK economy to grow and increase its productivity.

Market structure of Oil companies in the long term:

On the supply side, oil can be stated that in 2015, strong growth in the productivity of the UK by non-OPEC producers was observed and the growing “US shale oil production” also contributed in the increase of the out and UK economy had an increase in its overall production.  According to the strategy of OPEC producers, Saudi Arabia decreased the oil prices, which led to the decline in the production in the UK.  Saudi Arabia decreased the prices of the oil “to maintain the level of production to defend as well as to grow the market shares by forcing expensive unconventional sources out of the market” (RafieiSakhaei et al., 2016).

 On the demand side, breakdown or slowdown in the pace of growth in China and the slow recovery of the economy in the United Kingdom caused a decline in the demand for oil. By these consequences, downward pressure on the prices of oil was observed in 2015. Furthermore, the consumers of the oil took advantage of a major decline in the price of oil and got the opportunity to stockpile cheap oil, which can reduce their demand for oil in the short-term. While in the long term, the technological advancement will cause a decline in the prices of oil as the technological advancement has reduced the cost of extraction of oil, which will boost the non-OPEC supply of oil.  The rebalancing of the economy of China from manufacturing to services can have a negative influence on the consumption of oil.  Therefore, the growth in developing countries increased the efficiency of the energy and shifted towards the renewable energy in the developed countries (Widya Yudha et al., 2018, p.1272). The net impact of these factors is still unclear, but it can be an applied to a return in long-term prices in line with the marginal cost of supply of oil.

At the current period, the demand of the oil is around $70-100 per barrel. It is stated that the significant decline in the prices of the oil in the UK was due to the economic growth activities such as the cost of production of the business was declined, especially for those business industries who were heavily dependent on the oil inputs (RafieiSakhaei et al., 2016).

PESTEL Analysis:

 PESTEL analysis determines the external factors, which can influence the market structure and performance of the oil industries.

Political factors:

The threats, which can be faced by the oil companies by the political factors, are the decision, which is made by the government. The major threats, which can be faced by the oil companies due to political factors, are as Political instability, Geopolitical conflicts and the majority of governments of oil manufacturing nations control more than of 90% of proven oil reserves as well as 75% of the global oil and gas production as also controlled by them (Uddin et al., 2018, p.108). 

Figure 4: Oil reservoirs (Uddin et al., 2018, p.108)

From (fig 4) it can be stated that the political factors were a great threat to the British Petroleum. In addition, the tax policies are also a political factor, which can influence the oil company.

Economic factors:

 There is a strong connection between the oil industries economy because they highly interact with each other. It is stated that oil and gas are the major drivers for economic growth, in addition, it can be stated that oil prices are connected with the supply and demand of the commodity. Beside these factors, there are also some economic factors which can influence the development and growth of oil company such as Global economic crises, the bankruptcy of the large commercial banks and over debt public as well as private sector in many countries who are a member of OECD (Benes et al., 2015, p.207).

Figure 5: economic factors (Benes et al., 2015, p.207)

Social factors:

 Social factors express migration, culture, religion, demographics and ideological views of the individuals.  Some of the social trends and beliefs can significantly influence the oil industry are increasing awareness. The focus on more friendly fuels and a decrease in the use of dirty fossil fuels such as sand, shale gas and coal are the social factors, which can influence the market of oil companies. Social factors also influenced the productivity of British Petroleum (Benes et al., 2015, p.207).

Technological factors

 The technological factors which can impact the oil companies are as uncertainty over return, cost of development, insufficient use of technology and fundings and the organisation is not using the new technology which causes an increase in the cost of their production (Uddin et al., 2018, p.108).

Figure 6: Technological factors (Uddin et al., 2018, p.108)

Environmental factors:

 Environmental factors represent the landform, climate, flora rock structure and natural resources that are in the reserved of oil companies.  Geographical location also influences the activities and performance of the oil companies because it defines the distance between refiners, exploitation and consumers and it can influence the demand for oil (Widya Yudha et al., 2018, p.1272).

Legal factors:

 Legal factors represent the constitutions and laws, such as the legal authorities impose the law on the organisations, which cause pollution in the environment, and the increase in the tax rates can also influence the oil companies (Widya Yudha et al., 2018, p.1272).

References:

Basher, S.A., Haug, A.A. and Sadorsky, P., 2016. The impact of oil shocks on exchange rates: a Markov-switching approach. Energy Economics, 54, pp.11-23.

Benes, J., Chauvet, M., Kamenik, O., Kumhof, M., Laxton, D., Mursula, S. and Selody, J., 2015. The future of oil: Geology versus technology. International Journal of Forecasting, 31(1), pp.207-221.

Broad, R. and Cavanagh, J., 2015. Development redefined: How the market met its match. Routledge.

Cashin, P., Mohaddes, K., Raissi, M. and Raissi, M., 2014. The differential effects of oil demand and supply shocks on the global economy. Energy Economics, 44, pp.113-134.

Cunado, J. and de Gracia, F.P., 2014. Oil price shocks and stock market returns: Evidence for some European countries. Energy Economics, 42, pp.365-377.

Harrell, L., 2016. British petroleum (BP): a critical analysis of its corporate and international strategies. International Journal of Research in IT and Management, 6(3), pp.143-161.

Jadidzadeh, A. and Serletis, A., 2017. How does the US natural gas market react to demand and supply shocks in the crude oil market?. Energy Economics, 63, pp.66-74.