Oil Prices Fluctuation

Question: What fluctuates oil prices across the world and the impact it has on social, economic and environmental issues against the UK In the last decade in relation to Libya civil war causing a shortage of oil supply and prices to increase. Answer: Oil and Gas Management Research Methodology The focus of this paper is to identify what are the main reasons that change oil prices. It also tries to find out what social, economic and environmental issues are arising in UK due to the changes in oil price. Strategies of UK government to control the impacts of oil price changes, has also been discussed. The methodology adopted in this research paper is based on secondary findings, which have been found by in other research papers. In this paper, various techniques by the researchers have been incorporated to ensure the collections of information are appropriate and relevant, which are to be used in order to find out the research questions. Research Philosophy: It is important to choose research philosophy to conduct a research. It describes how to develop knowledge for the research and classify the nature of the knowledge. There are three kinds of research philosophy, such as, positivism; interpretivism and realism (O'Leary, 2013). Positivism deals with methodology, which is structural. It analyzes the statistical observation, which is quantifiable. Interpretivism deals with interpretation of elements of a study. It integrates human interest into the research study. In this approach research, give importance to their beliefs and values to justify the research problem. It criticizes the approaches of positivism. Realism deals with the reality and beliefs that already exist. It describes the scenario by explaining what is exactly happening and the real experiences of a particular situation. The paper follows positivism approach (DePoy and Gitlin, 2015). This is because the paper aims to answer some research question and does not discuss only the subject of the issues. This research report will select data and make their analysis; hence, it is quantitative in nature. Moreover, it will also describe the factors on which the data or variables are deviating; hence, it is qualitative. Research Approach: It is essential to adopt a relevant approach for conducting a research. It is very critical to develop an appropriate approach of a research, which will help to identify and facilitate the findings of the problem and its solutions. There are two types of research approaches, such as, inductive approach and deductive research approach (Smith et al., 2012). Inductive approach is associated with generating new theory or developing conclusion based on the results emerged from the given data. In this approach, the researcher observes the data and tries to set a general proposition from that particular experience. Deductive research approach aims to test theory from the result obtained from data. It emphasises on causality (Creswell, 2013). In this approach, the researcher studies what others have done and try to relate those findings to the existing theories. Basically, it tests the hypothesis by analyzing the sample data. It identifies whether the sample is following t he general theory. In this research paper, the approach of the study is deductive in nature. It identifies the factors that can affect the changes in oil prices. After identifying, research will focus on how much it has actually affected the price of oil. Similarly, it will also address the social and economic issues that have been faced in UK due to the oil price changes. From the sample observation or studying the effect, it will explain the how oil shocks affected UK economy in terms of GDP and CPI inflation. Research Strategy: Appropriate research strategy has to be selected based on the research question and aims of the research. There are different research strategies that can be used to conduct a research, such as, experiment; case study; survey; action research; ethnography; grounded theory. In most of the research, there are overlaps among the strategies. A case study is preferred when research questions take the form of how; what and why (Yin, 2013). This paper requires adopting a case study strategy to answer the research questions, which aim to answer cause and effect of oil price changes. Hence, this research paper involves investigating phenomenon in real-life context. A case-study based research relies more on multiple sources of evidence and this paper solely depends on the sources like articles and journals. This paper collects data and evidences from previous research works. The origin of oil price volatility has been found from World Trade Report, 2010 (Kilian, 2010). Simi larly, this research requires to collect information on the economic and social effects of oil price change on UK economy, from various research papers. This paper explores a single phenomenon oil price shocks by explaining variety of methods followed in different research papers. It allows the researcher to obtain in-depth knowledge and rich mix of information from various studies. This research work also involves various information and data from different sources. Advantage of this strategy is that it allows the researcher to assess a situation by gathering data and results from the previous work, instead of taking any sample data. Data Collection: Method of collecting data is of two types, primary data collection and secondary data collection. When data are collected through direct field survey, it is primary in nature. Primary data can be collected by designing questionnaire or taking interviews. The data is secondary, when it is already collected and used for different research works. Secondary information is collected from various books; journals; news reports or any kind of internet sources. In order to conduct our research work, data and information is collected from the writings of various scholars in their research works, which are related to cause of oil price changes and its impacts on UK market. Data Analysis: Data analysis methods are dependent on the nature of data and the research objectives (Barratt et al., .2011) In order to find out the factor behind the price shocks and its impact on UK economy, this paper uses two models. These two models are adopted from a research paper (Lorusso and Pieroni, 2015). To find the causes of oil price shocks, the changes in the variables are analysed. Such variables are global crude oil production; real price of oil; index of global real economic activity. After identifying the oil shocks and the responses all over the world, this research estimates the impact of this oil price changes on UK economy. Growth rate of real GDP; CPI inflation; the short-term nominal interest rate and real government deficit have been considered, in order to test the consequences. The effects of oil supply shocks, aggregate demand shocks and oil specific demand shocks on these macroeconomic aggregates will be discussed with the help of regression analysis do ne in the research paper by Lorusso and Pieroni (2015). This research is based on the time period 1976-2014. The study will look into several episodes associated with the major changes in real oil price (Lorusso and Pieroni, 2015). Based on the least-square estimation, this paper will assess their effect on UK macroeconomic aggregates based on the several research papers. Ethical Issues and Limitations: A research work involves collecting data or information whether directly or indirectly. If the information is personal or researchers must take the consent from the respective individual. In some cases, information is confidential and strictly has some obligations to fetch this kind of information, either by an individual or by the government of a country. So, research requires prior permission to access those data. Even if the data has been obtained, the source of it should be kept confidential by the researchers or the data should not fall under wrong hand (Gray, 2013). However, in order to conduct this research no ethical issues have been encountered. The report is based on secondary information, which is directly obtained from various sources in the internet. Hence, it does not require any prior permission before working on it. This paper is based on not only some secondary data but also on research works done in the same context. The only differen ce is that, this paper does not only incorporate a single research paper but combines various results and findings in order to find the origins of the oil shocks and its consequences on UK economy (Yoshizaki 2011). However, this research paper has some limitations. The models developed in it are obtained from other research papers. It only considered the numerical values given on various papers and analyses the changes and impact of oil price. It does not verify the sources. The variables that are considered in the first model, are necessary to explain the changes in oil price, but may not be sufficient. Even the residual or error term of the model describes whether there are any changes in due to other factors, but it does not explain what exactly the factors are that might cause the changes in the worldwide oil price. Moreover, the impact of oil price changes in UK economy is based on the first model, which describes the scenario of the world (Lorusso and Pieroni, 2015). This implies that the world VAR model is not necessarily capable in explaining the scenario in the UK market. Similarly, there might be some other factors apart from the variables taken in the second model which affect the UK s macroeconomic variables. Again, it must be mentioned that the macroeconomic variables, which are taken as indicators to explain the condition of an economy, are not the only indicators. However, since the research overviews the findings and observations of many other papers and articles, the scope of the paper is versatile in nature. It is capable of answering its research questions, which are also represented diagrammatically. Findings and Discussion Impact of Falling of Oil Prices It has been observed that due to the Libya War, the price of the crude oil has fallen by 50%. The fall of the pricing had a significant impact on transport system and other associated business cost. However, the parameter of oil price was considered as effective news for the importing countries, such as Western Europe, India, China and Japan. However, countries such as Kuwait, Iraq, Venezuela and Nigeria had a severe impact on the price fall. A graph is provided which highlights towards the fluctuation of oil price in the economy of the United Kingdom. Figure 1: Fluctuation of Oil Price (in $) (Source: Lippi and Nobili 2012) Thus from the above graph, it can be clearly analyzed that there was an effective rise in the price of the oil products during 2007-08. However, the country experienced effective price drop in the next year (2009), and thereby (almost) maintained a constant slope (Webster and Dunning 2013). Impact on Oil Consumers Lowering of the oil prices focused towards reduction in cost of living. It was analyzed that there was a relative fall in the transportation charges, which leaded in lowering the cost of living and thereby minimizing the inflation rate to a huge scale. Fall of oil price resulted in the fall of UK inflation to 0%. With the stagnant real wages, this fall associated to cost of living was considered as an important virtue for the Western consumers. This in turn magnified the real GDP for the United Kingdom. Impact on the Overall UK GDP after Libya War (Estimated) Figure 2: Impact on the level of real GDP, 2015-2020 (In the United Kingdom) (Source: Kilian 2010) From the above graph, it can be analyzed that there is a huge fluctuation in the price of oil in the United Kingdom. The Scenario 1 highlights towards the scenario where the price remains persistently low at $50 per barrel between 2015 and 2020. The initial impact finds to rise the level of UK GDP by 1.2%. The effect of the peak in 2016 tends to increase by 1.4% of the baseline level. The impact is observed to have trailed off to around 0.6% of the baseline as the United Kingdom is highly exposed to cheaper imports from other countries, as an effective aftereffect of Libya War (Reboredo and Castro 2014). In Scenario 2, it can be effectively observed that the oil price generally recovers gradually to US $73 by 2020, based on the latest IMF projections. The UK GDP has been estimated to be around 0.5% and higher, within the limited period of 2015-2020. In Scenario 3, the oil price tends to recover to a huge scale, which mainly recovers to mid 2014 (by 2020). The basic impact of economy was estimated to be around 0.2% on an average scale of 2015-2020. This is associated to minimal effect on the GDP level by 2020. The Figure helps in understanding the historical evolution of the structural shocks considering the model emphasizing on the period of the Libyan Civil War. Interpretation of the present model helps in understanding the factors responsible in analyzing the impact on the oil prices particularly in the UK. As mentioned, this primarily focuses on the episodes associated with the viral changes in the real oil price. The estimated results provide us with the findings for the samples within the mentioned period. This successively focuses on the different consequences of oil prices in the UK economy. However, the present finding helps in understanding and analyzing the sample this will also help in explaining the variation in oil price in the recent years in relation to the Libyan Civil War. On analyzing the concern of the surge in the oil price, which occurred during the period of the Libyan Civil War there, has been a clear evidence providing data on the series of positive oil market specific demand shocks. As a result, serious concern about political instability in UK have emerged protests taking place in other parts of the country as well. Some signs of civil unrest have also been observed in certain parts of Egypt, Algeria and Lebanon. Repeated oil market specific demand shocks, which occurred during this period, have been explained by the sharp rise in the investors demand as the financial crisis unfolded. As the financial crisis unfolded, the investors tried pulling out the complex financial demands and assets in search of a safer place. Furthermore, it can also be noted that an unexpected increase in the aggregate demand, particularly emphasizes on the expansion of the global oil production that becomes significant after a specific shock occurs which leads to a significant increase in the overall global real economic activity and a very sharp, persistent and statistically significant increase in the real oil price. Unanticipated expansion of the specific oil market demand does not significantly influences the global oil production, but it produces a temporary increase in the overall global economic activity, which is significant to an immediate large increase in the real oil price. This parameter in particular produces a highly persistent and significant effect. Thus, the results and finding helped in understanding the overall crisis in the oil supply demands, which arises primarily due to the Libyan war revolution. In particular the results primarily emphasize on the shortfalls in oil supply that leads to small and significant effects on the oil price changes. The oil supply disruptions in one region are therefore compensated by an overall increase in the endogenous oil supply from other regions of the world. These changes are primarily accompanied by with the sharp increase of precautionary demands for oil. Turning to more recent case of oil price fluctuation, it has been found that the Libyan Civil War caused a steady increase in the demand as well as the price of the oil. This in particular coincided with the very large swing in global real economic activity. Indeed, it is during this period of time there has been a sustained global demand pressure and there has been a steady increase in the oil price more than the other commodity prices. This particular effect caused a sustained global demand pressure and thus the oil price increased more than the prices of the other commodities. The latter effect occurred because of the stagnant supply in crude oil during the post Libyan era. Thus, this model provides an assumption of the adaptive expectations, which highlights in the economic agents and thereby revising the expectations of the future oil prices during each of the period. The major factor associated to the context highlights to the consequences of Libya War, which still monitors the UKs economy to a huge scale. The stickiness of the downward price adjustment focuses towards the concept that the impact of oil shock tend to limit the countrys economy to a huge scale. Falling of Oil Price in Entire Europe It was estimated that the oil importing countries such as India and China effectively welcomed the fall of oil price. However, it was also formulated that there was a deeply fearful prospects available which tend to effect the European and global economy to a massive scale. Firstly, the fall of the oil price reflects towards the weak global demand. This is followed by the continues low growth all around the world. This was mainly holding the economy of the country to a huge scale. Thereby, fall of the oil price reflected to the concept of low global growth of the European countries, especially the United Kingdom. In this section, using the specified model, the researcher has analyzed the identical shocks on UK macroeconomic variables, which were GDP growth, normal interest rate, CPI inflation and the real government deficit. The response of the GDP growth associated to the oil supply disruption is found to be negative in all the quarters. However, it can be analyzed that one standard error confidence intervals indicates towards the negative response is significant for the first five quarters. It can be assumed that the response of the GDP growth associated with the demand expansion is considered positive. However, this is statistically not significant. Moreover, it has been observed that seven quarters, resulting from the shocks turn to be negative.. As an alternative, one standard error confidence interval indicates towards the response of GDP growth to the oil market specific demand shock. It has been determined that this data is statistically not significant at all the horizons. The resear cher has evidences some declination within the GRP growth rate within the six quarters after the shock occurs. While inspecting the inflation response, it can be noted that the negative oil supply shocks generally lead to significant increase in the CPI inflation throughout all the quarters. Moreover, the impact of the increase in the demand among the UK consumers price levels. It was considered positive and statistically significant from the 1st year onwards. The maximum is reached within three years after the Str. Shock appears. Finally, the impact of the expansion of oil market specific demand upon the UK inflation was considered to be around zero in all the quarters.With the increase in the aggregate demand at the initial stage, there is a negligible effect of the UK output growth. However, in terms of long run they tend to depress it. The positive unexpected global economic shocks tend to stimulate the UK real GDP in terms of growth. The offset of growth retarding factors are found to possess effects on the hiked price of oil. However, as this stimulus disappears within the time scale, t he response to the UK GDP growth slowly tends to become negative. It had been estimated that positive precautionary demand shocks have a very considerable impact on the GDP growth. Moreover, it has no effect on the domestic inflation. From these findings, it can be analyzed that the precautionary demand shocks have insignificant effect on the domestic GDP growth along with the CPI inflation. This was because the UK is considered as an oil producer country. Thus, the UK economy had a low affect on the fluctuations within the inventory holdings as compared to the typical oil importing countries. This is because it had the possibility to magnify the self oil production to self insure against the interruptions of the foreign oil supplies. One of the biggest fears, which was highlighted in Europe at that moment, focuses in developing slide for the deflation. The EU inflation was observed to have fallen to a five-year low (0.4% by August 2014). In addition, 31% by Euro zone goods. This was the concern for limiting the factors of deflation, as it caused several macro economical issues. These issues are as follows: Lowering the consumer spending along with the investment: As the consumers and the firms delay in spending and investments Increased Real Debt Burden: This was particularly an effective problem which was associated to the Euro zone economies, which tend to find harder to reduce the GDP ratios. Falling of the oil prices provided some relief to the consumers of the United Kingdom. Falling of the oil products focuses in helping to increasing the spending and thereby minimizing the inflation rate. Thus, countries such as the United Kingdom experienced effective deflation period to a huge scale. Other Economic Impacts of Lower Oil Prices The reduction of the profitability associated to alternative energy sources was highlighted to a huge scale. The part of the fall of oil price was mainly due to the countries (OPEC countries, such as Saudi Arabia and Kuwait). These countries wanted to protect their oil markets and thereby not to lose any market share. Thus, the emergence of the other energy sources was minimized to a huge scale by these countries in order to protect their economies (Mohaddes and Pesaran 2015). It was estimated that fall in the oil prices may have delayed the investments into an alternative greener forms of energy. This would lead to the invention of modern technological gadgets, such as electric cars. Thus, the modernization of the concepts associated to the Western countries such as the United States of America and the United Kingdom hampered the economy of the OPEC countries to a huge scale. All these factors, which were completely linked to the Libya War, seemed to have created a huge turmoil on the global economies to a huge scale. Reflection of the Results of the Economy The work in this study is based on the relationships between the oil prices and economic variables consigning to the UK economy. The empirical research is endogenous to in terms of macroeconomic fundamentals and identifies the growth in a two-way method. Various insights emerged from the analysis. At the first, oil prices with aggregate demand were studied and later oil prices were studied with macroeconomic aggregates. The analysis of demand and supply shocks were underlying when the transmission was studied using UK economy. There were changes related to the real output level in both developed economies of the UK and USA (Mohaddes and Pesaran, 2015). The important reflections made in the country are highlighted in two points: As global demand shocks are the main drive for fluctuation; the other reason being the speculative shock that makes changes in oil prices on the world economy. The movement between oil prices and prices of other commodities is majorly explained by global demand (Juvenal and Petrella, 2014). The result corresponding to the world with reference to macroeconomic fundamentals showed that such volatility was damaging and cause unrest in macroeconomic influences that presented a fundamental barrier to future sustainable growth if is not corrected or checked on time (Ebrahim, et al., 2014). In reference to the world analysis, there was growing nervousness because of the increase in prices of oil shocks hit the world with the global terror. Countries like USA, UK, London, Germany, France, Sydney and China. Investors concern even heightened when tension in the area increased the fuel prices and threatened the fragile global economic recovery. This also led to a significant increase in the risk premiums of the economy with a lot of panic selling in the market (BBC News, 2011). Therefore, the changes with respect to stock market showed lagged behaviour worldwide. In addition, in case high emerging economies showed high and stable demand. The oil shocks were caused due to the supply side bottlenecks. Therefore, this can be seen as in context with the market efficiency and behavioural finance literature in the capital market (Sehgal and Kapur, 2012). Moreover, the OPEC was insufficient to control the oil prices in the world economy, though the influence of OPEC was temporary. The future of oil prices seemed to pressurize in an upward direction from the present levels of global oil production. Hence, the impact was more on price and the availability of alternatives to energy and the rate, which the production declined. Therefore, there was need of policies to encourage and avoid efficient oil use and reliance on energy alternatives. Recommendations It can be summarised with some recommendations that needs to be taken by the policy. Some of the recommendations are enlisted below. To reduce inflation, while enhancing the positive effects of oil prices. Consistent inflation in oil prices results in lowering of GDP growth during the time of crisis. This will in turn result in persistent declining oil prices, further reduces the dominance of demand than supply. This is the consequence of many factors such as lack of interrupted that will create excess/surplus capacity once determined (Ftiti et al., 2014). To increase taxes or reduce subsidies on oil prices, which is considered good in terms of economic and environment, terms. To dictate a response shocks affecting demand and the level of slack in the economy. Hence, there should be a favourable policy to stabilize the output gap that appears as a key objective for the central banks. This key objective will not only result in welfare, but will also contribute to a lower volatility of wage and price inflation. The another policy should be in reflecting the decline in current account deficit and inflation moving with policy targets has permitted several central banks to cut on interest rates. There is also need to establish stable inflation and investor confidence on account of any currency pressures. With even change in exchange rate depreciations will result in oil exporting countries to adjust a negative term of trade shock and to bound the impact on aggregate demand, keeping in mind changes done in the balance sheet that can lead to a challenging environment (Baffes et al., 2015). Now that interest rates have reached zero, there is a need of ability of the monetary authorities to meet the inflation target (Sussman and Zohar, 2015). Conclusion In this research, the causes and consequences of the oil price fluctuations in the UK economy have been studied. The experiential research focuses on the two-phase methods. In the first case, the oil prices were determined using World oil price from aggregate demand and market demand of oil supply. In the second case, the oil prices were assessed with the structural innovations estimated in the first phase on macroeconomic aggregates such as real GDP, Inflation, interest rate and government deficit in the UK. It was brought forward that the changes in price, changes because of oil supply have been very small in the mid 1970s. The macroeconomic aggregates have shown shock affecting oil prices. GDP growth has considerably gone down when there have been negative oil shocks. Previously, it showed small variations in the growth of output, but in the long run, the reduction seen is volatile. Hence, oil shocks have raised the UK inflation. In addition to monetary policy, aggregate demand shocks and market demand showed a nominal interest rate to rise. It also depicted that because of the increase in real oil prices, there has been increase in UK finances due to high oil revenues. To conclude, this paper provides the empirical research that is practical and gives promising results to understand the causes and consequences of oil prices across the world and its influence on social, environmental and economic issues against the UK in the last decade. References Barratt, M., Choi, T.Y. and Li, M., 2011. Qualitative case studies in operations management: Trends, research outcomes, and future research implications.Journal of Operations Management,29(4), pp.329-342. BBC News, (2011).Oil prices rise as Libyan conflict intensifies - BBC News. 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