Causes of Erratic Oil Price Fluctuations on a Global Scale Essay

1641 Words Apr 26th, 2014 7 Pages
Causes of Erratic Oil Price Fluctuations on a Global Scale
Crude oil is a significant commodity that has a far-reaching global economic impact. This is mostly because it is used as a primary raw product for extracting various forms of energy, such as diesel, petrol, and kerosene. The products extracted from crude oil are used in the various facets of human life. For instance, diesel is a crucial component used in manufacturing facilities (Mankiw 115-133). There are constant fluctuations in oil prices, making the price of a barrel of crude oil vary on a minute-by-minute scale. Fluctuations in fuel prices can be a primary factor in the cost of transportation and manufacturing to name but a few. Therefore, fluctuations in the price of
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To this end, it is vital to analyze how individual factors cause fluctuations in crude oil prices. In doing so, both the microeconomic and macroeconomic concepts will be applied so as to provide a conclusive discussion of what causes the erratic fluctuations in oil prices.
1. Speculative Trading
The first cause of erratic price fluctuations on global stage is speculative oil trading. Speculators in the oil market are arguably the main case of oil price fluctuations. In this scenario, a speculator is an individual who holds onto oil commodities when he expects that the price of oil will increase. It is alleged that the sustained volatility of global price of oil between 2003 and 2008 was a direct result of speculative trading (Mankiw 115-133). The explanation to this fluctuations lies on the vital shifts in future markets of oil, which occurred approximately at the same time as when the prices started to rise. Traditionally, oil futures markets were used to lock prices at which future oil should be bought or sold at a future date (Carollo 61-98). For instance, in 2003, financial investors participated in oil future markets anticipating that they would make huge returns. Gigantic swings in the commodity price of oil and related products ensued.
It is believed, by many observers and analysts alike, that this increased demand

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