Assignment On, Topic: High Oil Prices. Why do they matter and what can be done?

Prepared For, Prepared By,

Introduction:
Oil, as one of the key few material goods on the planet, sets itself as a substance whose value sets economic trends throughout the world. It can affect inflation rates for dependent countries, dominate the domestic GDP for producing nations, and can cause crisis for all industries when it's supply becomes scarce. In the current, post-9/11 world the cost of oil has steadily risen and the question is presented as to how much longer we will even be able to rely on this dominant energy source. Though tensions in the middle east and dwindling surplus seems the logical answer for the skyrocketing costs, there are a number of factors that play into setting oil prices. The price of oil as quoted in news generally refers to the spot price per barrel (159 liters) of either WTI/light crude as traded on the New York

Mercantile Exchange (NYMEX) for delivery at Cushing, Oklahoma, or of Brent as traded on the Intercontinental Exchange. The price of a barrel of oil is highly dependent on both its grade, determined by factors such as its specific gravity or API and its sulphur content, and its location. Other important benchmarks include Dubai, Tapis, and the OPEC basket. The Energy Information Administration (EIA) uses the imported refiner acquisition cost, the weighted average cost of all oil imported into the US, as its "world oil price". The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to try to counter the oil companies cartel, which had been controlling posted prices since the socalled 1927 Red Line Agreement and 1928 Achnacarry Agreement, and had achieved a high level of price stability until 1972. The price of oil underwent a significant decrease after the record peak of US$145 it reached in July 2008. On December 23, 2008, WTI crude oil spot price fell to US$30.28 a barrel, the lowest since the financial crisis of 20072010 began, and traded at between US$35 a barrel and US$82 a barrel in 2009.[3] On 31 January 2011, the Brent price hit $100 a barrel for the first time since October 2008, on concerns about the political unrest in Egypt.

Reasons of High oil prices:

Oil prices are high for three reasons: there is a very high global demand for it, especially from the new powerhouse economies of china and India .Secondly ,The political turmoil and uncertainty in the Middle East has led to concerns about future supplies. It is true that Libya only contributes a small percentage to the worlds oil output but traders in the oil market hate uncertainty. If the stock market is uncertain about a companys prospect ,the share prices will fall- but with commodities, and especially oil, the price goes up. Finally, the main oil producing nations that operates the cartel OPEC have not rushed forward to dramatically increase the supply of oil onto the world market in the light of both of this factors.(and why should they? It means High Profits for them)

Problems Of High Oil prices:

Solutions of High Oil prices:

HERES not much we can do about rising oil prices because we import virtually all of our requirements. And the situation is made unstable by current tensions in the Middle East, which accounts for the bulk of the global oil supplies. Even the worlds most powerful nation is helpless. US President Barack Obamas chances of winning a second term may be affected by oil prices. His critics have pointed out that

US domestic gasoline prices have more than doubled since Obama took officefrom $1.832 per gallon in January 2009 to $3.787 on March 19, 2012. In some areas gasoline prices are as high as $4 a gallon. We dont have such emergency reserves of petroleum products. Oil from a few offshore fields in Palawan is just a small part of our domestic requirements. The government also lost its strategic ability to influence oil prices when it privatized 100 percent of Petron Corp. In power generation, we abandoned the development of a nuclear power plant. For all intents and purposes, the Bataan nuclear plant project can and, in my view, should no longer be revived. Im not keen at pursuing new nuclear power-generation projects, given last years meltdown in Fukushima, which continues to be a problem in Japan, more than a year after its tsunami disaster. So, what are our options? We cannot revive the Oil Price Stabilization Fund, which was adopted during the 1970s to cushion the impact of the oil crisis. At present, we do not have the resources to finance such fund. With respect to oil, the government should continue to encourage exploration activities. Fortunately, foreign investors have maintained interest in drilling for oil, mainly in waters off Palawan, where we have several producing wells. We should also speed up the development of other indigenous energy sources like natural gas. While we lack crude-oil resources, we are rich in other natural resources. We have fertile lands, and we can produce more than we need. Thus, we can increase exports, which will generate foreign exchange to pay for oil imports. The clamor for a review of the oil- deregulation law is understandable because that law was expected to result in lower domestic prices of petroleum products. But it has not delivered on that promise. At the same time, current pricing of gasoline, diesel and other oil products has raised the issue of cartel-like practices of oil industry players. For instance, why are prices of service stations of supposedly competing companies the same in specific areas? Two of the major players operate their own refineries in the Philippines, while their competitors import finished oil products, yet retail prices are the same at the pumps. I dont want to raise false hopes. As I have said earlier, theres really not much we can do about rising oil prices. Removing or suspending the value-added tax on petroleum products will only provide temporary relief, but the government is not inclined to do it because revenues from value-added taxes finance major problems like the Conditional Cash Transfer Program. The latest round of price increases has renewed calls for the repeal or review of the oilderegulation law. In my view, repealing the oil-deregulation law will not solve the problem of

high oil prices. But I believe that the law may stand some amendments to strengthen its provisions against cartel-like pricing, which defeats the objective of the law toward healthy competition. Oil industry players should also accept that despite deregulation, the oil industry remains a sensitive sector of the economy because of its impact on prices of essential commodities and services. Thus, the government has the responsibility of monitoring the domestic oil trade, including prices, to protect the interest of the people.

Recommendations:
Our country imports more than 80% of crude petroleum from other countries. From which country we import, it mainly depends on foreign policy of the country. Which indeed depends on various other policies. So the cost of petroleum products are not in our hand. Both central and state government collects a huge amount of tax on these products. So I think leaving the price of petrol on international market is a proper decision. We consider diesel and kerosene as fuel of common people, and decontrolling their price will directly affect the market. I think government should carry on subsidy for some more time. But the situation is not going to develop, with time passes petroleum will become more and more costly. My solution is, the huge amount of tax government collects from petrol use a healthy part of it in researching the other sources of energy like hydrogen, solar, wind power and there practical use. Government should make a law on it. To deal with the hike of oil price:1) we must recover from near-stagflation economy by improving our exports and reducing our imports. 2) IOC could cut down its unnecessary expenditure. 3) alternative resources like solar energy must be equally utilized. 4) without eliminating corruption and corruptive politicians its very hard recover from these kind of oil price hikes and inflation. It is the correct time to be serious on non conventional sources. Otherwise it will be to late.

In the current scenario where we are facing the problem of economic slowdown, high oil prices is big issue of concern for all. We must have to apply some major reforms in the current policies regarding oil. We are observing a great difference between prices of diesel and petrol which is leading to unbalance economy and higher diesel subsidies are

becoming a issue of worry for government. I think that we have to narrow down the difference between petrol and diesel price but the issue is how? High diesel subsidies are given as diesel is used by farming class people so they get some help. But now the scenario is changing. Due to hike in petrol prices all peoples are switching to diesel fuel vehicles and consumption of diesel is increasing leading to more burden on economy. One solution to the problem is that we can increase the excise duty on diesel fuel vehicles but then also it is a fixed increase while oil prices are increasing regularly. So we should reduce the use of fuel. We can fight with the high oil prices if we convince ourselves, our community, our colleagues that oil is precious and we all are dependent on it so avoid personal cars when you have the option of public transport. Some regulations can be made like only cars with odd number will be used for monday and even digit number for tuesday and so on.