The Role of Risk management in the managing price Volatility in the Global oil and Gas Market
Energy is a basic requirement for all human activity. A main characteristic of every culture and society throughout history has been the way in which it has used the energy resource at its disposal, and the per capital consumption of energy is the common measurement of its level of development. The oil and gas market are the driving force of the global economy and accounts for an ample of the world’s energy consumption. This is the process of organizing, at various levels, the commerce of bringing Oil and Gas from the wellhead to end-users. Price volatility is the “Sustained, unpredictable price movements that frustrate the economics of high-load-factor use of natural gas in industrial, chemical, and power-generation applications (on the upside), or frustrate the organized, sustained growth of deliverability from domestic onshore unconventional resources.”(Task Force on National Gas Stability, 2010) These Erratic and Unpredictable changes in prices and the dominant reliance of the economy on crude create concern, uncertainty and indirect cost to the economy. This affect decision making and in other to manage the concerns, uncertainty and indirect cost that are associated with the oil and gas markets, Risk management is introduced. Risk management is the systematic ongoing process by which an organisation identifies, prioritizes and implements programmes to reduce the chance of negative outcomes on a business (Wayne Harrop's). In this case effective risk management helps to assess the unpredictable changes in prices, its possible economic impact and Produce strategies to curtail the impact of price volatility. The focus of this review would be to accentuate the causes of price volatility, and how effective risk management minimizes dangers of price volatility in the global oil and gas market.
Origin of Price Volatility
Causes of Price volatility
There lots factors that are responsible for the abrupt changes in the volatility of price in the oil and gas sector. These factors posses a positive or negative impact depending on the scenario and movement of the market forces (the demand and supply) or mostly due to the market force or various scenarios. Below are some of the factors that could affect the volatility of crude in an oil and gas market.
The price of crude oil rises if the cost of producing and supplying is high, or if there is more consumers willing to buying crude at a current price (i.e. when demand is greater than supply). The price of crude will fall if the cost of production and supply of crude is low or if people are willing to buy less crude at a given price (i.e. supply is greater than demand). The price of crude is said to be stable when the price at which the quantity demand over time by the consumer matches the quantity the producer is willing to supply. In general, the price of a commodity, such, reflects producers’ costs and Consumers’ willingness to pay The vitality and responsiveness of the supply-demand balance is the most important factor determining whether price volatility in either direction will occur. As with price drivers for other commodities so it is with oil and gas. The interaction of demand and supply for global oil and gas has been the major economic driver of price volatility in the global Economy. As more and more demand is made of oil and gas, the price for the commodity has responded either positively or negatively. Positively here refers to increase while negatively refers to decrease in prices.
The Organisation of Petroleum Exporting Countries (OPEC) emerged in 1960 due to the need to systematically respond to increases in the global oil production. It comprises of 12 top member oil exporting nations with 81.3 percent of the world's proven crude reserves, up from 79.6 percent in 2009 (lawler, 2011). OPEC basic function is to coordinate and unify...
Please join StudyMode to read the full document