Producers' Reaction to Raw Material Price Changes.

Topics: Petroleum, Peak oil, Price of petroleum Pages: 7 (2318 words) Published: June 13, 2013
Table of Contents

Introduction
1. Crude oil: what influences the price?
2. Use of Gasoline:
2.1. Gasoline in the U. S.
2.2. Vehicles on the roads
3. Determining gasoline prices
3.1 Gasoline price depends on crude oil
Conclusions
List of references

Introduction

These days all over the world people use products of crude oil. Most of people cannot imagine their life without products such as diesel or gasoline. However, these are only the finished products, which go through specific stages of production. They are made out of crude oil, which sometimes is called „black gold“. Fuel; however is not the only production made out of crude oil. Lubricants, asphalt, paraffin wax, tar – all these are product made out of crude oil. As stated by US Energy Information Administration (EIA): estimated consumption of oil in the world in 2011 will be 87.421 million barrels of oil each day. Obviously, crude oil is an important material in the modern world. It has an important role in economy as well. The cost of crude oil affects economy both directly and indirectly. Nowadays, debates about rising prices of fuel or heating are almost an everyday topic. The price changes of fuel are always mentioned on financial news on TV. Naturally, it is interesting what influences the cost of crude oil. How the rise or fall of price affects the price of fuel, and how businesses deal with the fluctuating prices. 1. Crude Oil as a Raw Material

When talking about product price changes it is important to understand how the price of raw material is calculated and how it is affected. The perception of how the price is set for the raw materials gives an opportunity to better understand the price of the final product, and all the fluctuations related to the final products’ prices. Also, it helps to recognize how various political decisions or world-wide events, including disasters or new innovations, affect various markets. As for crude oil prices, the statistical and analytical agency within the U.S. Department of Energy called Energy Information Administration (EIA) has defined seven key factors which have an influence on and each contribute to the price of crude oil. 1. Production. The Organization of Petroleum Exporting Countries (OPEC) consortium provides about 60 percent of all the oil production traded on international markets and 40 percent of the world’s oil production. All actions and statements of this organization can and do affect world oil prices, because of the dominant crude supply market share. Changes of the amounts of crude oil production lead to changes in price. If OPEC cuts the production, it generally means a rise in price of oil. 2. Supply. The other oil suppliers still represent 60 percent of the world’s oil supply. Even though non-OPEC suppliers as a group are 50 percent larger than OPEC, they have almost no spare capacity. Non-OPEC suppliers are considered to be “Price Takers”, rather than “Price Setters”. They respond to market prices, not like OPEC, who manipulate them. Consequently, non-OPEC suppliers practically produce near to full or at full capacity. Any fault in production has the effect on increasing oil supplies. As well, it gives OPEC the capability to further manipulate world supplies. 3. Global oil inventories. The supply and demand is balanced by global oil inventories. For example, if more oil is produced than demanded, the excess supplies can be stored. This principle also works in reverse order. If consumption exceeds demand, inventories can be used to meet the growing demand. The bond between oil inventories and oil prices makes corrections possible in either direction. If oil futures rise in comparison with the current spot price for oil, the need and urge to store oil will increase. As well, spot oil prices will drop, if market makers notice an inventory build. That is the response to balance demand with supply. 4. Financial markets. Oil is not only sold by its...
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