Good Example OF Essay On Falling Prices OF Gasoline And Natural Gas: Signs OF A New Trajectory
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The recent fall in the prices of gasoline and natural gas has proved all the past apprehensions about oil depletion and the ensuing rise in prices to be wrong. The plunge is continuing for some time and its magnitude has also taken the world in surprise. The world has experienced a number of oil shocks before which has led to uncertainties in the prices and has created turmoil in the energy sector. But the picture today is quite contrary to what we have seen and believed before. In this analysis we look deeper into the causes of changes in the gas prices with a wider view on the recent fall in the prices of crude oil. We also discuss the effects of this fall on the various sectors of the economy and also on the global economy as a whole. Our discussion will lead us to a predictive analysis about the future directions of the prices, its effects, and the policy implications of such cause-effect relationship. The policy prescriptions can be viewed as future directions that the economy should take so that the welfare at large is maximized. We begin our analysis with a brief description of the recent changes in the prices of gasoline and natural gas.
Recent Plunge in the Price of Gasoline and Natural Gas
The prices of gasoline have come to a two year low in December, 2014 falling by 30% in two years time. The natural gas prices have also tumbled but less violently. The price of natural gas has fallen by 9% since the February 2014. Natural gas as well as gasoline prices are subject to seasonal fluctuations. In the winter months the price tends to increase due to increase in demand for fuel for room heating purposes. But the US is facing a warm winter this year which has reduced the demand for fuel for space heating purpose. Moreover, the energy sector in the US is in a boom. The increase in the supply of oil and natural gas has also contributed to the fall in prices.
Though we can find some short terms reasons for the fall in the gas prices this winter, a look into the past fluctuations will tell us that the prices rise and fall due to a number of reasons of global dimensions. The international prices of crude oil tend to fluctuate due to a number of reasons. Global recessions tend to reduce the demand for crude oil and lead to the fall in its price. Often political turmoil in the oil producing nations has resulted in the shortage of the supply of crude and a resultant rise in its price. Natural calamities can also affect the price of gas. For example during the hurricane Rita and Katrina in 2005 the supply of oil took a downslide because of the shortage in supply from the refineries in the Gulf of Mexico.
There are a number of studies on the changing prices of gasoline and natural gas. We have touched upon a few causes of the fluctuations in the price of gas. But in the long run it was believed, until very recently, that the price of gas will take a upward turn. We know that fossil fuel is an exhaustible source of energy. The oil that the world is extracting for its use now cannot be replenished in an economically viable time frame. So there were concerns worldwide about the future path of the growth in the supply and demand of crude oil. Analysts pointed out that the gradual depletion of this valuable and exhaustible natural resource will lead to a situation of scarcity and lead to the sky-rocketing of the price of crude in future. Moreover, with the growth and development of the countries of the world the demand for this economically important resource will be constantly on the rise. This combined with the gradual depletion of natural oil will create oil crisis in the future. But the recent trends have proved the fears of the policy makers, financial analysts and economic thinkers wrong. Let us now analyze the long-term causes behind this fall in the gas prices that the world is experiencing in the last two years.
The Causes of This Reverse Trend
Economic analysts have pointed out to some recent changes around the world that has caused the fall in the prices of crude and in effect the fall in the price of gasoline. The primary cause in the fall as cited by the theorists is the fall in demand by the major countries of the world because of the ongoing recessionary situation that the global economy is experiencing now. The supply of crude has also increased due to the discoveries of new oil wells and the innovation of advanced technique of extraction of oil. But a careful analysis of some long-term changes in the world economy will tell us that there is more to this story of falling demand and rising supply.
The oil shocks in the past and the concerns about the depletion of natural oil have raised alarm worldwide in the last few decades of the past century. These concerns have led to the call for a sustainable use of natural gas through the various earth summits and environmental conferences. The Kyoto protocol and the Rio summit have made the countries come together and make targeted approach towards the cutting down in the consumption of oil and natural gas. These targets have led to the innovations of fuel efficient cars, use of non-conventional sources of energy like solar and wind energy and also the spread of awareness all over the world which have made people use fuel more judiciously. These changes over the last five decades have been responsible for a long-term fall in the demand for gas.
The recent impressive development of the Information and Communication Technology (ICT) sector has also contributed greatly to the fall in the demand for gas. A number of works which needed our physical presence at the work site can now be done online. We can do our banking through the internet and cell phones. Even nowadays we don’t need to drive to our workplace. We can manage our work quite well from our home as well. A number of jobs are being outsourced nowadays and does not require the physical presence of the personnel at the work place. These developments have reduced the requirements of travelling and thereby reduced the demand for fuel.
Many of the developed countries of the world are now facing a trend of negative population growth rate or very low growth rate. This means even if the per capita consumption of gas remains the same the future demand for gas in the developed countries will fall as population declines.
In the developing countries a large section of the population still uses biomass as their primary everyday fuel for cooking and lighting purposes. The policy makers in most of the developing countries are aiming at replacing the usage of biomass with more clean and sustainable form of energy for the poorer sections of the society. The usage of solar PVs is on the increase. Use of bio-gas has also become common in the rural areas. Thus we can see that even in the developing countries, where the economic activities are on rise, there is no potential shift in the demand for oil because of the shift in the energy options.
The above discussions point to the fact that the demand for gas will not tend to rise to very high proportions in future. The supply will increase to some extent due to the use of advanced technology of refining and extracting. Let us now look at the effect of the recent plunge in the crude oil and gas prices.
The Effect of the fall
The fall in the price of gasoline and natural gas has come as a blessing to the consumers. The immediate effect may be an increase in the demand gas. An adverse impact will be the less judicious use of fuel. The oil producing countries will be adversely affected. The oil-rich Middle East countries will face a fall in output and production. It should be noted that these countries are mainly oil-producing countries. The primary source of their national income is the export of crude oil. If the fall in the crude oil that the world is facing recently is a sign of a long-term change then the oil-rich countries have to model a new path of growth and development.
The nations in the developed block will face mixed effects. The households will be benefited. Some industries will face a fall in cost due to the fall in the price of an important source of energy. But the producers of crude oil will face a setback. The oil refineries will feel the surge in activity due to the greater import of crude oil. The developing countries should also reap the benefit of the fall in the crude prices that will give a boost to the industries.
Concluding Remarks and Policy Prescription
The discussion has already made some implicit suggestions about the policy to be followed in the face of this global plunge in fuel prices. If this price is only temporary in nature then the fall in the domestic price of gas should be checked by imposing some tax on the sale of gas as the fall in the price will send a wrong signal in the economy and lead to non-judicious use of fuel. If the price fall suggests a long-term change in the price of crude, the petroleum producing countries should take caution and look for alternative sources of generating income to sustain the growth process.
Whether the recent plunge in the crude prices points to a long-term reversal in the trends in the prices or not, the effort towards the use of alternative and sustainable sources of energy should be maintained continuously. The renewable source of energy should be the primary means of fuelling the future world which ensures sustainable resource use as well as a cleaner environment.
Kilian, Lutz. "Explaining Fluctations in Gasoline Prices: A Joint Model of THe Global Crude OIl Market and the U.S. Retail Gasoline Market." Energy Journal (2010).
Puko, Timothy. "Natural Gas Slides to Near a Two- Year Low." Wall Street Journal 22 December 2014.
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