The Changing Price of Oil and Its Impact on the American Consumers Essay

The Changing Price of Oil and Its Impact on the American Consumers - Essay Example In the words of Lionel Robbins (1898-1984), Head of the Economics Department at the LSE: "Economics is a science which studies human behavior as a relationship between ends and scarce means which have alternative uses." (Robbins, 2007,3). This scarcity definition proposed by Lionel Robbins in 1923 reflects the fact that we have to make economic choices in daily life. Economic goods may be defined as those that are relatively scarce, have value and command a price. The price of a particular good or commodity as always is determined by the laws of demand and supply. Demand may be defined as the amount of a particular economic good or service that a consumer or group of consumers will want to purchase at a given price (www.about.com). Supply may be defined as the total amount of a product (good or service) that is available for purchase at a given price (www.investorwords.com). It is the interaction of the forces of demand and supply in a marketplace that determines the price of a produ ct at any given time. Price is the quantity of payment or compensation given by one party to another in return for goods and services. We talk of individual demand when we refer to a particular transaction made by a buyer or seller at a given price. We speak of aggregate demand when we talk of the entire demand of the world buyers for a particular commodity, in this case, oil. This aggregate demand is thus the sum of demand for oil by all the countries interested in buying this commodity from a certain supplier at a given point in time. The biggest supplier of oil in the world market is a consortium or group of producers called OPEC or the Organization of Petroleum Exporting Countries, an intergovernmental group of presently 12 oil producers. The graph below shows the price of Brent Crude oil per barrel for the four weeks beginning 07 November 2011 and ending on 07 December 2011. Price is indicated on the vertical axis and the time period on the horizontal axis of the graph. From th e movement of oil prices on the graph, we can see that Brent Crude hit a high of $116 on 08 November 2011, probably as the war in Libya was still raging between Gaddafi loyalists and forces opposing the decadent regime. Ultimately as the liberating forces gained the upper hand, Gadaffi was captured from a sewer in his hometown of Sirte. Still, the battle raged on for a few days more as forces loyal to the former leader took their last stand. The OPEC nations meanwhile had temporarily increased their supply to the world in the light of the fact that access to Libyan oil, which totals 5 percent of the world supply, was unavailable during this period. There is a drop in oil price to $107 per barrel on 17 November 2011 as the world debate on what to do in post-war Libya was finalized and funds were released to the emerging leadership and the commander of the liberating forces was even invited to France to talk with Sarkozy and other leaders. Once it was clear that a transition to democr acy was on the cards and there was no danger of further insurgencies or threat of an Islamist radical group taking over, Libya was given its funds, sanctions were lifted and supplies of oil to the world could be resumed. Meanwhile, as Iran and Syria face increasing sanctions, they would like to keep the price of oil as high as possible.

Case Study on Financial Management Essay Example | Topics and Well Written Essays - 2000 words

Case Study on Financial Management - Essay Example The aim of diversification is to reduce the extreme ups and downs in returns and rather to create a consistent return under different economic and market conditions (McGowan, Collier and Young 1992). There are many different asset classes that are available to an investor when making an investment decision. Depending on the return the investor is looking at, the time horizons that the investor is expecting to reap the benefits in and also the level of risk the investor is willing to accept, he or she can invest in a varying combinations and thus achieve diversification of his or her portfolio. Some of the asset classes that are available to us today are money market funds, bonds funds and equity funds. Money market funds are short-term debt instruments that are very liquid and can be converted to cash easily. Treasury bills and commercial paper fall into this category. The risk of loss is lower and pay higher yields than deposit accounts. Bond funds on the other hand pay a regular income, have a longer maturity period and the actual income can fluctuate during economic upturns and downturns since it is for a longer period of time than the money market funds, however they are rel atively safer than equity funds. Equity funds yield much higher returns than both money market and bonds funds however they can be very volatile in the short term and cause havoc in a portfolio. Therefore it is advisable to invest in them for long-term gain rather than short term gain. Diversification can be further classified into geographic, industry and style diversification as well. By this it is meant that we can diversify our portfolios by equity, bonds and money market funds from different regions and countries - which is known as geographic diversification. Sector or industry diversification is investing in equity and bonds from different industries instead of sticking to one particular industry. Style diversification is investing in a portfolio that has instruments that have short term and long term yields or under valued and over valued stocks or all (Adair, Berry and McGreal 1994). The Addendum gives a detailed description of the different diversification strategies that can be used by an individual when combining two classes of assets and gives an indicative calculation of how risk and rewards are leveraged under each strategy by just changing the weight given to the different