Oil Prices and the Jamaica Economy a Global Outlook

Crude_oil_prices_in_dollar_and_euro

How have oil prices been trending?

Oil prices began the year at $115 USD per barrel, subsequently falling to approximately $98 USD per barrel by the end of July. According to the OPEC reference basket which is used to measure changes in monthly oil price fell by 11 percent in November. Prices have fallen further to $55 per barrel currently. Historically, oil prices sky rocketed to over $140 USD per barrel during the asset bubble of mid 2008. When the bubble burst prices fell to a low of little over $30 per barrel by mid 2009. Subsequently the prices have been volatile but have now taken a gradual downward trend since the beginning of 2014. This has been having a positive impact on the economies of oil importing countries.

How is the Jamaican economy responding?

Consumer prices fell by 0.5 percent for the month of November, due mainly to reduction in the price of vegetables and electricity on the consumer price index (CPI). JPS reduced fuel prices on electricity bills in November after eight months of consecutive increases in response to falling global oil prices. According to the Fair Trading Commission, oil prices at the pump have fallen by 17% recently compared to 20 percent in the US. Although motorist claim they have only received marginal price decreases. It appears the market is characterized by price asymmetry. Where increases in oil prices are passed on to consumers quicker than decreases. Here retailers pass on the costs associated with oil price increase quicker to consumers than benefits they receive from oil prices decreases. The Jamaican dollar exchange rate depreciated further against the bench mark US, falling approximately 7.5 percent since the start of the year closing at $114.29 to $1 at the end of the trading day on Monday.

How is oil traded globally?

Oil futures are contract signed today for the delivery of a specific amount of oil from seller to the buyer at specific time in the future at a price determined today. For example an oil futures purchaser can enter into a futures contract to purchase 100 barrels of oil at a current price of $55 dollars per barrel which will be delivered in the next three months. In this case purchasers pay for the oil in advance before the oil is received. Even if prices fall you are already contracted to pay $55 per barrel originally which cannot change. To take advantage of further fall in prices, purchasers will have to enter new oil futures contract. Crude oil futures are traded on the New York Mercantile Exchange NYMEX in dollars per barrel and on the Tokyo Commodity Exchange in yens per kilolitre. Crude oil futures can also be the underlying asset traded in crude oil options. Holders of crude oil option have the right but not necessarily the obligation to trade their options at strike price before the end of trading day on the maturity date. Trading of oil future and options are critical to global economic activity.

What are the projections for the future?

According to OPEC, the world economy is expected to grow by 260 percent by 2040. Energy demand will increase by 60 percent and fossil fuel will remain the main source. The world supply of primary energy will gradually increase over the next 40 years; oil supply will increase the lowest by 0.7 percent per annum, coal will increase at a steady rate of 1.4 percent per annum, bio mass 1.5 percent per annum, nuclear 1.6 percent per annum, hydro energy 1.8 percent, gas 2.4 and other renewable 7.7 percent. Commercial vehicle usage is also expected to grow significantly by 2040. These are necessary for transport and commerce in economic growth, there are expected to be more than 500 million commercial vehicles on the roads globally, 300 million more than that of 2011. Growth in commercial vehicle usage in developing countries is expected to increase beyond that of developed countries. Currently there are more commercial vehicles in the OECD. Notwithstanding this, average oil use per vehicle is expected to decrease by 2.2 percent per annum. Any deviations from the global economy from forecast will disrupt oil price projections as well.

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