Escalating Global Fuel Prices and Its Effects

Abstract

Despite many attempts to control the escalating global fuel prices, the efforts have proved to be fruitless. This study proposal examines the history of fuel prices, how they have changed over the years and the subsequent effects that are likely to come along with these increased fuel prices.¹ The report will give a detailed information on how the data will be collected from various investors to assess how these effects have impacted on their investment decisions and how their businesses have been affected as a result of the same. In addition, the data methodology that is sample population, the methods to be used in data collection and analysis and interpretation are also contained in the study.²

The study analyzes the history of increased fuel prices and their negative impacts in the past as well as the past’s scenario with the current scenario. That is how economically different economies were affected and how they reacted to such effects. Finally, the report gives the expected output after the real study is carried out after the research proposal.

Background Information

Fuel is an important commodity without which life would be impossible. Almost all commodities produced either intermediary or final goods require oil indirectly or directly. Despite this, the precious commodity is becoming expensive every day and thus causing serious scarcity for some essential consumer goods. This is because of price increase of crude oil where various oil products originate. This is causing inflationary pressures on almost all final goods and services and subsequently raising living standards in many countries with an exception of petroleum producing countries.³ Organization Petroleum Exporting Countries (OPEC) has been vested with the overall responsibility of regulating and controlling the global fuel prices. It raises or lowers the prices based on prevailing economic conditions.

The effects of oil price changes can be traced back between the year 1980 and 1985. During this period, OPEC increased the global prices of oil substantially. Countries such as Saudi Arabia had to reduce the production to a great extend. By 1985, the Saudi Arabian production reduced their output to 25 percent of what it had originally been.⁴ This history can once again be tracked back in 2008 in Malaysia.

Malaysian opposition wing of the government mobilized ordinary people to match into the streets to protest against increased oil prices in their country. So many questions were posed by the protesters demanding an explanation as to why an oil exporting country like Malaysia was being hit by the effects of skyrocketing oil prices. Despite the country being an oil producer and exporter, the announcement of drastic increase in oil prices led to increased oil prices in the country whereby the percentage increase was passed to the ultimate consumer to bear the burden.⁵ This further led to increased prices of essential goods and services.

The empirical studies conducted show that the global economic performance dwells on the oil prices. Many countries depend largely on this commodity in the production of goods and a slight increase in its price can adversely affect their economic performance. Oil is a substantial component of many countries’ imports. Since these countries mostly rely on US currency ($) to import oil products, the demand for US currency becomes high and subsequently weakens other country’s currencies thus making imports of other commodities expensive. The effects have been so severe in third world countries whose importation mainly consists of heavy capital goods and other manufactured products.

The escalating fuel prices can slow down economic growth of a given country and that is what has led to lagging down of many African countries in terms of development. This study will help unveil the truth of any possible relationship between the investments and the decrease or increase in fuel prices.⁶ It will further help recommend how investors can react to escalating effects of fuel prices to evade or minimize the effects associated with the same.

Problem statement

Over the years, there have been unstable global fuel prices. This has posed great problems to the US and other countries in a global scope.⁷ The countries have been unable to meet their development objectives in particular the developing nations. The developing countries have been struggling very hard to extricate themselves from their poor status but nothing has been achieved. This is because these nations are the most affected by these effects due to exchange rate fluctuations brought about by increased fuel prices thus weakening their currency. This has an effect in US economy since their exports become relatively expensive to the importers of their goods yet reduce their export revenues.

This price crisis has become a major problem and is leading to reduction of investment activities in US. If a lasting solution is not sought in advance then several peoples’ businesses will be at stake following what has been going on in the recent past.⁸ An alternative source of energy needs to be sought that can be relied on in carrying out business activities without incurring huge costs driven by high global oil prices.

Research questions

This study aims at answering the following crucial questions:

1. Do the high costs of production incurred by manufacturing firms partially caused by the escalating oil prices?
2. Is the demand and sales of final goods and services determined by the global oil prices?
3. Is there any relationship between the investment rate and fuel prices?

Objectives of the study

1. The general objective of this study is to establish how the recent increase in oil prices has affected the investors in various sectors and particular small-scale investors.
2. The study will also establish the extent to which a given percentage increases can affect business activities of various investors.
3. The study will give a highlight of how small enterprises can react to such effects and still make some progress in pursuing their trading activities.
4. To establish the reasons behind the rising price and the possible solutions to control or prevent future increase in global oil prices.

Hypothesis

1. There is an inverse relationship between the increase in fuel prices and the rate at which the investment grows
2. There is a direct relationship between increasing fuel prices and the final prices paid by the ultimate consumers of goods and services.

Justification of the study

The increase in overall fuel prices has adverse effects on the livelihoods of many people. These price effects have of late affected the economies of different economies. The big question is for how long shall this go on? How this trend is persisting leave so many questions unanswered on how the future of many nations will be affected. This is because investment has a direct relationship with the development of a nation.⁹ Lowly invested economies have slow growth rates as compared to highly invested ones.

The prices of goods and services manufactured tend to go high with increase in prices of oil. Subsequently, investors are finding it difficult to continue with their trading activities given the high costs incurred in the production. Assuming the fuel prices could be maintained constantly or uncertainties regarding their price increase could be removed, the current existing investors would have confidence in the industry and thus get a motivation to continually produce goods and services and attract new players in the market that will increase the productivity of the economy.

Restoration of investors’ confidence is what is required to instill motivation in them and ensure they participate fully in their trading activities. Oil is an essential input in production and its price determines largely how the output will be produced.¹⁰ That is, the final price of goods and services will be determined by the initial price of oils. The goods are not only the affected products but also other services. The most significant one, transport sector. Once there has been a change in oil prices what follows immediately is the adjustment of transport costs that are likely to affect the movement of goods and people from one place to another.

This will hinder the free movement of goods and especially raw materials used in the manufacturing industries. The ultimate cause is of course high costs of production coupled with low production capacities and reduced investments. There is quite number of countries relying on other alternative energy producing substances and they have been successfully evading these adverse effects brought about by the fluctuating global oil prices.

Methodology

Area of study

Some small-scale investors will be selected in some chosen parts of the United States (US) and specific the capital of Washington. This is because these are the most affected groups by fuel price hikes due to the nature of their size.¹¹ This will entail both the small manufacturing industries, wholesalers and retailers dealing directly with the consumers. This will give an insight into how their daily incomes have been affected as well as their sales since the demand for goods and services must have changed due to change in demand because of changing oil prices.

Data Collection

The data to be analyzed will be collected for one week. It will be mostly from primary sources since it might be difficult to collect secondary data. This primary data will be collected from a few manufacturing industries and small-scale investors. This will be aimed at getting information on their current production costs per unit produced as compared to two years ago at the same period. The records maintained by the few selected firms will assist in getting past information concerning the costs incurred in the production of certain goods. The reason why only few manufacturing firms will be selected is that there is limitation in time and resources to be used.

The wholesalers too will provide data on how a given quantity of goods used to cost in the last two years and the current cost price of the same quantity of goods. These wholesalers will tell how they have adjusted their prices and the difficulties they have been experiencing in adjusting the prices to avoid incurring of losses. Finally, data on retailers will be obtained to establish how the increased fuel prices have too affected them.

This will determine how their demand for goods has been affected and enquire how customers have reacted to increased prices. This will also tell how the demand for consumer goods has changed. In addition, using oral interviews, the retailers will be able to tell how they have observed consumers’ attitude and their reactions towards the increased prices of consumer goods.

Sampling Design

To get relevant and high quality data, more emphasis will be confined to small-scale manufacturing firms. This is because the groups rely heavily on direct consumption of oil and other fuel products. A systematic sampling technique will be used since not all the subjects of study can be accessed.¹² This probability technique will ensure that any business is eliminated. A maximum of ten manufacturing firms will be selected for the study since time will not allow analysis of huge quantity of data. This will ensure that the shortest time available is utilized effectively and the objective of the study is fully realized.

Methods of Data Collection

An appropriate method of data collection will be chosen. The method to be used should be convenient to the respondents to win their confidence and ensure high standards are maintained in the entire process. Due to the nature of the study, questionnaires and face-to-face interview will be most preferred to generate the expected output. However, more emphasis will be paid to closed questionnaires. Questionnaires will be designed and administered to individual companies and other business entities where the relevant information will be required. This is because questionnaires are very easy to tabulate and analyze data. Interviews will facilitate face-to-face communication with the respondents who will get an opportunity to clarify on some critical issues not clarifiable in questionnaires where conclusions will be made.

Project Output

The study aims at coming up with recommendations that can help investors cope with increasing fuel or prices or measures that can help control or prevent higher inflation rates in the country where possible. It will help in trying to maintain the price stability of fuel prices hence cutting down the production costs and subsequently high prices for goods and services and cost of living. The study will advise on structures that can be put in place by governments, the ultimate consumer of goods and services concerns OPEC or any other relevant authority to legislate the maximum price controls as far as oil and any other related petroleum products even when the forces of supply and demand cannot determine reasonable prices bearable.

Moreover, the study will contribute towards economic growth and development of US and many countries of the world and hence enhancing overall development of global economy. That is after the producers and other traders are assured of price stability of goods and other raw materials each and every one will strive towards ensuring optimum allocation of resources for maximum output. It is estimated that if appropriate actions are taken after the recommendations are made out of the study, so many investors will be saved from the dangers of shutting down their businesses or going into bankruptcy. This is because it is believed that there are so many other alternatives that can be relied on to produce energy rather than crude oil products.¹³

The process of sampling subjects and the groups to be studied

An appropriate process of sampling the respondents will be adopted. Simple random method that will ensure fairness and that the exercise becomes a success will be used. Each subject will have an equal chance of being studied and therefore the biases eliminated.¹⁴ No specific groups will be studied since the study will be directed to individual investors. They will be made aware of the reasons behind carrying out the study so they can give accurate and comprehensive information regarding what they have experienced because of escalating fuel prices. These firms will be selected in the United States where manufacturing firms are located and its outskirts to get an access of required few wholesalers and retailers.

Data analysis

Various data analysis techniques will be used to improve the authenticity and quality of the study.¹⁵ Data on fuel prices per chosen units in the last year the same period will be taken together with data on overall costs for production of a given number of units. Still in the manufacturing firms, data on quantities of goods sold will also be taken. This data will be compared with the current data and observe any changes that might have occurred that is the percentage increase in the prices of fuels. In addition, it will help compare how a given percentage in fuel price increase impacts on the production costs of a given amount of goods.

Similar approach will be used on the data collected from wholesalers and retailers. The total costs of quantities of goods purchased in the last three years will be compared with total costs of goods as at the time of study. The monthly or daily sales quantities during the same period will be compared with the same current data to see how the demand trend has been moving.

All above-mentioned data will be analyzed using both bar graphs and pie charts to enable comparison. The overall quantity for the selected two periods will be taken, and then the percentage of each period computed as a percentage of the entire period and the information presented in the pie chart and bar graph. The x-axis will represent the periods while the y-axis will represent the percentages of sales quantities. The data will also be subjected to Statistical Package for Social Sciences (SPSS) to determine the accuracy of the information and the degree of confidence level.

References

Auemheimer, L, ‘The Honest Government’s Guide to the Revenue From the Creation of Money,’ Journal of Political Economy, Vol. 82, No. 3, 1974, pp. 598-606.

Baumol, WJ & SA Blinder, Macroeconomics: Principles and Policy, Tenth Edition. Thomson South-Western, 2006.

Blume, M, Inflation and Capital Markets. Ballinger, Cambridge. 1978.

Bookstaber, R, ‘The effects of inflation uncertainty on crowding out.’ Journal of Macroeconomics, 1976, vol. 1 p.7-10.

Brown, A, Inflation, development and integration. Leeds University Press, World Factbook, 1979.

Bulkley, G, ‘Personal Savings and Anticipated Inflation.’ The Economic Journal, 1981 (361): 124–13.

Burda, MC & C Wyplosz, Macroeconomics: a European text. Oxford, Oxford University Press. 1997.

Federal Reserve Bank of Boston, Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective, Chatham, Massachusetts. 2008.

Gordon, JR, ‘Recent Development in the Theory of Inflation and Unemployment.’ Journal of Monetary Economics, 1976, vol. 2, p.17-25.

Gordon, RJ, Macroeconomics: Theory and Policy, 2nd ed., Chap. 22.4, ‘Modern theories of inflation’. McGraw-Hill. 1988.

Hall, R, Inflation, Causes and Effects. University of Chicago Press, Chicago, 1982.

Hellerstein, R, ‘The Impact of Inflation,’ Regional Review, 1997. Vol. 7, No. 1.

Massimo, C, ‘Investment and the Persistence of Price Uncertainty,’ Research in economics, Vol. 55, 2001.

Mishkin, FS, The Economics of Money, Banking, and Financial Markets, New York, 1995.

Nenovsky, N, Exchange Rate and Inflation: France and Bulgaria in the Interwar Period and the Contribution of Albert Aftalion (1874-1956). Bulgarian National Bank, 2006.

Footnotes

1. M Blume, Inflation and Capital Markets. Ballinger, Cambridge. 1978.
2. WJ Baumol & SA Blinder, Macroeconomics: Principles and Policy, Tenth edition. Thomson Southwestern, 2006.
3. R Hellerstein, ‘The Impact of Inflation,’ Regional Review, 1997. Vol. 7, No. 1.
4. Massimo, C, ‘Investment and the Persistence of Price Uncertainty,’ Research in economics, Vol. 55, 2001.
5. FS Mishkin, The Economics of Money, Banking, and Financial Markets, New York, 1995.
6. G Bulkley, ‘Personal Savings and Anticipated Inflation.’ The Economic Journal, 1981 (361): 124–13.
7. N Nenovsky, Exchange Rate and Inflation: France and Bulgaria in the Interwar Period and the Contribution of Albert Aftalion (1874-1956). Bulgarian National Bank, 2006.
8. Federal Reserve Bank of Boston, Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective, Chatham, Massachusetts. 2008.
9. L Auemheimer, ‘The Honest Government’s Guide to the Revenue From the Creation of Money,’ Journal of Political Economy, Vol. 82, No. 3, 1974, pp. 598-606.
10. Gordon, JR, ‘Recent Development in the Theory of Inflation and Unemployment.’ Journal of Monetary Economics, 1976, vol. 2, p.17-25.
11. R Bookstaber, ‘The effects of inflation uncertainty on crowding out.’ Journal of Macroecnomics, 1976, vol. 1 p.7-10.
12. A Brown, Inflation, development and integration. Leeds University press, World Factbook, 1979.
13. MC Burda & C Wyplosz, Macroeconomics: a European text. Oxford, Oxford University Press. 1997.
14. RJ Gordon, Macroeconomics: Theory and Policy, 2nd ed., Chap. 22.4, ‘Modern theories of inflation’. McGraw-Hill. 1988.
15. R Hall, Inflation, Causes and Effects. University of Chicago Press, Chicago, 1982.