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The impact of declining oil prices

Write an essay on International Energy Policies?

The prices of the crude oil witnessed a substantial hike during the year 2013-14 which was regarded as stable. The standards for crude oil which had been internationally traded is Brent and lies between the range $100-155 per barrel. The oil price trend reveals that the stable is short sighted and that it does not linger long to be stable but we can rely on Brent prices of oil to be normal. But recently a decline in the oil prices by 40% was seen in June 2014. (GLOBAL TRENDS IN OIL & GAS MARKETS TO 2025, 2015) The decline in the oil prices has benefited many nations like India but has affected some of the members of the Organization of Petroleum Exporting Countries (OPEC) as it has decided not to curtail its production in order to raise their prices. (The Economist, 2013) This situation aggravated the reduction in oil prices. The saturation of the global oil markets is a result of the increased supply of oil in the markets which has eventually reduced the prices of oil. The ideal step that should have been taken by the member countries in this regard was to decrease the oil supplies so that a situation of excess supply will drive up the prices of oil. Once the pace of the oil price is settled the member countries can again converge to the high production scenario and increase its production. It is the duty of the OPEC to observe and monitor the actions of the Member countries and prevent their dishonest and rogue behavior. (Greiner, 2014) Saudi Arabia is one of the member countries that have decided not to suppress its production of oil. This country is believed to face a crux situation and a victim of nervous politics. The decision of Saudi Arabia to maintain the same level or increase the oil production was out of fear and anxiousness to lose the share and global position in the oil markets. The fall in the Brent crude oil prices for the year 2014 is shown below. (Tradingeconomics.com, 2015)

We can say that the relation that oil, energy and the direction of the international politics is entangled. The main focus of the US is on the two nations: Iran and Russia. (Nardelli et al., 2014)The motive of the US is to dampen the image of both the nations through the fluctuations in the oil prices. Russia is a weak nation and the decline in the oil prices affect this nation adversely as the foreign capital flow into the country will decrease. It would require for Russia to reform its foreign policies and improve its status. Iran has incriminated Saudi Arabia for the decline in the oil prices because of the fact that it refused to curtail its oil production which is shown by the chart given below where the oil production is high during June to August 2014. (Tradingeconomics.com, 2015) The low oil prices meant that revenues earned from the sale of oil will be low. Iran thus earned low oil revenue. It can be deciphered that it is the work of the US through coercion on Saudi Arabia to weaken the economic condition of Iran and leave the country with no option but to sign the deal on nuclear power with the US. (Oil Price Review, 2013) This would result in the loss of nuclear capability of Iran.

Role of major players like OPEC

The decline in the oil prices has also benefited certain nations previously but with China the case goes in different direction. China is the emerging industrialized country and it had huge plans to introduce shale gas. This is because China want its nation to be self reliant and self sufficient in energy. But if China was successful in implementing such a plan then it would definitely hamper the position of the US. So the US with its power was able to influence the international companies that would help China to set up the shale gas. These international companies which eventually assisted the US to build its own shale gas were incurring loss due to decreased production and high cost. Left with no other option these companies had to withdrew and discontinue their investments on projects like the one in China. Thus China can be regarded as the next victim. The other nations were facing a destructive and damaging phases due to the unusual decision of the OPEC. The damaging impact of OPEC on its other member countries like Libya and Venezuela deteriorated the economic position of the countries. The downswing of the oil price will have a long lasting effect on the Non OPEC Countries. (Reuters, 2015) The Non OPEC countries were anticipated to increase their production but at a slower rate. This would prevent the North American energy companies to earn lower profits. The strategies and policies that can be implemented by the Non OPEC Countries are explained with respect to the US economy. (Peakoil.com, 2015)  With virtue of the decline in the oil price the US can reform energy policies and can even restrict the subsidies it spends on fossil fuel, can allure investors who would augment the oil price increase relative to OPEC and increase their revenues. From the chart below we can see that the production of crude oil in the USA followed an upward trend in the year 2014-15. (Tradingeconomics.com, 2015)

The agreements that are used in the oil and natural gas industries can be segregated into two types which are concessions and contractual agreements. Concession agreements involve equity interest and royalties that are calculated from the production value and income taxes on the total income. Contractual agreements consist of production share, contracts regarding service and risk connected to the contracts. The factors that influence the agreement depend on the type of agreement implemented by the resource holder. While formulating the concession agreement exclusive rights of Exploration and Production of the oil companies must be granted by the states concerned, finance and taxation responsibilities must be on the oil companies, the domestic supply of oil and gas and the sources of cash flow, and costs and benefits must be included. (Alramahi, 2015)

Many countries put the energy policies on the spotlight. The Czech Republic has implemented the State Energy Strategy in order to decrease its lignite production. Germany in this regard has also introduced annual progress report for creating awareness on the country’s energy policy. Canada also introduced The Responsible Resource Development Plan with a view to achieve the goals and change its regulatory system. The procedure of building infrastructure of the energy sector has been eased out by the Netherland to retain the national interest. Sweden has also taken a step forward than all other nation by planning to launch a fossil fuel free automobile by the year 2030. It also taxes the individuals, companies and factories on carbon dioxide emission which made the nation a carbon free one.teh USA had implemented a Climate Action Plan for prevention of greenhouse gas emission. The plan aimed at reducing carbon pollution, preparing for climate change and combating any global climate changes. (Energy Policy Highlights, 2015)

Energy policies implementation in different countries

The challenges that the international energy policies face make its implementation robust and needs a solution. While initiating projects and policies the energy sector must consider the Environmental Impact Assessment (EIA) (Barker and Jones, 2013)and spatial planning else there can arise complications. The policy making must be assisted by a committee of expertise so that the energy policies are implemented without distortions. Without such expertise the policies may be criticized on several grounds. (Oilandgasuk.co.uk, 2015)One of the challenges that the energy sector faces is the interference at the national level regarding the implementation of the policies. This may not be preferred or welcomed by most of the local and regional governments as a result country clash can occur. Another restriction that is imposed on the formulation of the energy policies is the lack of appropriate and complete data on prices and consumption of international energy by the household, transportation sector and other trading sectors. In this regard the energy companies must hire an energy expert who can monitor and formulate suitable policies and also appoint a skilled executive who would and maintain a smooth connection between EIA and the spatial planning and help to assemble correct data. (generator, 2015)

The important aspect that provides direction to the global economy is the world demand and supply of products. The rise in the population attributed the rise in the world demand. The challenge here is that with the increased population and increased demand, there will be rise in the demand for oil which the oil companies have to satisfy with increased production. It is important for OPEC to check out the emerging powerhouses like the ones in China and India which is depicted in the charts below. These powerhouses can pose a threat to the other oil companies which would impact the demand and supply of the oil as they are supposed to race with the developed nations through the per capita energy use. The complexity of the challenges also arises from the environmental and geopolitical discord. (Forbes, 2015)

Both the charts show that during june-july 2014, the oil production was high for both countries though the production for India(Tradingeconomics.com, 2015) is low relative to China. (Tradingeconomics.com, 2015)

The access to resources of oil is limited for the oil companies as the major portion which is about 80 percent of the resources are in the hands of the National Oil Companies (NOCs) and host governments. This can be counted as a challenge to the oil companies. The oil industries must have services being rendered in the field of engineering, drilling, procurement and constructions purposes which involves high cost. For the heavy scale industries, technology is an important factor. Purchasing machines means making business investment but what is more important and cost impending is the recruitment of skilled and experienced technical porfessionals that have the capacity to operate such complex machines and technology. All these would mean that the industry will incur more cost. Now an increased cost must be curtailed in two ways either by increasing the sales or raising the prices. Considering the oil prices and its instability, oil companies can never rely on the price to cover up the cost. What they can to si to incrfease the oil production to mitigate the increase in the cost.

Challenges and solutions for international energy policies

There is an immediate need to mordernize the oil sector by introducing and installing new technology or in other words technological advancement is required in the oil sector. Now we have already discussed about the higher cost associated with the technological upgradation. The rise in the population at a geometric rate causes a rise in demand. This increased demand would impose the companies to produce more and in doing so the companies must update their machines and technology to increase production. The other side of the technological advancement is that when experienced employees are hired to operate the machines, there is also a cut in the unskilled and inefficient labour. This causes an unemployment in the economy.

One of the ways to combat the challenges of the oil and gas industries is by executing cost effective way to production process. The oil and gas industry must also increase their Barrels of oil equivalencies (BOEs) and enforce change process management.

The error that the oil and gas sector is commiting repeatedly is the objective of their business. The oil and gas industries mainly focuses on reducing cost and using cost effective ways to produce oil. But in this regard the sector is unable to identify that such cost effective solutions can be applied to sectors whose market conditions are narrow. The strategy that the oil companies can be recommended is that they must be concerned about the supply of assets and examine their acess to other markets. It is also recommended that these companies must ensure that their presence in markets where there acess is low  is not short sighted and they must take steps as to prevent price bidding war. Thus, our essay deals with the decline in the oil prices aggravated by the refusal to cut down production by the OPEC. This does not imply that the oil markets have a dark and devastating future. It is te utmost duties of the oil producers to implement policies that would help to improve the global oil price condition. (Bowler, 2015)

References


Alramahi,, M. (2015). International OIl and GAs Contracts and Deal making. 1st ed. [ebook] Available at: https://unctad.org/en/docs/diaeiia20097a1_en.pdf [Accessed 20 Mar. 2015].

Barker, A. and Jones, C. (2013). A critique of the performance of EIA within the offshore oil and gas sector. Environmental Impact Assessment Review, 43, pp.31-39.

Bowler, T. (2015). Falling oil prices: Winners and losers. [online] BBC News. Available at: https://www.bbc.com/news/business-29643612 [Accessed 20 Mar. 2015].

Forbes, (2015). How Will The 2014 Drop In Oil Prices Affect The World Economy And Geopolitics?. [online] Available at: https://www.forbes.com/sites/quora/2015/01/06/how-will-the-2014-drop-in-oil-prices-affect-the-world-economy-and-geopolitics/ [Accessed 20 Mar. 2015].

generator, m. (2015). IEA - International Energy Agency - affordable clean energy for all | iea.org. [online] Iea.org. Available at: https://www.iea.org/. [Accessed 20 Mar. 2015].

Greiner, B. (2014). Oil Prices - Decline Turned Into Collapse?. [online] Forbes. Available at: https://www.forbes.com/sites/billgreiner/2014/12/04/oil-prices-decline-turned-into-collapse/ [Accessed 20 Mar. 2015].

Nardelli, A., Elliott, L., Luhn, A., Dehghan, S. and Black, I. (2014). Recession in Russia, revolt in Venezuela? The knock-on effects of tumbling oil prices. [online] the Guardian. Available at: https://www.theguardian.com/news/datablog/2014/oct/16/datablog-low-oil-prices-chill-producer-economies [Accessed 20 Mar. 2015].

Oil Price Review. (2013). Oil and Energy Trends, 38(7), pp.10-12.

Reuters, (2015). Libya declares oil crisis over after state reclaims ports. [online] Available at: https://www.reuters.com/article/2014/07/02/us-libya-oil-idUSKBN0F72LZ20140702 [Accessed 20 Mar. 2015].

The Economist, (2013). The day of the huge integrated international oil company is drawing to a close. [online] Available at: https://www.economist.com/news/briefing/21582522-day-huge-integrated-international-oil-company-drawing [Accessed 20 Mar. 2015].

Tradingeconomics.com, (2015). Brent crude oil | 1970-2015 | Data | Chart | Calendar | Forecast | News. [online] Available at: https://www.tradingeconomics.com/commodity/brent-crude-oil [Accessed 20 Mar. 2015].

Tradingeconomics.com, (2015). China Crude Oil Production | 1973-2015 | Data | Chart | Calendar | Forecast. [online] Available at: https://www.tradingeconomics.com/china/crude-oil-production [Accessed 20 Mar. 2015].

Tradingeconomics.com, (2015). India Crude Oil Production | 1994-2015 | Data | Chart | Calendar | Forecast. [online] Available at: https://www.tradingeconomics.com/india/crude-oil-production [Accessed 20 Mar. 2015].

Tradingeconomics.com, (2015). Saudi Arabia Crude Oil Production | 1973-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/saudi-arabia/crude-oil-production [Accessed 20 Mar. 2015].

Tradingeconomics.com, (2015). United States Crude Oil Production | 1950-2015 | Data | Chart | Calendar. [online] Available at: https://www.tradingeconomics.com/united-states/crude-oil-production [Accessed 20 Mar. 2015].

Energy Policy Highlights. (2015). 1st ed. p.https://www.iea.org/.

Global Trends In Oil & Gas Markets TO 2025. (2015). 1st ed.

Oilandgasuk.co.uk, (2015). Economics, Energy Policy and Gas - Oil & Gas UK. [online] Available at: https://www.oilandgasuk.co.uk/economics.cfm [Accessed 10 Mar. 2015].

Peakoil.com, (2015). IEA Sees Oil-Price Recovery; Cuts 2015 Non-OPEC Output Estimate  | Peak Oil News and Message Boards. [online] Available at: https://peakoil.com/consumption/iea-sees-oil-price-recovery-cuts-2015-non-opec-output-estimate [Accessed 10 Mar. 2015].

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