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Question 1
A rise in oil prices will undoubtedly prove to be a boost to the overall revenues of most oil
and gas companies. With reference to the case study of Chevron’s sales revenue (table1), it is
estimated that crude oil will rebound to about $70 per barrel by 2018 in the base case.
However, in case the market conditions recover over the next few seasons, due to the
Organization of the Petroleum Exporting Countries (OPEC) or the US oil producers reducing
their high level of production, or optimistic rise in global demand for oil, crude oil prices
could rebound to almost $100 per barrel by 2018. In such a case, it is projected that
Chevron’s 2018 revenue to be approximately 25% higher than initially estimated (Cabalu &
Alfonso, 2007).
Table 1
Nonetheless, the rise in revenue for oil companies will only go on for the nest 10 or 20 years
because most oil users will begin searching for other energy sources such as renewable
energy where the prices are lower than that of oil in the future. Market forces will eventually
dictate which types of energy are going to win. The rapid development and advancement in
other renewable energy such as solar energy will eventually drive down the production costs
of those energy sources. In the future when the crude oil and natural gas are completely
consumed, we are only left with solar, wind, nuclear or tidal energy at our disposal. The
effect if oil prices can be seen clearly in the comparison between solar companies’ revenues
and crude oil prices. In the solar energy sector, where the competition lies with natural gas
and coal, people generally have more faith on solar energy when the oil prices are high while
investors simply abandon the idea of solar energy when oil prices are low (Case & Fair,
2009). This effect can be seen on the stock market, where solar manufacturers and
developers First Solar(NASDAQ:FSLR) and SunPower (NASDAQ:SPWR) have long been
impacted right by the price of oil (table 2). The below table shows that their performances
worsen when the oil prices fall. This generally conclude that a drop in oil price directly
plunge their stock market value as well. Therefore, on the opposite side, a rise in oil prices
will ensure the prosperity of these companies providing renewable energies.
Table 2
We need to keep in mind that petroleum is non-renewable energy source which is going to be
run out one day in the future. According to the rule of supply and demand, when the scarcity
of oil and gas becomes more prominent, their prices are going to increase provided that the
demand remains the same. In this case, our world’s demand for oil and gas is going to spur
further due to the population growth and increased urban activities (Cornot-Gandolphe, 2016).
The reason why renewable energy cannot replace the use of petroleum right now is that their
production costs cannot rival that of oil and gas. Therefore, when one day the production
costs of renewable energies are lower than the price of oil and gas, market forces will dictate
that renewable energies become the more viable option. At this point of time, the sales
revenue of oil companies will begin to drop due to more countries switching to renewable
energy sources. The higher the rise in crude oil prices, the smaller the overall profits earned
by the oil producers in the very distant future.
Johnston (2017) also lamented that many oil and gas companies have left the industry last
year because of low crude oil prices and UK’s plan to usher in a new low-carbon economy
system. Many companies are also forced to cut down on number of employees because the
increasing prominent global warming effect caused by the burning of fossil fuels. This
situation also led to more people entering into the newer sectors of the 21st century. The
collapse in oil price also put a lot of pressure on many small and independent companies in
the UK. It is also predicted that the price for a barrel of oil can drop to 10 dollars due to a
fall-short of demand. Even Engie, the world’s biggest private energy production firm, is
bolstering its stand on the renewables while cutting down on the coal-burning plants and
fossil fuel survey rights (Johnston, 2017). The oil price also resulted in many independent
companies selling off their shares of oil production to larger companies. The slower growth
in economies of Europe and China before 2014 has led to weaker demand for crude oil. The
rise of oil prices from 2000 to 2010 has forced more countries to search for new ways of
reducing their reliance on crude oil. They mainly do so by upscaling investment on renewable
energy and lay out plans to achieve oil consumption reductions. At that time, electric or
hybrid car that are both energy efficient and environmental friendly gained larger market
share and consumer preference. Many residents also chose to set up their own solar panels to
cut down on electricity consumption which is powered by coal or fossil fuels. As capital
investments flow into the development of renewable energies and the drive of technological
advance have enabled renewable energy to become the next new viable option to oil. In short,
the shrinking demand in oil and surging supply from around the globe have clashed the oil
prices. Even if the OPEC and other oil producing countries like US and Russia have reached
an agreement to cut down on oil production, there is little hope that oil prices will rise up to
100 dollars per barrel. Because the world has entered a new era of low carbon society where
the burning of fossil fuel becomes obsolete and unpopular for most developed countries.
In conclusion, the rise in oil price will heighten the sales revenue of oil producers in the
immediate future. But the long-term profits of those oil and gas companies are going to drop
in the distant future because most users will turn to renewable energy when the oil prices
become unbearably high.
Question 2
Briefly explain the cross elasticity of demand for coal with respect to a rise in the price of
natural gas. In relation to ‘rising living standards and ongoing urbanization’ in the region,
comment upon the likely income elasticity of demand for i) traditional biomass (paragraph 5)
and ii) energy, in general (table 1)
Cross elasticity of demand for coal with respect of rise in price for natural gas
Even though there are reports saying that gas contributes a growing share energy mix in the
world, the share for coal is also seen on a significant rise in the recent years, especially in
booming countries like China and the rest of Southeast Asia (Lehar, 2012). Coal and natural
gas are the two main energy mix ingredients which is largely demanded on the trend now,
however, demand for coal is seen to have a higher proposition as compared to natural gas due
to its various economical strengths and attractions such as lower in price and abundant in
supply. Hence, demand for coal is seen to expect to grow tremendously over the projection
period, while the demand for natural gas is expected to have a slight rise or remain at its
current pace.
The changes of relative products or services within an industry will relatively have some
effects on the demand towards a particular product or service. The effect here is known as the
