The Effect of Fuel Prices on Industry and Future Developments

The Effect Of Fuel Prices On Industry

And

Future Developments.

Contents

Introduction:

The history and effects of oil price fluctuations on industry and economy:

Mass production and the thirst for oil:

The present day, oil prices, and the credit crunch:

Future developments:

Conclusion:

Recommendations:

Bibliography:

Appendices:

Reflection:

Introduction

This assignment will look at some of the modern history of fuel prices, current energy cost levels and its effects on industry.

It will investigate the relationship of oil and International conflict in the oil producing regions, which can lead to damaging effects in the world's financial markets, and the effects on the supply chain due to emerging fuel producing nations developing after the fall of the communism in the former Soviet states.

This will also explore future developments in alternative and renewable energy sources and the effects this may have in the energy supply chain.

The history and effects of oil price fluctuations on industry and economy.

In modern history the effects of large fluctuations in oil prices, have had a direct effect on the world economy. For example in the 1970's the Oil Producing and Exporting Countries (OPEC) restricted oil output, this caused oil based products to increase in price. This had a direct effect on substitute energy sources (e.g. coal and gas) for which demand increased, and also on manufacturing industries (e.g. the steel industry and the car industry) in which demand fell (Griffiths & Wall, 2007, p2-3).

The economic situation caused by this meant that manufacturers and consumers were forced to reduce energy usage, manufacturing outputs fell and redundancies were seen in industries with a high energy usage.

An indirect effect of oil price fluctuation is the effect on currency. In the early 1980's due to North Sea oil production the pound became responsive to oil prices, and due to the currencies strength at this time UK exports became more expensive whereas imports became cheaper. Again, this had a detrimental effect on the UK's manufacturing production and employment.

When in the mid 1980's oil price halved, this caused the pound to fall as well, which in turn led to an increase in manufacturing outputs at this time, (Griffiths & Wall, 2007, p2-3).

International conflict also has an effect on fuel prices. The effects of the Yom Kippur War and the Iranian Revolution caused huge upward spikes in crude oil prices in the 1970's, (BP, 2008). See appendix 1.

During the first Gulf War oil prices increased causing a subsequent appreciation in the value of the pound, again causing pressure on UK exports.

When OPEC increased the price of a barrel of oil from $3 to $12 in 1973-74, industry had to accept the increases, and by 1979 the price was over $30 a barrel. As higher oil prices dominated, domestically and industrially ways were sought to economise consumption. People demanded smaller, more economical cars. Gas central heating became wide spread in homes and workplaces across the country. Industry converted to other fuels, the demand for oil powered electricity generation reduced, and energy saving schemes became widespread in industry and home. Therefore the trend in oil price during the 1980's was downward, oil supplies were still profitable and new oil fields were exploited, Alaska, China, Mexico and in the North Sea. This tempted OPEC to break their production quotas and the increase in supplies meant that by the late 1990's oil was priced at $10 per barrel. OPEC cut back on production once again. The difference this time was that economically growth was picking up worldwide, and as OPEC continued to restrict oil supplies price per barrel increased to over $30, this was accentuated by the Iraq War in 2003 as many industrialised countries stockpiled due to fears over interruption of supplies from the massive Iraqi oil fields, (Sloman & Sutcliffe, 2004, p96-97).

The increases in gas and oil extraction had a major effect on a traditional UK energy industry Coal mining all but disappeared in the UK during the 1980's and 1990's after a brief resurgence when oil prices increased during the 1970's. The growth in extraction from the North Sea oil and gas fields and cheap imports from Eastern Europe and former Soviet states increasingly substituted the need of coal, clearly outlined in the following statement.

"Coal output fell by around 30% between 1979 and 1990 and then by a further 85% between 1990 and 2005 as the privatised electricity producing companies made their dash for gas". (Griffiths & Wall, 2007, p 3-4).

Mass production and the thirst for oil

During the American Industrial revolution in the early 20th century, mass production and the demand for new technologies and modern luxuries (e.g. motorcars) drove the demand for oil upwards. Two main exponents and pioneers of these new production methods were Frederick Taylor and Henry Ford.

Taylor's methods were the utilisation of 'time and motion' studies in detailing division of labour and devising a 'pay for performance' system of working.

Taylor outlined his main elements of what he called "Scientific Management" as "time studies, standardisation of tools and implements, the use of slide rules and other time saving devices, instruction cards for workmen and task allocation" (Taylor, 1911). Taylorism was to become a worldwide business model standard, and his theories were adopted and adapted by people like Ford.

Ford