Crude oil is one of the most necessitated worldwide required commodities (Kenneth, 2003). Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. The volatility of crude oil prices drove many economies away (Holmgren, 2006).
Crude oil prices have been regularly and closely monitored by worldwide economists. According to Dayton (2008), in the year 2008 the prices have shoot up to record levels of $125 per barrel. This is an increase of nearly 70% from that of the year of 2007. The consumption level of oil is projected to rise by 1.2 million barrel/day in the year 2008. The consumption of China is presumed to rise by 0.4 million barrel/day in year 2008, as it has already registered an increase of 0.8 million barrel/day in March. These numbers proves the demand of the crude oil and also vulnerability of crude oil price due to the complexity of the market.
Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply (Dayton, 2008). Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. It has been observed that $10 in the crude oil price means decrease in the economic growth of the OPEC countries by 0.5%. This rise in prices accounts to have more influence on the economic condition of developing countries. According to the Central Bank Annual Report (2008), Sri Lanka is also a developing country which crude oil is been the main energy source for the country and the crude oil market behaviour is a significant factor concerning the economic activities of the country.
Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The stock exchanges of every country keep a close eye on any up and downward movement of the crude oil price (Holmgren, 2006). India fulfils its major crude oil requirements by importing it from oil producing nations. India meets more than 80% of its requirement by importing process. Therefore, any upward and downward motions of prices are closely tracked in the domestic marketplace. Many times it has been recorded that prices of essential products like crude oil also acts as a prime driver in becoming reason of up and down movement of prices (Jessup, 2006).
Dayton (2008) has stated that any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price implies to the higher price of energy, which in turn negatively affects other trading practices that are directly or indirectly depends on it. Crude oil has been traded in throughout the world and there prices are behaving like any other commodity as swinging more during shortage and excessiveness (Kenneth, 2003).
In the short term, price of crude oil is influenced by many factors like socio and political events, status of financial markets, whereas from medium to long run, it is influenced by the fundamentals of demand and supply which thus results into self-price correction mechanism (Eric, 2006).
Further, Eric (2006) stated that while demand touches to a great height, supply juggles to keep up the pace. The production from existing sources had been reduced by 4% per annum, which implies that around 3 million barrels per day of new capacity is required to be added in every year for offsetting this declination.
There are innumerable factors which influence the price movement of crude oil throughout the world like methods and technology used to increase the oil production, storing up of crude oil by rich and prosperous countries, changes introduced in tax policy, social and political issues, etc. In recent years many factors have emerged as the key figures in influencing the price index of crude oil throughout the world (Holmgren, 2006).
Crude oil prices have been regularly and closely monitored by worldwide economists. According to Dayton (2008), in the year 2008 the prices have shoot up to record levels of $125 per barrel. This is an increase of nearly 70% from that of the year of 2007. The consumption level of oil is projected to rise by 1.2 million barrel/day in the year 2008. The consumption of China is presumed to rise by 0.4 million barrel/day in year 2008, as it has already registered an increase of 0.8 million barrel/day in March. These numbers proves the demand of the crude oil and also vulnerability of crude oil price due to the complexity of the market.
Crude oil prices act like any other product cost with more variation taken place during shortage and excess supply (Dayton, 2008). Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. It has been observed that $10 in the crude oil price means decrease in the economic growth of the OPEC countries by 0.5%. This rise in prices accounts to have more influence on the economic condition of developing countries. According to the Central Bank Annual Report (2008), Sri Lanka is also a developing country which crude oil is been the main energy source for the country and the crude oil market behaviour is a significant factor concerning the economic activities of the country.
Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The stock exchanges of every country keep a close eye on any up and downward movement of the crude oil price (Holmgren, 2006). India fulfils its major crude oil requirements by importing it from oil producing nations. India meets more than 80% of its requirement by importing process. Therefore, any upward and downward motions of prices are closely tracked in the domestic marketplace. Many times it has been recorded that prices of essential products like crude oil also acts as a prime driver in becoming reason of up and down movement of prices (Jessup, 2006).
Dayton (2008) has stated that any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price implies to the higher price of energy, which in turn negatively affects other trading practices that are directly or indirectly depends on it. Crude oil has been traded in throughout the world and there prices are behaving like any other commodity as swinging more during shortage and excessiveness (Kenneth, 2003).
In the short term, price of crude oil is influenced by many factors like socio and political events, status of financial markets, whereas from medium to long run, it is influenced by the fundamentals of demand and supply which thus results into self-price correction mechanism (Eric, 2006).
Further, Eric (2006) stated that while demand touches to a great height, supply juggles to keep up the pace. The production from existing sources had been reduced by 4% per annum, which implies that around 3 million barrels per day of new capacity is required to be added in every year for offsetting this declination.
There are innumerable factors which influence the price movement of crude oil throughout the world like methods and technology used to increase the oil production, storing up of crude oil by rich and prosperous countries, changes introduced in tax policy, social and political issues, etc. In recent years many factors have emerged as the key figures in influencing the price index of crude oil throughout the world (Holmgren, 2006).
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