Finance Essay Question – (1000 words) –
In Module 1, the first required assignment asked you to examine the course and relate it to a current, real-world event or recent news story. Based on what you have learned in this course since Module 1, reflect on how your answers would change now that you have gained new knowledge. Return to your initial assignment and directly connect the content of your responses to the theories and material of this course. Additionally, based on what you learned in this course, provide some strategies that would address the issues described in the real-world event or recent news story you chose. For example, if you chose a recent story about how high school attendance rates have diminished in the past decade, provide several strategies for addressing that issue based on what you directly learned in this course. Submit a final assignment of 1000 words that synthesizes all these points.
Note: The Module 1 Essay for the real-world event or recent news story that demonstrates the relevance of studying this course is listed below. Answer the above assignment based on this real-world event, incorporating how corporate finance impacts the falling oil prices.
A real-world event that demonstrates the relevance of this course would be how the falling price of oil affects the finance and budgeting decisions of industry and global economies. This course will help to provide an understanding as to how the price of oil is set. Historical and political factors impact related industry companies (petrochemical) that trade shares in the stock markets. Looking back, there was a significant decrease in the price of oil in late 2014. The price dropped from a high of $108 a barrel on June 08, 2014 to just above $40 a barrel in January 2015. It is currently sitting at around $52.38 per barrel. Expectations based on private sector forecasts expects the U.S. benchmark West Texas intermediate to average $54 (U.S.) a barrel this year, rising to $67 in 2016 and $75 in 2017. The high price of oil previous to the recent drop was mitigated by several global factors. The demand for oil during the mid-2000’s by China resulted in a shortage of global supply, a spike in prices, and a viability in new exploration and technology. This resulted with an increase in shale production in North America through fracking technology, horizontal drilling, and improved transportation networks. Production increased by about 4 million barrels a day since 2009. The Organization of Oil Producing Countries (OPEC) has traditionally dominated the production and pricing with their huge reserves. They can maintain and ensure a low price for oil by continuing to produce and over supply the market. The desire by OPEC to over-supply and keep the price low is an attempt to squeeze out the small producers involved in the North American domestic market. Essentially OPEC can produce oil at a significantly lower cost than the North American market. As the price gets lower from over-supply, domestic markets will stop exploration and drilling new oil wells. Companies that use high-cost production technology will be squeezed out of the market and the longer the price is depressed, the more bankruptcies will occur. As the oil industry adjusts to the falling prices, pressure is put on the supply chain with a drop in wages and margins. Investors are hurt by the sudden drop in share prices and new investment is hesitant until price stabilizes. Other foreign countries are also adversely affected by OPEC’s over-production policies. Oil producing countries like Nigeria, Venezuela, and Russia have been hit hard by the lower oil prices. There dependency on oil and lack of diversification within their economy are contributing factors. With the lower prices corporate profits are reduced, results in less investment and employment in the oil sector. However, consumers do benefit with the lower price of oil. The lower the cost of energy (oil in this case), the more money consumers have in their pocket to spend. Industries have lower production costs with the lower oil prices and make bigger profits. The bigger profits in turn allow for more taxes being paid, which aid governments. Companies that have a strong balance sheet are also more inclined to make acquisitions, which further improves the economy. The beneficial or harmful effects of the drop in oil is only relative to the industry your in. Consumers may have their daily expenses reduced, but investors will see severe fluctuations affect their ability to profit in the energy sector. This real-world event, of a severe reduction in oil prices, demonstrates the relevance of this course in several areas. The trade off between risk and return, valuation, budgeting, and investment decisions are all relevant areas discussed in this course.
References
Berk, J. & DeMarzo, P. (2011) Corporate Finance: The Core (2nd ed.). Boston, MA: Prentice Hall.
London, E.L. (Mar. 18, 2015). Everything you want to know about falling oil prices. The Economist. Website Retrieved from https://www.economist.com/blogs/economist-explains/2015/03/economist-explains-14?zid=298&ah=0bc99f9da8f185b2964b6cef412227be