Energy is vital in every sector of the economy. Global consumption of energy has continued to surge with increased growth in developing countries. While the global economic depression that occurred in 2008 created a great impact on demand for energy, continued growth has influenced its impact on a global scale (Wang, Wu, & Yang 2013). The timing of major events is significant in ascertaining the cost of energy.
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Events like the Syrian war, the Iranian war, and the war in Iraq have affected demand and supply of energy significantly. Of great importance is the impact of politics and legislations on the cost of energy. This paper will explore the effects of speculation and legislation in energy markets (Williams & Simkins 2013).
Ways in which speculation negatively affects energy markets
Market speculation is usually utilised to minimise market instability. To some extent, speculation helps in determining the price of energy. However, speculation can have a negative influence on the pricing of energy. For instance, when speculation becomes a way of manipulating prices (Bekaert, Harvey, & Garcia 1997). In essence, if market speculation turns into price manipulation, then it affects energy markets negatively. Economists have shown that speculators influence shifts in demand and supply fundamentals.
Another way in which speculation negatively affects energy markets is though excessive speculation. Excessive speculation concentrates price shifts on futures markets. Moreover, speculation can encourage hoarding which may harm consumers by increasing the cost of energy (Bhawna & Poonaam 2012).
Long speculators have also been observed to increase energy costs. Moreover, speculative investment through the influx of dollars in energy markets has increased market volatility thereby influencing energy markets negatively. Therefore, speculative buying of futures can also influence energy market negatively. This occurs because speculative buying creates additional demand for energy thereby pushing the prices (Pirrong 2008).
This practice is utilised by big oil companies as a cushion for buying more oil for future sales. In the process, energy prices shoot despite sufficient inventories. Essentially, speculation can have adverse effects on energy markets. Moreover, speculating on volatility of future net demand shocks can also result in irrational prices thereby affecting energy markets negatively (Perry 2010).
The extent to which legislation assists in curbing market volatility
Market volatility occurs because of fluctuation in demand and supply. Prices in the energy sector can change quickly based on factors that affect demand and supply. Legislations can help control market volatility when other factors are normal (Doren 2016).
Legislations are important in controlling irrational energy prices, which can be brought about by excessive speculation. Legislation plays an important role in monitoring market players to ensure that they do not manipulate prices. By introducing margins in the futures markets, legislations help reduce the negative influence in the trade of futures market. This is important in stabilising prices (Hamilton 2011).
Legislations can deregulate or regulate energy markets depending on the prevailing market, political and environmental conditions. By controlling imports and exports, legislations can assert control over the price of energy. Furthermore, legislations can control gambling and hoarding of stock. However, legislations are not absolute in controlling market volatility (Wang, Wu, & Yang 2013).
Bekaert, G, Harvey, R, & Garcia, P 1997, The contribution of speculators to effective financial markets. Web.
Bhawna, S & Poonam, B 2012, ‘Role of speculation – false confidence in the commodity market‘, Research Journal of Management Sciences, vol.1, no. 1, pp. 24-28. Web.
Doren, P 2016, A brief history of federal energy regulations. Web.
Hamilton, J 2011, ‘Nonlinearities and the macroeconomic effects of oil prices’, Macroeconomic Dynamics, vol.15, no. S3, pp.364-378.
Perry, J 2010, Energy prices: supply, demand or speculation? Nova Science, Hauppauge.
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Pirrong, C 2008, Energy market speculation and manipulation. Web.
Wang, Y, Wu, C, & Yang, L 2013, ‘Oil price shocks and stock market activities: evidence from oil-importing and oil-exporting countries’, Journal of Comparative Economics, vol. 41, no. 4, pp. 1220-1239.
Williams, J & Simkins, B 2013, ‘Energy economics: Past, present, and prospects for the future’, in B Simkins & R Simkins (eds), Energy finance and economics: analysis and valuation, risk management, and the future of energy, Wiley, Hoboken, pp. 49-59.