Introduction
This project involved calculation of the annual average data of gas prices in US cities. The data was for years 1982 to 2011. The scatter diagram shows the exact movement of the prices since 1982.
Although the prices have fluctuation both upwards and downwards, the clear pattern is that these prices have been on upward trend overtime. Although the most recent prices are yet to reach the historic high that was recorded in 2008, there is a clear indication that the prices will never drop to the low range of 1990’s.
The linear regression analysis shows that the prices are on a positive trend, and they will continue to increase in the next 10 years.
Since 1989, the prices of the gas have been increasing steadily. This could perhaps have resulted from tight demand and supply balance, which exposes gas market to tremendous price swings when unforeseen adjustments takes place in the market – these includes supply constraints resulting from natural disasters and spike in demand that results from weather changes.
This report focuses the effects of higher gas prices on our distribution company in the next 10 years.
The gas industry is operating under a challenging and a dynamic global marketplace characterized by persistent price surges. Over the recent years, oil price fluctuation has become the order of the day.
In spite of this, our delivery company has a challenging task of ensuring it focus on the medium to long-term conditions, if it is to make credible decisions and achieve its growth targets. Investing in people, technology and R&D are critical to ensuring a lasting competitive edge (Dybvig & Stephen, 1985).
When the prices of natural gas increase, all the end-use consuming sectors are affected significantly. Although the observed trend may be a suitable market reaction to the existing supply and demand, the adjustments to higher prices impacts on both suppliers and consumers of gas.
Higher gas prices renders distributors to higher risks. This problem is made even worse by defaults of payments and reduced markets as a result of higher consumption efficiencies and conservation that results from economic or political factors.
The reduction in market volumes will force the distributors to adopt cost recovery strategies. Consequently, the financial returns as a result of the potential impact of the market developments will be substantial.
Supposing the increased prices of gas will reduce the consumption by the customers, this will cause a lot of problems since the distributors have designed their systems to meet the demand especially on peak seasons.
If the consumption fails to recover soon, then this may grind down cost recovery slowly and result into a serious negative effect on the potential for our market growth.
Although a delivery company can result to new rates that matches the lower expenditure per customer, this course can be costly and length.
The constant price surges since 1989 have worsened problems that results from our distribution market. This surge draws a parallel relationship with the defaults by the customers and increase in late payments.
This in turn results to increased costs to the distributors and it may eventually result in bad debts when the efforts to collect the bills fail to bear fruits.
Therefore, the distribution companies may result to changing their rates in an attempt to alleviate some of the impacts of reduced volumes of delivery.
Although prices may reduce from the historically high of 2008, they appear to have moved to a range considerably higher than that of the 1990’s. If the higher prices will carry on, the problems of reduction in gas consumption per customer, reduction in gas markets, and payments issues are expected to persist in the next ten years.
Furthermore, since the prices have gone up, the scale of price fluctuations that occurs daily will perhaps scale up, which will exacerbate the price risk faced by our delivery company (Squires, 1995).
Our company has to contend with the mounting uncertainty that is particularly typical of the recent decades. With tighter regulations and new policies to adhere to, long-term planning and strategy are very critical, given the uncertain environment.
In a bid to balance the mounting demand and price surge with sustainable and sufficient energy, our company will have to adopt new technologies. As the market continues to become more competitive albeit increased prices, industry analysts have continued to forecast a positive trend in gas demand.
Besides demand, there are several other positive trends, including improvements in refining and improved GDP. However, these positive signals cannot be so impressive considering the 2008 economic crisis, which left the industry in tatters.
As such, there is a significant upward pressure on the prices of oil and gas. This is contributed by the geopolitical turbulence that has hit Islamic countries, from Middle East to North Africa, as well as a general speculation of an upsurge in commodities market (Bodie, Kane & Marcus, 2009).
If the gas prices will continue with the upward trend, then mending up of the economy may come under a threat, which will affect gas demand in the next ten years. This problem will be exacerbated by the fact that the markets are fundamentally oversupplied.
As already discussed, the uncertainty that has gripped the industry is constraining unrestrained optimism, which is marked in all sectors, but more pronounced in the downstream sector.
In this sector, the uncertainty emanated from the so called refinery ‘golden age’, which took a high toll in 2006 when refiners were enjoying high profit margins as a result of increased oil demand. Therefore, the refining market is still finding a way of avoiding recurrence of such conditions in the future.
This incidence left a market full of persistent overcapacity in OECD nations. In spite of the grim prospects, the industry can draw some optimism from adapted tactics for the uncertain market circumstances.
Strategizing a business, which is flexible enough to capitalize on the changing market dynamics will be critical to any promising prospects in this industry, in the coming years (Christopherson, Wayne & Andrew, 1999).
In the analysis, I have predicted that the gas prices will increase to $13.67 in the next ten years.
Although there are considerable errors associated with this analysis, this forecast may turn out to be true considering the drastic fluctuation that have been experienced in recent years, in addition to the disturbance that is likely to come from the political and economical factors that have reigned the oil producing giants from the middle east (Banerjee, 1990)
Conclusion
The analysis shows a clear indication that the gas price surge will persist in the next ten years. Certainly, this situation will have a significant impact on the operation of the delivery companies.
Mostly importantly, the customers will experience more problems repaying their debts hence imposing extra costs their operations, and also affect their cash flows negatively.
In addition, the delivery companies will result to price reductions in response the shrinking demand – this will significantly reduce their profit margins.
Albeit the multiple risks associated with prices surges, analysis have predicted that the demand for this commodity will continue to increase in the future, but the delivery companies may continue to suffer because the competition in the market is intensifying.
References
Banerjee, B. (1990). Financial Policy and Management Accounting. London: PHI Learning Pvt.
Bodie, Z., Kane, A., & Marcus, J. (2009). Essentials of Investments. New York: McGraw-Hill Irwin.
Christopherson, J. A., Wayne, E.F., & Andrew, L. (1999). Performance Evaluation Using Conditional Alphas and Betas. Journal of Portfolio Management, 26(1), 59–72.
Dybvig, P.H., & Stephen A.R. (1985). The Analytics of Performance Measurement. Journal of Finance, 40(2), 2-56.
Squires, J. (1995). Performance Evaluation, Benchmarks, and Attribution Analysis. Charlottesville: Management and Research Association.