Fattouh ( 2007 ) discusses three models for analyzing the behavior of oil markets which can be used in analyzing the determiners of oil monetary values in the universe market: Non Structural Models, Supply-Demand Framework and the Informal Approach. Each of these models efforts to offer accounts on the set of variables and drivers that determine oil monetary values.
For illustration while the Non-structural theoretical accounts depend on the theory of exhaustible resources ( Ricardo, Hotelling, 1931 ) , the supply-demand model employs behavioral equations which link oil demand to its supply through such determiners as GDP growing, monetary values and militias.2.3.1 Non Structural Models: The Non structural theoretical account depends to a great extent on the theory of exhaustible resources to explicate the behavior of oil monetary values. There is a big organic structure of theoretical research on the relationship between oil monetary value behavior in the context of non-renewable resources ( Krautkraemer, 1998 ) .
There are two of import features of non-renewable resources: they are non replaceable or where they are replaceable, such replacing happens at a really slow gait. This means that one time they are used up, the resources are no longer available for usage or extraction within a sensible clip skyline ( Fattouh 2007 ) . Second, the supply of non-renewable resources is limited comparative to demand. Oil, has both of these cardinal features.
There are two of import branchings of the exhaustibility of natural resources ( Fattouh, 2007 ) : the production and ingestion of oil today has of import deductions for production and ingestion tomorrow. This means that the oil market ought to be analysed in the context of such dynamism. Second, as non-renewable natural resource, oil must command rent. Rent in this context refers to resource rent or scarceness rent. This is the wages that accrues to states with such resources for postponing the extraction of their resources until today.
Fattouh ( 2007 ) maintains that `` unlike standard goods, the market monetary value for non-renewable resource is non equalized with the fringy cost '' .The pioneering work of Hotelling ( 1931 ) laid the foundations of the literature on the exhaustibility of resources. He noted that ;`` Contemplation of the universe 's vanishing supplies of minerals, woods and other exhaustible assets had led to demands for ordinance of their development. The feeling that these merchandises are now excessively inexpensive for the good of future coevalss, that they are being egotistically exploited at excessively rapid a rate, and that in effect of their inordinate bargain rate they are being produced and consumed prodigally has given rise to the preservation motion. ''Hotelling 's work ( 1931 ) was concerned with an of import inquiry: given demand and an initial stock of the resource, what sum of the resource must be extracted each period in order for the proprietor of the resource to obtain the maximal wagess from the resource? To turn to this inquiry, Hotelling proposed an of import theory.
He argues that presuming no extraction costs and given a market monetary value per unit of resource and existent hazard free involvement rate on investing in the economic system R, in a competitory market, the optimum extraction way must be such that the monetary value of the renewable resource will lift over clip at the rate of involvement. In this instance, the proprietor of this resource has two picks ; he can either pull out the resource today or go forth it buried in the land for extraction in the hereafter. If the proprietor of the resource decides to pull out the resource today that resource will non be available for future extraction and any of the resource left in the land can bring a higher monetary value in the hereafter. In that regard, if the resource is extracted today, the resource proprietor can utilize the returns and put them at an involvement rate r. However, if the monetary value of the resource is expected to lift over and above the rate of involvement R, so the inducement is at that place for the proprietor to keep the resource for extraction at a ulterior day of the month.
In that instance, if all resource-owners behave in a similar mode, the supply would travel down thereby doing the current market monetary value of the resource to lift. Fattouh ( 2007 ) argues that `` given this equilibrating mechanism, the optimal extraction flight is the 1 in which oil monetary value additions in line with the involvement rate '' . One deduction of this theory is that as monetary values addition, demand for the resource is clogged up and any farther high degrees of additions in monetary value lead to an riddance of the demand for the resource. This point occurs when the resource is wholly dog-tired ( see Fattouh, 2007 ) .Hotelling 's theory has had a far making influence on most energy economic experts who maintain that oil monetary values must lift over clip.
This place continued to be a dominant force in calculating theoretical accounts in the account of oil monetary value behavior even in the 1980s and 1990s ( a period that saw unprecedented falls in oil monetary values ) . Empirical research has nevertheless shown that mineral monetary values are trendless ( see Krautkraemer,1998: Lynch,2002 ) . Based on this place, Lynch ( 2002 ) argued that ;`` for many old ages, about every oil monetary value prognosis called for such a tendency ; as the prognosiss proved erroneous, the tendency was retained but applied to the new lower point... the combination of these theoretical statements with the oil monetary value daze of 1979 gave acceptance to these lifting monetary value prognosiss, and it has proven hard to convert insouciant perceivers that although monetary values might lift, it is neither inevitable nor preordained by either economic jurisprudence or geology ''In turn toing some of the issues raised in the Hotelling theoretical account, Pindyck ( 1999 ) suggested that instead than utilizing structural theoretical accounts which factor in a broad scope of supply and demand factors, it is preferred to utilize simple non-structural theoretical accounts that examine the stochastic behavior of oil monetary values.
But Fattouh ( 2007 ) observed that the prediction public presentation of the theoretical accounts used in Pindyck ( 1999 ) were extremely assorted and hapless in explicating the behavior of oil monetary value fluctuations between 1974 and 1985. Some research workers in recent times have relaxed some of the Hotelling premises to do the theoretical account more realistic ( Fattouh, 2007 ) . By loosen uping these premises, oil monetary values have been shown to exhibit a figure of tendencies ( see Moazzami and Anderson 1994 ; Slade, 1982 ; Khanna, 2001 ) . These new theoretical accounts the relaxation of some of the initial premises in Hotelling ( 1931 ) have shown that monetary values can be revised downward or may even follow a U-shaped way.Harmonizing to Slade ( 1982 ) , the monetary values of non-renewable resources exhibit a U-shaped way.
Harmonizing to this research, technological alteration lowers the cost of pull outing the non-renewable resource doing a decreasing way. However uninterrupted resource depletion with decreasing returns to technological invention will take to an upward displacement in monetary value hence an upward way. Harmonizing to this empirical research, the minimal point of the U-path occurred in the sample period of 1978 bespeaking that the oil monetary values should hold followed an upward tendency from the late 1970s onwards. But as Fattouh ( 2007 ) observed, this upward tendency did non go on and the state of affairs is farther thrown into confusion with farther empirical surveies demoing that non-renewable resource monetary values do so exhibit stochastic tendencies.The above treatment elucidates the confusion environing the Hotelling theoretical account and the literature on resource exhaustibility. One of the cardinal unfavorable judgment against the Hotelling theoretical account lies in the premises on the exhaustibility of resources and fixed stock.
Adelman ( 1990 ) argues that instead than handling resources as a fixed stock, they should instead be viewed as stock lists which can be depleted through extraction but besides replenished through geographic expedition and development. Consequently, Adelman ( 1990 ) sought to reason that the construct of scarceness rent is non-existent and that theoretical accounts based on this construct fail to supply an accurate word picture of oil monetary values in the existent universe. These statements against Hotelling have nevertheless been debunked as misapplications of the theoretical account ( see Fattouh 2007 ; Watkins 2006 ) in that Hotelling 's work was `` directed more at the house degree where the focal point is on a sedimentation of known, fixed measure '' ( Watkins, 2006 ) .2.3.
2 The Supply-Demand Framework: One of the cardinal economic mechanisms through which the monetary value of a given trade good is determined is through the interactions between the forces of demand and supply. The supply-demand model is based on such interactions and this is the most widely used theoretical account used in the finding of oil monetary values ( Dees et al. , 2007 ) . In analyzing the determiners of oil monetary values in the hereafter, one thing that is certain about the monetary value of oil is its uncertainness. Such uncertainnesss may be captured in such issues as geopolitical currents particularly in oil-producing states as seen in the events of the `` Arab Spring '' ; breaks on supply due to OPEC policies and natural catastrophes as seen in the Great East Japan Earthquake.
On the demand side of the model, issues such as the monetary value elasticicity ( Gately and Huntington,2002 ) and income elasticiticity ( see Ibrahim and Hurst,1990 ; Gately and Huntington,2002 ; and Brook et al.,2004 ) of petroleum oil demand, the snap of gasolene demand are analysed. This is because the long-term and short-term monetary value and income snaps can bring forth different demand curve forms ( Fattouh 2007 ) . Conversely, on the supply side of the equation the behavior of non-OPEC supply ( Cremer and Salehi-Isfahani, 1991 ; Hubbert, 1956 ) , the size of planetary oil militias ( Campbell, 1989 ; USGS, 2000 ; Odell and Rosing,1983 ; Shell 2001 ) , economic-based theoretical accounts ( Alhajji and Huettner,2000 ; Watkins and Streifel, 1998 ) and the behavior of Hybrid theoretical accounts ( Kaufmann, 1995 ; Kaufmann and Cleveland,2001 ) are discussed to find the monetary value of rough oil. Undoubtedly, one administration which exerts untold force per unit area on the monetary value of rough oil in the universe market is the Administration of the Petroleum Exporting Countries ( OPEC ) . This makes the survey of OPEC behavior unimpeachably of import in an effort to understand oil monetary values.
OPEC behavior has hence been a topic of great involvement among research workers ( eg. Johany, 1980 ; Teece, 1982 and Mead, 1979 ; Hnyilicza and Pindyck, 1976 ; Adelman, 1982 ; Salant 1976 and Smith, 2005 ) . Changing accounts for the behavior of OPEC have been given including two-block trust, gawky trust, dominant house, co-operating oligopoly and residuary house monopolizer ( Fattouh, 2007 ) .2.
3.3 The Informal Approach: In analyzing the recent rises in the monetary value of oil, research workers have focused their attending on a broader spectrum of factors other than alterations in snaps and militias. Attention is now being paid to such factors as a deficiency of trim capacity in upstream oil, distributional constrictions, and the response of OPEC to provide, geopolitical undertones and the increasing incursions of speculators and bargainers in the oil market. The divergency of positions on the influence of OPEC in the finding of oil monetary values has already been highlighted above.A reappraisal of the literature on the three attacks discussed above shows the gamut of divergent positions among research workers on the scope of factors that determine oil monetary value.
In the building of the scenario logics for the hereafter of conveyance in Ghana, we propose to utilize the Informal Approach in picking out the two critical factors that drive oil monetary values in the universe market. This is because while each of the three models suffers from major restrictions ( Fattouh,2007 ) , oil monetary value volatility in modern-day times are explained by this model ( see Fattouh, 2007 ) .
