...Costs Related to Rising Fuel Costs? ECO 550 Dr. Isley Mary Thomas March 19, 2011 Are the rising food costs related to rising fuel costs? Not only does the rising costs of fuel cause an increase in prices, but the use of some crops to make biofuels also drives the cost of food up. High crude oil prices have fueled interest in finding alternative energy sources and reducing dependency on import oil supplies. The emergence of biofuels has given rise to an alternative market for a number of agriculture commodities. Fossil fuel is a general term for buried combustible geologic deposits of organic materials formed from decayed plants and animals that have been converted to crude oil, coal, natural gas, or heavy oils by exposure to heat and pressure in the earth’s crust over hundreds of millions of years. The burning of these fossil fuels is the largest source of emissions of carbon dioxide which is one of the greenhouse gases that contribute to global warming. Biofuels are transportation fuels like ethanol and biodiesel that are made from biomass materials. The fuels are usually blended with petroleum fuels, but can also be used alone. Using ethanol or biodiesel means we don’t burn quite as much fossil fuel. Biofuels are usually...
Words: 2657 - Pages: 11
...JetBlue Fuel Hedging Case by Mengni Huang David Niedrauer . 1. the high price of jet fuel at the end of 2011, JetBlue should hedge its fuel costs for 2012. JetBlue’s approach to fuel hedging was to enter into hedges on a discretionary basis without a specific targets. As you can see from Exhibit 1 in the Appendix, it hedged less in 2009 when oil prices were low and increased the percentage hedged again in 2010 and 2011. Dynamic strategies were based on the idea that oil prices followed a mean-reverting process. Ideally, airlines wanted to lock in prices at the low point in the cycle while capping prices at the high end but take advantage of eventual price declines. Besides, the hedge value H is given by the relationship, H = ρ * σ [spot] / σ [futures] where ρ is the correlation between the spot jet fuel price and selected futures contract, σ is the standard deviation, or volatility, of each respective contract. If the price of jet fuel price increases, the hedge ratio will also increase, which means the percentage hedged should be increased. 2. Looking back from 2007 through 2011, heating oil moved closely with the price of jet fuel. The results from question 3 shows that the price of jet fuel moved more closely with price of heating oil than other two fuels. ...
Words: 696 - Pages: 3
...Fuel Hedging in the Airline Industry: The Case of Southwest Airlines Executive Summary From December 21, 1998 to September 11, 2000, jet fuel prices increased 255%, from 28.50 cents/gallon to 101.25 cents/gallon. While jet fuel prices have declined from their highs, at a price of 79.45 cents/gallon, they are still significantly above the December 1998 lows. With the future price of jet fuel being unpredictable, Southwest has decided to implement a trading strategy in an effort to mitigate its exposure to adverse price movements in jet fuel. To do this, Southwest has settled on 5 possible strategies: (1)Do nothing; (2) Hedge using plain vanilla jet fuel or heating oil swap; (3) Hedge using options; (4) Hedge using a zero-cost collar strategy; or (5) Hedge using a crude oil or heating oil futures contract. The merits and demerits of each strategy are discussed in depth below. After evaluating the possible scenarios, it is our recommendation that Southwest implement a hedging strategy that involves a combination of the jet fuel swap and the heating oil swap. The combined strategy will allow Southwest to achieve the lowest net jet fuel costs, while limiting the risks associated with the strategies individually, such as counterparty risk for the jet fuel swap and basis risk for the heating oil swap. Concerning the split between the two strategies, a 50/50 even split is recommended. Why Hedge? Hedging is a financial strategy that enables airlines or other investors...
Words: 3383 - Pages: 14
...GOVERNMENT SHOULD NOT INCREASE THE FUEL PRICE ------------------------------------------------- Abstract This essay is about the Government Should not Increase the Fuel Price. Nowadays the fuel prices are increased, and it is eventually going to affect each and everything that we use in our day to day life. Means that there are lot of effect once fuel price increase. For example, the rich get richer, and the poor get poorer. It is a chain reaction once started will affect all. The thesis statement of this essay is government should not increase the fuel price because the cost of doing business will continue to rise, increase the food price and the society will be greatly affected. The topic sentence for Body Paragraph 1 is government should not increase the fuel price because the cost of doing business will continue to rise and the topic sentence for Body Paragraph 2 is other than that, government should not increase the fuel price because it will increase in food price. Body Paragraph 3 is the refutation and the topic sentence is the government should increase the fuel price because it can reduce traffic and pollution. As we know, fuel has become an indispensable part of our day-to-day life, and we can’t imagine our life without it. There are mishaps and our life must be incomplete without them. Nowadays the petrol prices are increased, and it is eventually going to affect each and everything that we use in our day to day life...
Words: 1555 - Pages: 7
...Airlines Face when it comes to Jet Fuel” “GLOBAL FINANCIAL STRATEGIES” Instructor: Dr. William Hardin III FLORIDA INTERNACIONAL UNIVERSITY Professional Master’s in Business Adminstration Program- Panama May 5th, 2012 Project Outline Introduction 1. “Hedging” Defined 2. The Hedging Process 1. The Fuel Hedging Decision-making 2. Steps in the Hedging Process 3. Different types of Hedging Strategies 4. The Accounting Aspects of Hedging 5. Formula used in the Spot Pricing of Jet Fuel 3. Pros and Cons Arguments of Hedging Jet Fuel 4. Risk Factors that may affect the Hedging of Jet Fuel. 5. Conclusion 6. Data Analysis, Graphics and Tables 7. Bibliography Introduction The hedging of jet fuel by major airlines is the topic of this project. Hedging is considered by some as a form of insurance, similar to the kind you buy for your personal use (health, life, auto) or for your business (fire, flood, cargo). The process of hedging fuel and its derivatives is far more complicated than going out to buy a homeowner’s insurance policy, for example. We will address the different types of hedging strategies that can and are being implemented by some of the major global carriers and we will also take a look at those carriers who do not practice hedging at all. Hedging allows airlines to “insure” themselves against a negative event, such as a sharp rise in fuel prices due to a shortage in oil production...
Words: 5737 - Pages: 23
...product at competitive, low prices is not the only thing that is required to be successful. These retailers also have to make sure that they have enough products available to satisfy customer demand. At the same time, retailers must be careful not to sit on their financial assets by overstocking their warehouse with unneeded merchandise. Proper inventory management is impacted by several factors including verifying on-hands, correct capturing at point-of-sale, effective merchandising, product ordering, and receiving of the product. The first four factors are directly controlled by the retailer itself. The final factor, receiving of product, can be affected by outside influences. The product sold by retailers arrives at their final destination via vendor trucking companies or parcel delivery companies like UPS. The cost of these delivery services can highly fluctuate based on the cost of fuel, and can have a negative impact on all parties involved including the customer. In this paper, I plan to discuss how the high cost of fuel affects the operation and capital of a major retailer such as Home Depot. First, let’s take a closer look at Home Depot by conducting a SWOT analysis. StrengthsLarge buying powerProprietary vendors | OpportunitiesOnline sales “Green” shipping options | WeaknessesLimited in-stockProduct transit time | ThreatsIncreased shipping costsSlow economy | Are High Fuel Prices Leaving Our Customers High and Dry? High fuel prices directly impact the daily...
Words: 1590 - Pages: 7
...their production costs. The size of this tax should be equal to the size of the external costs associated with the product, thus enforcing the ‘polluter pays principle.’ If this were to occur, the diagram below shows what would happen in the market. As there is an increase in production costs, there is a leftward shift in supply from S to S1. This causes an increase in price of the petrol and diesel from P to P1, as the business pass on a "consumer burden" to consumers in an attempt to cover their costs by. The consequence of this is a contraction in demand from Q to Q1, as the high prices discourages some consumers. It could be argued that the indirect tax on petrol and diesel in the UK should be reduced, for various reasons. Firstly, the current tax placed on producers by the government is very high meaning producers pass on large "consumer burdens" to cover their good. As most means of transport rely on these fuels, the product is deemed "a necessity". High prices of the product mean consumers have less disposable income and result in high costs of living. In order to satisfy and maximise consumer welfare, it could thus be argued that indirect tax levels are reduced. Furthermore, a reduction in indirect tax...
Words: 1021 - Pages: 5
...Gas Prices and the Economy The marketplace of supply and demand determines the price of fuel. If demand grows or if supply decreases, there will be an increase in pricing. On the flip side, if demand declines or if there is a surge in supply in the market, there will be a decrease in pricing. If a retailer in the market prices its gas too high without regard to competitors’ pricing, consumers will take their business to the competitor with lower prices. If the retailer loses enough business due to higher pricing, they will lower the prices to be more competitive in order to retain customers. Retailer competition affects gas pricing which can be seen by price differences on stretches of highway with multiple gas retailers. More choices generally mean more competition for the retailers. Even though many retailers carry the gasoline of major oil companies, they are independent dealers of the product and can set prices as they wish. The cost of foreign trade is contributes to the rising cost; however, many other factors contribute to the pricing of gasoline which drastically affects buyers and sellers in the marketplace. According to the Chevron Corporation, like agricultural products, such as wheat and corn, and precious metals, such as silver and gold, crude oil is traded on the world market. Recently, crude oil prices have risen dramatically, driven by rising global demand and political instability in several oil producing countries (“The Price of Fuel…”). Since crude...
Words: 1528 - Pages: 7
...searches for an alternative fuel that can replace the oil industry, but usually the cost of producing a fuel isn’t as cheap as producing oil. One alternative to using oil is using bio-fuel; bio fuel isn’t produced without a cost. Bio-fuel uses food to make fuel and the main problem that has come out of this is the crisis of 2007 and 2008. The crisis caused a rise in the cost of food and distribution and caused many hungry people to be even more deprived from food. Bio-fuels help decrease the amount of carbon in our atmosphere, but do bio-fuel help in other areas beside the environment. Bio-fuels mainly use corn and other agriculture to make ethanol, an alternative to the petroleum-based fuel. What some say is happening is the amount of corn and other agriculture stockpiles are decreasing and causing the price of bio-fuel based agriculture to go up. There have been controversies about the issue with alternative fuels, mainly the big crisis that took place in 2007 and 2008. The price in oil increased and the amount of grain stockpile decreased. The cost of the increase in oil has escalated the cost of food transportation, industrial agriculture, and fertilizers. Some of the root causes may have been the increase of bio-fuels in developing countries and the demand for a variety diet across the expanding middle class of Asia. Factors like these combined with a decrease of food stockpiles all have an effect on the global rise in food costs. The use of bio-fuels increased the amount...
Words: 641 - Pages: 3
...How to Deal With High Oil Prices Student Name Institution Global oil industry faces a threat, which primarily originates from escalating oil prices. An increase in oil prices causes a tremendous negative impact on the growth of major developing and developed economies due to its direct effects on the transportation industry thereby affecting mobility of goods and people (Bacon & Kojima, 2006). At the core of the policy response concerning which party should deal with high oil prices numerous parties are considered. These parties are users, businesses, government, and the taxpayers. In response, to escalating oil prices, the government should establish a constant maximum limit of subsidized consumption for each family. Oil subsidy enables government to regulate fuel consumption, which alters the forces of demand and supply thereby obtaining an optimal oil price level. On the other hand, users deal with high oil prices by avoiding the use of personal vehicles unnecessarily. In this sense, users are obliged to use public means of transport, as exceeding the maximum subsidized value leads to a premium rate. In addition, the taxpayers could deal with high oil prices through use of efficient vehicles. Some of the efficient cars have a higher mile to the gallon of gas, which leads to relatively low consumption of gas coupled with less carbon emissions. Improved fuel efficiency offsets the negative impact of higher oil prices on economic growth. Consequently...
Words: 305 - Pages: 2
...business model? Using Figure 1.2 on p. 11 of your text as a guide, describe the three components of the business system that comprise the local business you selected. Your response should be 200-300 words in length. Conoco Fuel Station and Garage Business Commerce – The fuel station provides fuel and lubricants from outside pumps that can be accessed 24hrs per day. The outside pumps have pay at the pump to reduce personnel overhead and add convenience for people in a hurry or customers can go inside where drinks, snacks, and magazines are available for purchase. The fuel for vehicles is always in high demand because people rely on their vehicles to transport them from their homes to work, grocery store, and other locations on a daily bases. The demand for fuel stays on a consistent basis and has the supply of fuel oil diminishes the price for a gallon of fuel rises in price. The high demand and lower fuel supply has raised the price of fuel to an all-time high creating a consistently changing market price for the fuel and lubricants. All these products are purchased using cash, check, and credit card. The fuel station makes more of a profit on fuel when fuel prices are low because of the higher demand for the fuel. When fuel prices are high the fuel station makes less of a profit because of the higher cost of the supply creates less demand. The Conoco increases its profitability by investing in mechanics and tools to work on vehicles. Business Occupation – The Conoco...
Words: 808 - Pages: 4
...Competitive Advantage in the US Airline Industry The GREENair Strategy Executive MBA in Business & IT Class of 2014 Module 4 - Strategy & Organization - Assignment Author: Luís Faria Reviewer: Prof. Dr. Isabell Welpe Competitive Advantage in the US Airline Industry The GREENair Strategy Subject Page Module 4 - Strategy & Organization - Assignment 2/17 Abstract The US airline industry experienced many years of difficult and had consistently failed to earn returns that covered its cost of capital. Several changes such as regulation, deregulation and consolidation have affected the structure of the industry. The new conditions of competition led to changes on the strategy of airlines as they struggle for a competitive advantage. This document describes the current situation of the US airline industry and shape the strategic position of a medium-sized airline in the US market. Table of Content Abstract ..................................................................................................................................... 2 1 Introduction........................................................................................................................ 3 2 The US Airline Industry ................................................................................................... 4 2.1 Industry competitors ................................................................................................ 4 2.1.1 Major legacy carriers (United, American , Delta...
Words: 5013 - Pages: 21
...Buying a New Car XECO/212 Principles of Economics April 1, 2012 Buying a new car is fun and exciting but there are many factors in today’s market that are affecting those who want to purchase a new car. Not only are fuel prices incredibly high and expected to go higher based on tensions in the Middle East, employment is looking up but many are still without jobs or enough income to purchase a new vehicle. There are a few car makers that understand those looking for an economic vehicle that gets great gas mileage. Some of the factors that could cause possible changes in the supply and demand of a new car are again unemployment. This affects demand more than anything. If you do not have income to pay for a new vehicle the demand is down and probably the supply as well. High fuel prices are also affecting the supply and demand of new cars. The demand for fuel efficient vehicles is on the rise again. When gas prices increased a few years ago, people started trading in or selling their gas guzzling SUV’s. People still wanted to drive SUV’s but didn’t want to pay the price at the pump. This lead car manufacturers to develop fuel efficient SUV’s to counteract the effects of the high per gallon price of gasoline. Also the price of competitor’s vehicles for similar types of cars can affect the supply and demand of a particular vehicle. If I were looking to buy a new Buick Enclave knowing the average MPG for city is 17 and highway is 24 www.fueleconomy.gov , I would...
Words: 784 - Pages: 4
...pricing for oil and gas. This is a topic that concerns most people on this planet, why are the prices for gasoline so high and is it regarding the greed of oil producing companies to continue to keep rising the gasoline prices as high as possible. We will talk about the many reasons why these fluctuating pricing keeps occurring within our world market. Introduction: Gas and oil pricing is a constant irritate for many of us who are not happy about the high cost of fuel and why it remains high. We can use practical results that can provide evidence to this very contention of high fuel expense if we do the right research. These explanations can provide some examples of why the costs are constantly affected in our everyday life. When crude oil is produced it provides the cost per barrel depending on how many barrels it’s producing, therefore if the price is $ 80 dollars per gallon it may in fact cost the consumer the same amount by the cost of fuel per gallon. (Rising Gas Prices) Article Review of Cheaper Canadian Oil Not Reflected in Midwest Pump Prices The following information within this article relates that there is in fact a variable that continues to cause and affect our Oil and Gasoline pricing. These pricing effects can either the cost of oil per barrel; the higher the barrels are the higher the cost of fuel will be indicated. The biggest factor in the region's gas prices has been the partial shutdown of the Midwest's largest refinery BP's plant in...
Words: 945 - Pages: 4
...Closing case Chapter 6 Why did global food prices rise? Summary: In the last 25 years global food prices have been going downwards. This is thanks to the increasing productivity and output of the farm sector worldwide. However in 2007 prices went up dramatically. We can say that one of the main reasons was the increased demand in food. One of the main drivers has been the consumption of food in rapidly developing nations China and India. Rising consumption in meat leads to more demand in corn to feed animals. However farmers have been producing corn and soy beans for other reasons, mainly to create bio-fuels out of them. And to make matters even worse, governments are seeing bio-fuel as a solution for the increasing global warming situation. They are making a solution for global warming and creating another problem food is getting more expensive. The reason behind this is because farmers get subsidies from the government thus leaving the production of their crops as food behind. This makes it more expensive for other farmers to feed animals that will later lead to food in the market. These are 2 big problems that are happening right now because we want to protect the environment but we all know that we do not want to go hungry doing it. What is unfortunate in this situation is that high tariffs are shutting out producers of alternative products that can be turned into bio-fuels, most notable sugar cane, from the U.S. and EU. One of the most notably sugar cane producers...
Words: 1168 - Pages: 5
