Economics And Finance In Coal And Oil Markets: Analyzing Risks And Implications

Aim and Objectives of the Research

Discuss about the Economics and Finance in Coal and Oil Markets.

Interest within the oil and coal-based investments and related financial risk management has been developing for over the future financial years. Among the most vital energy commodities is deemed to be the crude oil that is accompanied by increasingly uncertain and volatile prices. Crude oil is deemed to be a vital aspect of the economic and the business activities within any economy (Mack, 2014). For this reason, realizing the price movement is deemed to be necessary for better business and economic decision making by managers within the oil and coal industry of Australia. In addition, the crude oil, coal along with other energy commodities has turned out to be among the highly active energy assets within Australia. From the current publications represented by “International Renewable Energy Agency (IRENA)” it has been gathered that the energy industry is dealing with the issues related with leaving more than $10 trillion in the oil, gas and coal along with other associated assets (Mackey & Gass, 2015). Few other reports published by the Australian government revealed that the energy industry operate on the precarious economic grounds that is experiencing new threats for the organizations focused on oil, gas and coal fossil fuels.

The major problem based on which the researcher has decided to carry out research on this topic is focused issues raised by the previous literature. It was gathered that several risks and uncertainties are faced by the oil and coal industry of Australia as per the report published by “International Renewable Energy Agency (IRENA)”. Such issues have also been identified from other publications as referred to declining of oil market in 2014. In addition, over the future years oil company reserves is deemed to drop by at least $22 trillion that is observed to be equal to twice the China’s GDP (Monasterolo et al., 2016). Declining local oil and coal industry is another concern faced in the energy sector these days. Several government publications on renewable and non-renewable energy indicated that in the year 2015, more than 94 organizations operating in the energy sector collapsed and the other 41 energy-based organizations shut down in the year 2016 (Slee, 2017). In some of the areas within United States it has been gathered that unsubsidized Solar energy is observed to attain more consideration for the investors as well as public concern regarding the climate risk requirements that must also be taken into account. Such risks will also be able to associate the economic risks that are present within the oil and coal market at the time of increasing investor along with public concern for the climate risk observed within the fossil fuel industry. The current research is focused on offering vital implications retarding the present understanding of risk management within crude oil and coal market. The major scope of this research is to observe the finance and economic risks associated with process of the crude oil and coal future contracts (Smith, 2017). It also offers analysis of the relationship between the oil prices and the economic or financial variables. Another factor is persistence that is present in data and economic oil prices transmission itself.

Conceptual Framework and Hypotheses

The aim of the current research that is to be addressed after its completion is to recognize the uncertainties those are present within the oil and coal industry of Australia along with analyzing the related risks in finance and economy of the nation. The research objectives that are to be met in the research are explained under:

• To identify the financial uncertainties that results in increased risks within the coal market
• To recognize the vital economic risks resulting in uncertainty to the coal industry
• To reveal the financial threats for the organizations related with the oil industry
• To evaluate the economic risks that can result in uncertainty within the oil industry

The current research is deemed to offer certain important research implications focused on complex oil and coal prices. The research will also explain the demand and supply followed by the inventories along with the storage that serves as the intermediary along with being a market making process between the demand and supply (Soeder et al., 2014). The current research will contribute to the literature regarding the co-movement of crude oil along with the coal prices within the fossil fuel market. This will be revealed through investigating the co-movement type employing the futures prices. The analysis carried out in this research will reveal that the higher coal price volatility that ultimately decreases the value of the project. For this reason, realizing the price movement is deemed to be necessary for better business and economic decision making by managers within the oil and coal industry of Australia (Taylor, Bogdan & DeVault, 2015). In addition, the crude oil, coal along with other energy commodities has turned out to be among the highly active energy assets within Australia. It will also indicate that not just the dynamics of oil and coal are important but also the co-movement nature of the process related with gas and oil products in such research outcomes, an important factor that is to be taken into consideration that valuation along with optimal operation. The valuation leads to encompass a long-term relationship between the oil and coal market that can serve in taking a crucial decision for valuing the project along with its suitable business operation. The research findings are also deemed to reveal that ignoring such long-term relationship makes the optimal policy highly sensitive to the dynamics of the coal and oil prices (Tulloch, Diaz-Rainey & Premachandra, 2016). It will also be gathered from the research results that the interest rate premium, foreign exchange rate risks, return on the coal and oil price remains statistically significant in determining a high return on the shares of coal and oil companies in Australia. Several risk factors related with the coal and oil companies in Australia will also be revealed through this research. Based on the financial and economic risks and uncertainties faced by the companies the process to deal with these risks will be identified. This includes dealing with market and industry risks that is a major part of financial and economic risk through proper use of derivative market and active trading (Vaioleti, 2016).

Bergmann, (2016) explained that financial risks experienced by the oil and coal market is associated with the trading assets within the industry or the inability to trade specific assets. Such risk describes the liquidity risk that is explained as the type of risk taking place from carrying out transactions within the industry that has decreased liquidity. Berkey, (2016) explained that operating in such economic marketplace can have negative implications on the company’s oil and coal assets as well as its prices. It is also gathered that in the energy industry of Australia making attempts to sell oil and coal assets might push prices lower and they will have to be sold at prices below their normal value or in a timeframe longer than anticipated.

Within the macroeconomic envirinmet, the oil and coal companies are observed to the major players and there are highly aware of the economic uncertainties faced by them by the market and from fluctuations in the commodity prices. According to Bryan, (2016) the economic risks are faced by the oil and coal companies in nations are because of the fluctuating global prices of crude oil, coal and gas along with some by-product chemicals. There are also vital implications of the buoyancy within the energy sector. It is also stated by these researchers that oil and coal prices volatility take place from the economy’s decreased tolerance to the increased oil prices. In contrast, Christophers, (2016) presented a view that there is a drive to constrain oil and coal demand in the Australian energy market in order to prevent the climate change and improve energy security that also threatens the profitability of the oil and coal companies as a whole. Economic control over the uncertainties is deemed to include regulatory as well as liability concerns focused on the regulations of crude oil trading along with the volatility of the market. Cowell, (2017) indicated that the financial risks include the concerns focused on the drilling and production of the crude oil and coal, the later uncertainty is associated with the liquidity risk that is caused by certain implications that can have a drastic impact on capability of oil and coal company’s ability to harvest as well as locate new sources. These reasechers also indicated that another financial risk that is likely to be faced by the oil and coal market is the credit risk. According to the views presented by Flick, (2015) it has been gathered that a change in the credit quality in trading between two parties for crude oil and coal is deemed to negatively affect the security value or that of the portfolio. Such risks can result in the oil and coal companies to face the possibility of getting default and in this the counter party is to any more in a position for the causes to address all the contractual obligations present within the energy market.

According to Roula, (2015) in the nature of financial and economic risk along with its omnipresence on its mitigation, managing as well as supervising encompass the matters of the financial nature which needs a discipline dedicated towards the end. Risks that are faced by the oil and coal companies are deemed to take place from certain environmental changes. Such changes are associated with the factors related with the changes in the interest, market as well as change rate risks. Frisari and Stadelmann, (2015) also stated that the financial risks that are observed outside the company’s engagement or interaction takes place from the transactions with the consumers, sellers and several other parties. Considering the same, the financial risk management within the oil and coal market is observed to impact the internal as well as external business operations of the related companies. Gary, (2018) explained economic risks management to be a discipline to deal with the uncertainties that took place from the economic market. Additional information is also provided that considers analyzing the economic risks faced by the oil and coal market along with developing effective management strategies consistent with internal policies present within the industry.

Hahnenstein, Köchling and Posch, (2018) indicated that management of the financial risks happens to be a reliable platform in attaining a detailed understanding of the causes that are causing it and it does not exclude the requirement to get involved in risky activities. For this reason, the risks and its management that are considered are not deemed to be mutually exclusive. These reasechers have also explained the economic and financial risks management process that includes identifying risks, measuring exposure, performance, measure, estimation and recognizing the techniques to mitigate them. Halland et al., (2014) evidenced that the economic risk management process has developed another image of effective risk management.

Considering same, measurement of economic risk is followed by recognition of instrument related with the trading risk. Such economic risk management process includes two significant activities stream. Both of these models are considered to be a sequential process in which the oil and coal companies get involved in certain interrelated activities which are monitored as well as analyzed in this process. Hasan, (2016) explained the type of investments that are made by the oil and coal companies to deal with the economic and financial risks that further facilitates in maintaining stability if the volatility in the value of such organizations. These reasechers have also recommended that among the advantages of economic risk management within the companies operating in oil and coal market it is likely to increase company value along with decreasing the financial distress possibility.  Lewis, (2015) added that the value of the energy sector companies is likely to experience fluctuations in the interest rates, foreign exchange along with the commodity prices that includes oil and coal fossil fuels.

The research hypotheses that are to be provided through accomplishment of the current research are explained under:

• Hypothesis 1: The financial uncertainties has positive impact on increasing increased risks within the coal market
• Hypothesis 2: The vital economic risks has positive impact on resulting in uncertainty to the coal industry
• Hypothesis 3: The financial threats for the organizations has positive impact on increasing uncertainties within the oil industry
• Hypothesis 4: The economic risks has positive impact on increasing uncertainty within the oil industry

The research survey that will be carried out in the research of financial and economical risks faced by the oil and coal companies will include the respondents from both the coal along with oil industries (Mackey & Gass, 2015). These respondents will be selected in a manner that they are the suitable people those can identify the distinct type of financial as well as economic issues that results to the uncertainties of the companies operating within the fossil fuels industry. The respondents will be divided into two major divisions such as middle level employee’s as well as the managers that works within the oil and coal industry in the Australian market. Mixed research approach will be employed in the current research. Moreover, qualitative research approach will be employed considering its benefit that it can support in using the semi-structured and the unstructured techniques (Monasterolo et al., 2016). This research approach is also focused on uncovering trends in the thoughts and viewpoints with offering detailed view within the recognized research problem. Quantitative approach of reassert will be used that can indicate the relevancy of the information that will be valuating in collection of important data that can provide relevant research results.

The aim of the current research that is to be addressed after its completion is to recognize the uncertainties those are present within the oil and coal industry of Australia along with analyzing the related risks in finance and economy of the nation (Soeder et al., 2014). In addition, as the current reassert focuses on analyzing the economic as well as financial risks within the coal and oil markets through quantitative analysis, deductive research approach will used employed in this study. This is due to the reason that the researcher has employed primary data collection method and deductive research approach is highly suitable in gathering relevant research results on this subject.

Collection of the qualitative as well as quantitative data that will be gathered in this research will be relied on a particular time as the oil prices has began to decline in the year 2014 (Taylor, Bogdan & DeVault, 2015). At such period, the oil industry was observed to be selling off at the auctions based on the prices of the bargain basement. The data collection of the research that will be focused on this study on the increasing debts of the coal and oil industries from the $1.1 trillion to $3 trillion from the year 2006 and the year 2014 (Mackey & Gass, 2015). Certain other sources of data collection that will be implied on the trend of the increasing unemployment from the boom of coal mining in the year 1970s. Several other research articles will be studied that is published by the “US Bureau of Labor Statistics”. The analysis is deemed to be relied in such report that will signify the increase in the demand of the coal and oil because of the resource depletion, technological changes as well as automation. In addition, the secondary data that will be gathered is deemed to be from the authentic ad reliable journals, e-books as well as previous research papers (Monasterolo et al., 2016). The data analysis will be carried out relied on the indication of the vital reasons for the risks and the uncertainties with the implementation of the measures of dispersion along with the descriptive statistics. The analysis of the qualitative data will be carried out through following the observation method.

The first chapter in the research of likely economic and finance risks present in coal and oil markets of Australia is focused on introducing this research topic. The second chapter of this research proposal will explain the research problem based on which certain solutions are to be gathered after research completion. The third chapter of the research is to explain the aim and objectives set in this particular research. The fourth chapter of this research proposal will provide justifications for the possible research outcomes in this study. The fifth chapter will explain the relevant literature that is present on the research subject based on which suitable research hypotheses will be developed that will be further tested in the research. The sixth chapter will explain the research methodology that will be employed in this study for explaining the suitable approach, data collection process and budget set for the research.

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