Essay: Energy Derivative
Student : Liridon Gashi Advisor: Ing. Luděk Benada
Uco : 401394
Content
1. Introduction
2. Energy industry
3. Key products in energy trading
3.1. Oil
3.2. Natural Gas
3.3. Alternative Energy
4. Energy trading
5. Conclusion
1. Introduction
With my paper, I would like to give you some basic information’s
about Energy Derivatives, As we know Investment became more
complicated as new types of derivative instruments are being
created over the pass of the last two decades. The use of
derivatives has been around for quite a long time, specially in the
farming industry.
A derivative instrument in which the underlying asset is based on
energy products including oil, natural gas and electricity, which
trade either on an exchange or over-the-counter. Energy
derivatives can be options, futures or swap agreements, among
others. The value of a derivative will vary based on the changes of
the price of the underlying energy product.
2. Energy Industry
The energy industry is the totality of all of the industries involved
in the production and sale of energy, including fuel extraction,
manufacturing, refining and distribution.
Energy has become a very essential requirement today for
existence of humans with the rapidly developing world. People
have turned to the use of energy driven resources to make their life
much easier. This has created a great demand for energy thus
leading to a supply deficit from the energy industry. Even though
the energy industry is faced with this supply deficit it has still been
going on with its driving factors ensuring invention of changes to
cope with developing world. These driving forces have also greatly
contributed to the key successes factors in this industry
One of the driving forces in energy industry is increasing need for
energy in the world. The world is developing swiftly and people
are consuming more energy through use of electronics which calls
on the energy industry to meet this increasing demand. Another
driving force in this industry is the need to combat environmental
degradation (Pipeline & Gas Journal, 2005). This is because in the
last years people have used fossil like oil, natural gas or coal as the
source of energy. These fossils contribute around 88 percent of
greenhouse effect. Thus the energy industry is been looked upon to
come up with new ways to produce energy which do not have
negative effects to our environment. Another driving force is the
need to achieve energy security (Greg, 2009). The changing
politics and economies in the world call upon government to come
up with own energy productions for security.
There have been numerous successes made in the energy industry
though inventions and new technologies. One of the success
factors is the use of solar energy. Currently invention of solar
panels made of plastic has been made instead of using silicon
which is expensive. Another success factor is the inventions on
generation of wind energy. In China inventions on use of magnetic
levitation wind turbines which ahs increased energy production of
a normal turbine by 20 percent (Lindermann, 2005). Use of
permanent magnets to generate energy is another success factor
within energy industry. Magnets are been used on electric motors,
generators and heaters as they are able to draw 100 watts of
electricity. Thus the energy industry is changing with new
inventions triggered by its driving forces.
3. Key products in energy industry
As we saw energy industry, plays big role in our society, while
globalization, and development of countries, I can say that
countries with highest natural resources and depends, how they use
those resources , they are leader, in world economy.
Fast development of the technology, plays big role in using of
energy industry.
Main products in Energy industry are :
1. Oil.
2. Natural Gas and
3. Alternative Energy.
Life became expensive, and consumption is really high in general,
for example consumption of energy is really high, in daily basis, I
can see myself ho much energy I consume, here in my room, so I
can imagine , in all the world , we
use electricity to cook food, to warm
some water, watching television
etc…
Every day, the average American
uses about as much energy as is
stored in seven gallons of gasoline. It
is quite easy to draw a conclusion who are the dominant consumers
of energy, just taking look into figure 1.
As we can se in this figure, industry, transport, residential and
commercial environment, they play big role in spending different
energy, like electricity, gas, oil.
3.1. Oil
According to Wikipedia Oil is any neutral chemical substance that
is a viscous liquid at ambient temperatures, is immiscible with
water but soluble in alcohols or ethers.
Oil is traded in form of gallon barrels, traditionally in contracts for
1000 barrels. The examples of exchanges, where oil is traded, are
CME and NYME. Though oil is openly traded in gallons, the price
of oil is counted as price of an individual barrel. Oil, being limited
resource, experiences its prices growth. Though it’s possible that in
the future due to existence of other substitutes it can become a
secondary energy source.
According to http://www.malaysiandigest.com/features/59641-top-
10-biggest-oil-producers-countries-in-the-world-2012-2013.html
we can find top countries who produce Oil.
Top five countries who produce Oil are:
1. Saudi Arabia
Crude production: 11.75 million barrels per day
Share of world production: 13.24 percent
Daily exports to the U.S.: 1.42 million barrels
Proven reserves: 262.6 billion barrels.
2. United States
Crude production: 10.59 million barrels per day
Share of world production: 11.94 percent
Daily exports to the U.S.: Not applicable
Proven reserves: 20.68 billion barrels
3. Russia
Crude production: 10.3 million barrels per day
Share of world production: 11.64 percent
Daily exports to the U.S.: 572,000 barrels
Proven reserves: 60 billion barrels
4. China
Crude production: 4.19 million barrels per day
Share of world production: 4.7 percent
Daily exports to the U.S.: 2,000 barrels
Proven reserves: 20.35 billion barrels
5. Iran
Crude production: 4.13 million barrels per day
Share of world production: 4.6 percent
Daily exports to the U.S.: 0
Proven reserves: 137 billion barrels.
3.2. Natural Gas
Now if you're talking about Gas as an energy source, we need it
because it is the most abundant and easily distributed source of
chemical energy available. The word "gas" can refer to two
separate mixtures of compounds. Gasoline is a petroleum distillate
that is liquid at standard temperature and pressure, yet easily mixes
with air to form a combustible vapor. This means that gasoline can
be easily transported and stored, and also is readily converted into
usable energy. As the name implies, Natural Gas occurs naturally
and is a gas phase at standard temperature and pressure. In fact,
natural gas will never liquefy under pressure alone. It is a very
efficient source of energy, but requires a pipeline infrastructure for
efficient distribution and due to its low density makes for poor
energy storage.
Natural gas is an important energy source to provide heating and
electricity. It is also used as fuel for vehicles and as a chemical
feedstock in the manufacture of plastics and other commercially
important organic chemicals.
Also we can see table of top five countries who produce gas:
Source: http://en.wikipedia.org/wiki/List_of_countries_by_natural_gas_production
Also we can look in map of countries:
Picture 1. Source :
http://en.wikipedia.org/wiki/List_of_countries_by_natural_gas_production
3.3. Alternative Energy.
Development of the world , has became necessary to use
alternative energy. As I mentioned before, in this paper, we spend
a lot of energy in daily life, all the households, businesses,
governments,… every thing need energy, to work. So lifestyle
changed in ages, and also needs are high now then in previous
years. So countries or governments they had to think how to use
natural sources, because they are less expensive and also natural
sources they are less dirty for climate. So if we want to keep good
condition of air, governments they should think about, to use more
alternative energy.
According from wikipedia “Renewable energy is energy that
comes from natural resources such as sunlight, wind, rain, tides,
waves and geothermal heat, which are renewable because they are
naturally replenished at a constant rate.”
Here are some possible alternatives:
1. Solar
2. Wind Power
3. Geothermal
1. Solar energy is the generation of electricity from the sun. It is
split up into two types, thermal and electric energy. These two
subgroups mean that they heat up homes and generate electricity
respectively.
2. Wind energy is the generation of electricity from the wind.
3. Geothermal energy is using hot water or steam from the
Earth’s
4. Energy trading
As we saw in previous pages, energy plays really big role , in
market, so also It take serious place in Financial Market.
Financial market is previously organized place for trade with
stocks, shares, securities and contracts. Financial market is divided
in two parts: general market (where most of the categories are
being traded) and specialized market (for instance energy market).
Energy market is submarket of financial market. On the energy
market are primarily being traded emergent. And it is one of the
most significant market since slight fluctuation on it, might cause
chain reaction on each of other markets.
5. Conclusion
Energy has become a very essential requirement today for
existence of humans with the rapidly developing world. People
have turned to the use of energy driven resources to make their life
much easier. This has created a great demand for energy thus
leading to a supply deficit from the energy industry
One of the driving forces in energy industry is increasing need for
energy in the world.
Main products in Energy industry are :
1. Oil.
2. Natural Gas and
3. Alternative Energy
Sources:
http://www.care2.com/causes/5-top-countries-leading-the-world-
in-renewable-
energy.html#13541353520151&action=collapse_widget&id=9271
687
http://www.futuresmag.com/2012/02/16/top-10-natural-gas-
producers-by-country-slideshow?t=commodities&page=11
http://en.wikipedia.org/wiki/Energy_derivative
http://www.malaysiandigest.com/features/59641-top-10-biggest-
oil-producers-countries-in-the-world-2012-2013.html
http://blogs.telegraph.co.uk/finance/ambroseevans-
pritchard/100020634/will-iraqs-energy-boom-postpone-peak-oil-
yet-again/
http://en.wikipedia.org/wiki/List_of_countries_by_natural_gas_pro
duction
http://duelingfuels.com/
http://healthyhug.com/5-stunning-and-recent-improvements-in-
alternative-energy.html
http://www.enjoygoinggreen.com/all/geothermal-energy/