Five main factors affecting oil price fluctuations

In the past decades, any changes in oil prices have been associated with political and economic chaos, and seen as a trigger for inflation and recession. As we all know, the price of oil affects a variety of goods and services because oil is used as an energy source in many economic activities. However, in the global market the price of oil is dependent by many different stimuli.  In this blog, we would like to discuss the determinants of global oil prices.

#1. The Organization of Petroleum Exporting Countries (OPEC)

OPEC is an intergovernmental organization of 13 oil-exporting developing countries. Their main goal is to manage and unify the petroleum policies and procedures, and ensure prices remain stable within global oil markets. Nations of OPEC are responsible for 46% of the world’s oil production. OPEC can affect the price of oil by stimulating (increasing/decreasing) oil output among member countries.

#2:  Supply and Demand

Demand for oil increases each year due to the global population and mean prosperity growth. As we all know, the best scenario for the global oil inventory will be when the supply will meet demand. However, often supply is a subject to a myriad of economic, political and technical forces. In the situation when production exceeds demand, surplus of oil can be stored. However, in the situation when consumption of oil exceeds demands, inventories can be used to meet the demand. Occasionally non-OPEC suppliers who generate 53% of the globe’s oil can be tapped. Nevertheless, they don’t have adequate reserves to dictate the oil prices and they can only respond to fluctuations of market. Where, OPEC can directly affect the market pricing, especially when the production of oil by non-OPEC countries falls.

#3:  Restrictive Regulation

Government has also a big impact on the oil prices because the majority of globe’s oil reserves and production are controlled by government-owned corporation. As we all know in US each state has own gas prices. This is due to the state and local taxes, different level of competition in local retail market, as well as suppliers and environmental regulation specific for each state.

#4:  Political Conflict

If oil-rich countries, such as Canada, become politically unstable, market could respond to this situation by increasing the price of oil so that suppliers are still willing to pay the highest bidder for a security.

#5:  Weather

Another unpredictable factor that could influence the oil prices is seasonal changes in weather. Hurricanes, tornados or thunderstorms can substantially affect production facilities and stimulate pricing spikes.

 

 

How bubble tea conquered United States market?

Bubble tea is a dessert drink that has been invented in Asia in 1980s. Many famous Asian bubble tea brand came to United States recent years, and became one of the popular place in many small and large cities such as New York, San Diego, and Los Angeles.

While people define Starbucks as a luxury coffee brand, bubble tea’s price are usually higher than Starbucks. However, people did not treat bubble tea as luxury, and they are willing to buy it sometimes once a day. The following picture showed the price of a famous bubble tea company named Kung Fu Tea. A classic kung fu milk tea starts with $3 in small size, and it take extra $0.50 for the bubble.

Normally, bubble tea company focuses on the original asian tea elements that people could not find in Starbucks or other coffee house. Plus, bubble tea company is trying to provide the great service to make their customers forget they are just ordering a to-go tea. The company decorated the house, put asian elements in it, provide hand made tea, offer a wide range of choice and you can mix match the tea with coffee, milk, boba, jelly.

iPhone’s pricing strategy

According to bloomberg’s news, Apple became the first U.S. company with a market value of more $800 billion and this amount is expecting to increase since the next iPhone is about to come. In the past years, people could not image how technology companies can play a role in the center of the global business world, and obviously Apple’s rise as one of the top company around the world marked the emergence of the technology.

Tim Cook, as the current CEO of Apple, stated that apple never had an objective to sell a low-cost phone and the primary objective of Apple is to sell a great phone and provide a great experience. Apple’s skimming pricing strategy allowed apple to increase their profit as selling a high price. Although this skinny pricing strategy made apple sacrifice their sales for these low-budget customers, the large profit helped Apple to invest more into the new products.

The premium pricing strategy also helped Apple to build and maintain a  loyal customer group. These customers normally believe they pay a high price for Apple because they receive a exceptional product with the best quality.

To conclude, it is not easy for apple to stick with the premium pricing strategy since sometimes customers would choose a lower cost phone due to the budget. However, Apple’s exception design and quality still helped Apple to be the one and only technology company all over the world.

Starbucks pricing strategy in China

As one of the historical coffee shop chain, Starbucks has already developed a mature system for its pricing strategy in order to build its affordable luxury brand image. While there are many cheaper coffee chains like Dunkin Donuts, Starbucks use its minimalist store decorations, loyal rewards, great product package to keep its own consumers. After reached a huge success in U.S, Starbucks expanded its market to one of the largest consumption country China in 1999.While the price in U.S. is already higher than other coffee chains, Starbucks even has a much higher price in China while China has a cheaper labor comparing to U.S.

According to Jim, a medium size latte cost RMB 27 in China, compared with RMB 19.98 in Chicago,RMB 24.25 in London. The following chart shows the price of a Starbucks grande latte.

Even though the price level in Starbucks China is the highest among all countries,  Starbucks did received a huge success in Chinese market. After twelve years, according to the data, Starbucks has successfully opened more than 570 stores in 48 cites. I believe their success has several key reasons. Firstly, Chinese people are willing to spend large amount of money on consumption especially brands from western countries. In some cities, drinking Starbucks is a symbol of having a luxury life. Plus, Starbucks made many products which were related with Chinese culture. The last but not the least, Starbucks promote its brand and products via different social platforms to attract its consumers.

 

Why luxury brands set a higher price in China compare to Europe?

The key and only reason for such a large number of Chinese consumers choose to purchase luxury goods overseas is the greatly difference between the price in China and Europe. There are two major reasons why the luxury companies establish a higher price in China. Firstly, the high tax in China leads to the higher price on luxury goods. The following is a chart of Chinese luxury good taxation.

Product Tariff Value-added tax Consumption tax Total
Jewelry 0%-35% 17% 10% 27-62%
Watches 11%-23% 17% 20% 48%-60%
Clothes 14-20% 17% N/A 31%-37%
Handbags 10%-20% 17% N/A 27%-37%
Cosmetics 6.5%-15% 17% 30% 53.5%-62%

Source:luxe.co

 

Another reason for the high retail price is the majority luxury and affordable luxury brands charged a high premium to not only achieve a high profit but also maintain a luxury brand image for Chinese market. With the relatively low rent cost, cheaper labor cost and higher premium, luxury brands achieve a great profit to make up its loss in either Europe or U.S. market.

The following chart stated the percentage of luxury brand’s price premium on Chinese vs us site. As we can see, almost one third of the pure luxury brands charged at most 16% to 25% higher price in China compared to their U.S. price. Famous accessible luxury brands especially Michael Kors and Calvin Klein charged at least 36% and at most 50% more premium on some specific item in Chinese market compared to U.S. sites.

To attract Chinese consumers to shop in the local boutique other than wait for overseas trip, it is important for luxury brand companies to rebuild their pricing strategies.