Oil Levies and Law of one Pirce

Introduction

The importance of oil in today's world can in no way be undermined. In the 21st century, the world must solve two great problems. These problems are rarely discussed by the public, and have received little media attention and neither are they discussed by those in power, at least not publicly. They are as follows: Over population in developing countries and over consumption in developed countries. "Oil Depletion: The primary problem of the developed world". (R. Guseo 2007) When it comes to oil, it’s always over consumed. For example U.S.A uses 20% of the world's oil. Two-thirds of this is for transportation. This is a result of the country's vast network of Federal highways leading to suburbs built in the 1950s. (Aramdeo 2012)There are two main questions coming to my mind is that firstly do the Arab Financial Markets impact World Oil Prices?

Answer is yes; the vast Middle East and North African regions depend on oil as its major source of revenue, especially Saudi Arabia. Apart from the many other geopolitical tensions like Iraq, Iran, Nigeria, and macro-economic factors that heavily influence the oil trading mainly in the USA and the UK. Second question for my report is to find out relation between oil levies and law of one price. This question mainly revolves around how oil levy can affect law of one price. For understanding the relation firstly we will know what exactly the law of one price is and how it is related to financial market. I will concentrate only on the financial markets of US and a few other Arab countries - namely: Bahrain, Saudi Arabia, United Arab Emirates, Qatar, Muscat & Kuwait along with Egypt, Lebanon & Jordan.

The law of one price

The Law of One Price is an economic way of rational perspective to explain the expectation of price uniformity of a particular commodity or say any economics goods across national boundaries. The law tries to explain what a market price condition of a given goods should be, all things being equal, across global boundaries. This law will hold where every variable that has a causality effect on price variation are held constant. That is where there is absence of transaction cost and no restriction or barrier to trades try to use real word scenario to explain the functionality and effectiveness of the law of one price. Under the assumption that the law could be realistic in completive market with no transaction and barrier to trade cost. Interesting point here is to see if law of one price can be violated or not. As per Lamont and Thaler it is very easy to violate the law in a consumer goods market. There are many factors such as friends, family, tastes, etc. which affect consumer buying decision and some of them can actually lead to the violation of the law of one price. (Thaler 2003) Talking about basic example for