Effects Of The Rise And Fall Of The Oil Prices

Oil is the product that each and every one of us use. It can be used for fuel, heating and even cooking. The most often known for unstable price is crude oil or gasoline. According to the The Economist, The main reason for price shifts of oil is oversupply. The oil production in Saudi rose 10.3 million barrels per day. This increase is the effect of a new method that I being applied to oil extraction. This method is called fracking, fracking is where they drill into tight-rock formations then gradually turning horizontal for several thousand feet more. This results to accommodations to multiple oil wells. This new approved method of oil harvesting has raised the productivity gains and reduced the cost of harvesting oil.

The United States consumes more than 25% of the world’s petroleum products which is a large percentage, considering only 3% of the world’s oil reserves are produced by the United States. Given the demand for petroleum products such as gasoline, understanding why Crude oil prices have skyrocketed in recent years, is not hard. According to the article “Ending America’s Oil Addiction,” the surge in crude oil prices can be reduced in large part to the simple concepts of supply and demand. (Cooper, 2008)

The featured article “The End of Oil,” the author, Alex Kuhlman argues that oil production is decreasing due to the costs of production are rising because cheap and easily accessible oil is hard to find despite increased consumption.(Kuhlman, 2007). Kuhlman (2007) provides evidence both from oil demand and supply aspects to illustrate the imbalance which causes the end of oil.

may be caused by “preferences, new information, fear, hope governmental interference” (O 'sullivan, Shefferin, & Perez, 2014). Factors that could cause a supply shift are “war, natural disasters, governmental interferences, and shortages of inputs” (O 'sullivan, Shefferin, & Perez, 2014). Back in August of 2005 hurricane Katrina caused one hundred billion dollars in damage. Understanding shifts in supply and demand is important to know because you must know what may cause a change in the demand and supply.

According to the U.S. Energy Information Administration (2014), China is the world 's second largest oil consumer behind the U.S. and with a fast-growing economy that accounted for one-third of the world’s oil consumption growth in 2013 (and expected for 2014), its demand profile is a key determinant of Brent crude oil price. Factors include:

The present study is intended to analyse the relationship between oil prices fluctuations and its role on GDP growth of United States economy. Oil crisis is prevailing in almost all developed and emerging nations for more than 40 years. Remarkable increase in oil prices have commenced from 2001 and decrease in prices was observed in 2008 during financial crisis. During decreased demand in Dec 2008, the crude oil prices dropped from 145 USD to 33 USD. However, soon prices started to rise sharply as then before. Oil caters 36% of US energy demand currently (Kilian, 2008). Oil is reported as main mover for US economy as 70% were consumed for transportation and rest 24% for industry and manufacturing and final 5% for commercial and residential sectors. The primary oil consumption rate continues to rise linearly and achieved its peak during 2008 and 2009.

The modern world of today runs on fossil fuels with crude oil being the live blood of industrialized countries. Though much of the twentieth century old was plentiful easily acquired and low in cost it has only been in the past thirty years that we have seen oil prices rise substantially. This can be attributed to many different reason. These price changes have challenged the industrialized world to become more creative with their techniques of both acquiring oil and using it.

A reciprocal of forces of supply besides demand determines market price. Hence, equilibrium price is the price at which the quantity demanded equals the quantity supplied in the market. This implies that, at this price there is a state of balance (Gillespie 2007, p.13-110). The diagrams below illustrate changes in equilibrium price:

Oil is a scarce commodity that is extracted from deep in the ground and it is not available everywhere. It is a commodity that has many uses and as such, its price, supply and demand fluctuate based on the needs of the economy and the market. In addition to oil being used to make gasoline it has many other uses, such as to make plastics, heating for people’s homes, in asphalt, and other things. Because of its many applications, it is a product that is in or plays an important part in our daily lives in one way or another. When the economy goes through periods of expansion, which are periods of economic growth, the demand for oil becomes greater and producers are encouraged to engage in more drilling in order to increase the supply to keep up with the consumption and also to maximize profits.

The purpose of this paper is to explain the effects of oil prices on various parts of the economy. The Impact of Lower Oil Prices by Bruce Lantz and Contemplating Collapsing Oil by Leonard Melman assist in explaining the advantages and disadvantages of declining oil prices. Both articles address the issues of unemployment and changes in total spending caused by the price of oil. Taking into consideration the opinions of chief brokerage and wealth management companies, as well as the actions of various prominent oil and gas companies, Lantz and Melman share their predictions in regards to the outcome of the current oil situation. However, after considering the facts presented in these articles, it seems very likely that these low prices will ultimately become a serious problem. Before delving into the meat of the above mentioned articles, several vital economic concepts must be tackled.

A number of theories have emerged as to why the price of oil has taken a severe plummet since its peak in June 2014. The price of crude oil was around $115 a barrel at in June 2014. By 2015, it had fallen by more than 40% to below $70 a barrel. (Petroff) There has been exhausting speculation over this matter including reasons relating to geopolitics, natural disasters, economic trends and the lack of regulation by the Organization of Petroleum Exporting Countries (OPEC). OPEC is the vicar of oil pricing, but has clearly contributed to the drastic price drop in the past year. The standard of OPEC is to ensure balance in the oil markets in order to secure a proficiently economic and steady supply of petroleum to consumers. (OPEC) In November 2014, OPEC failed to reach an agreement on setting a standard of how much petroleum each OPEC nation could produce, which essentially drove down the price of oil. If all of the countries in OPEC are not mandated to supply a fixed amount of oil, they will produce enough to drive down the price making it comfortable for consumers and importers to buy. This has been part of the issue since the plunge began. This de-regulation creates competition because each oil-producing country wants to set the most profitable price, which requires oil production exceeding the typical OPEC standard. The plummeting prices of oil have created positive and negative effects in different industries. The transportation and industrial industry experience lower

Besides the effect in the terms of trade, an oil price increase may have immediate effects on aggregate demand by means of higher consumer energy prices since inflationary pressures reduce consumers’ real disposable income, and, therefore, consumption. This is known in the literature as direct first-round effect. The size of the direct effect of an oil-price increase depends on the share of the cost of oil in national income, the degree of dependence on imported oil and the ability of end-users to reduce their consumption and switch away from oil .

Crude oil is the one of the most important natural resource of the industrialised nations, which could generate heat, drive machinery and fuel vehicles and airplanes (years, someone). Moreover, the crude oil components are used to manufacture almost all chemical products, such as plastic, detergents, paints and medicines (years, someone). Also, it plays a significant role in expanding technical ability to discover new sources and extending the production lives of existing oil fields. Therefore, constant changes in the price of the crude oil have an impact on a global economy (years, someone).

World oil demand is increasing as emerging economies need more energy to increase their living standards. Estimates, shown below, are that by 2030, China and India as emerging markets will import over 70% to 90% of their fossil fuel needs (1) . Coupled to a continued high and growing demand for oil, makes this a robust market for the next 30 years.

In Ghalayini’s study, by investigating the relationship between oil price and economic growth, the researcher found that as economic growth increases the demand for oil increases which pushes up the oil prices. While the increase in GDP growth and economic activity have led to an increase in the energy demand, a feedback relationship exists which can mitigate this effect (Ghalayini, 2011).