The Price Of Oil And Its Effects On The Economy

Oil has often been referred to as any economy’s lifeblood. Although this is an overemphasis, oil has been the key, nonhuman resource of the economy throughout the largest part of the 20th century. In the book “The Prize: The Epic Quest for Oil, Money, And Power” by Daniel Yergin, the author illustrates the political, societal, economic, and geo-strategic importance of this product.

Evidently, the connection between fuel and the world has resulted in an intimate relationship between global economy and the prices of oil. In this regard, the world is increasingly growing dependent on petroleum and, as such, it follows that matters concerning fuel prices are bound to affect the global economy. Be it a slump or a rise, oil prices factor significantly in every country regardless of if the given country is an importer or an exporter; however, the impacts are different in magnitude for each nation. In fact, the behaviour of fuel prices at any given moment world widely is crucial in determining the performance of the global economy with both low and high prices affecting the economy exclusively.

The causes for WTI crude oil and its price changes are all about supply and demand. If consumers are trying to cut down on there use of oil because it is getting to expensive then the supply is higher then the demand therefor the price of oil will go down to try and get consumers to buy more oil and stimulate the oil trade. If a large amount of people are demanding oil and the supply cannot keep up with the demand then the demand is higher than the supply therefor the price will go up to slow down the trading of oil.

The OPEC nations showed the world that their huge crude reserves could be wielded as a political and

The Organization of the Petroleum Exporting Countries (OPEC) was formed in 1960 to unify the policies of oil exporting countries in the Middle East (About Us). During the 1973 Arab-Israeli War, the United States and Netherlands helped Israel in this war with supplies. This angered OPEC countries and acted as a catalyst for the 1973 oil embargo (Reid). Many countries in OPEC and most notably Saudi Arabia, wanted Israel to retreat from territories they gained during the war (Reid). The embargo that resulted caught many Western countries flat footed and sparked a global recession.

This research paper provides an overview on why there is oil price falling in the United States. It will examine the reasons that are influencing fall of oil prices. Additionally, the paper will seek to explore the effects caused by the fall of oil prices in the American’s economy.

Leading up to the 1970’s the world was fueled by an abundance of cheap oil. Countries were able to industrialize, consumers were able to utilize all sorts of petroleum goods and low costs, and best of all there were no worries of shortages. The good times were not to last. There was emerging conflict in the Middle East that warranted United States aid to Israel in the early 1970s. The Arab countries of the Organization of the Petroleum Exporting Countries (OPEC) were not in favor of United States intervention with Israel. This caused an outrage and sparked a non-negotiable rise in posted prices of oil. Eventually, it led to an oil embargo on the United States and Netherlands. The impacts of the 1973 oil embargo led to long term impacts on Lesser Developed Countries economically, United States energy security outlook, and United States energy action.

The first steps towards forming the Organization of the Petroleum Exporting Countries, (OPEC) began in 1949. Venezuela and Iran contacted Iraq, Kuwait and Saudi Arabia about

The United States is the largest consumer of gasoline in the world. Not only do we use more than any other country in the world, but our usage is almost twice as much as the second largest consumer in the world. We need gasoline to power our cars, boats, and the modes of transportation we use to transport the goods we produce from one place to another. But what determines the price we pay for this precious commodity? Gasoline is produced from the refining of crude oil. We import and produce oil by the barrel. One barrel of unrefined oil produces approximately 19 gallons of gasoline. The crude oil we import is a commodity, and the world market is what determines the price of these barrels of oil, along with demand. The world demand can be controlled in a couple different ways. First, The Organization of the Petroleum Exporting Countries (OPEC), which is an oil cartel whose members are some of the largest oil producing countries in the world, control the amount of oil that is put into the world market. By controlling the amount available they can control the demand from countries that mainly rely on this import. The

All these global policies and strategies not only include OPEC, but other countries such as the United States of America, who is the third world oil producer. This has changed many times throughout the history, as shown by Tabak & Cajueiro who stated “Due to the limited production of crude oil in the United States in 1971, the power of control of crude oil was shifted from USA to OPEC” (30). This gives us a hint about who the “players” are that were mentioned above. This is referring to USA and OPEC (led by Saudi Arabia). In this “battle”, these two countries determine who leads the oil market and control the oil prices.

As crude oil is invoiced in USD, it is of interest to note how fluctuations in the value of the USD affect oil prices. Another of our factors is the price of natural gas, the closest substitute as a source of energy to oil. Lastly, we seek to establish a relationship between returns in the S&P500 and oil prices.

According to Domm (2013), the author of the first article, apart from the unrest in Egypt, several other factors such as a plunge in the inventories of domestic crude oil could drive up demand and in the end trigger an increase in the price of gas. In the opinion of the author, although the problems facing Egypt (and Libya) have affected supply

Graph 1 represents the market supply of crude oil, segmented by Organisation of Petroleum Exporting Countries (OPEC), Non-OPEC and US oil suppliers. It also represents how the oil price have fluctuated from 2004 until 2014. In 2014 we are able to see declining oil prices due to various factors related towards the supply and demand of crude oil which will be explored below.

Among the factors that often blamed the current price increases embrace the renewed geopolitical concerns in the Middle East, declining excess capacity in oil production, the production cuts agreed by the Organization of Petroleum Exporting Countries, the devaluation of U.S. dollar against other most important currencies, increased demand from rising countries and the noteworthy expansion in provisional dealings on oil futures market.

The world’s pricing mechanism of petroleum is determined by OPEC (Organization of the Petroleum Exporting Countries) and is quantified by barrels of crude oil. At peak, price of crude oil is USD147.27 per barrel in July 2008 following concern of an impending missile test by