rise in global oil prices and its effect on the global economy. We also discuss the possible reason of the rise in oil prices and the possible remedies. The specific effect of the increase in oil prices is also discussed. This is done according to specific industries. A conclusion is then provided
The issue of rising oil prices can be viewed from two perspectives. The first view by the producers is that it is the best scenario for profit making while the second view, that of the customers is that it results in a lot of financial burden. Through the years, the price of oil has appreciated at an unprecedented rate. The real question however is whether the global economy can really sustain the excessive hikes in oil prices. Consumers and businesses are therefore forced to adopt new changes in order to cope with the devastating effects of high oil prices in the economy.
Causes of the rise in global oil prices
There are several causes of the rise in oil prices. The main one being supply and demand. When the demand for oil is greater than the supply, then price goes up. There are several reasons that can affect the supply of oil. An increase in demand for can affect supply. Problems in the shipping and refinery can result in disruption in oil supply. There is an increase in demand for oil in the U.S. As well as other nations such as China and India. This increase in the oil demand has exerted too much pressure on the oil reserves.EIA (2008,p3) stated that an interruption of oil supply at refinery, pipeline or a reduction in the level of import may cause an unprecedented decline in general supply. This then results in a rapid drop in the gasoline inventories that subsequently cause oil traders (wholesalers) to bid at higher prices for the available gasoline supply as a result of concern over the future. The imbalance between supply and demand is therefore a major factor in the rise of oil prices. The other factors that may affect the production are threats to supply as well as the decision of Organization of the Petroleum Exporting Countries (OPEC).
The OPEC countries wield a lot of power in the global oil supply. They produce over 50% of the global oil. The Organization of the Petroleum Exporting Countries was formed in 1960 in order to regulate the global oil supply as well as the price of oil (EIA, 2008,p7).OPEC can be considered as an oil cartel and at times, they may refuse to pump oil for the fear of causing the oil prices to plummet further. The refusal by OPEC countries to increase oil production leads to a depletion of the available reserves and hence a reduction in supply with an increase in demand. The oil price then subsequently rises.
Conflict or war in the OPEC countries
Conflict and threat of war have been shown to lead to major disruption of global oil production as well as logistics. This then causes oil prices to escalate. Examples of conflicts that have led to a disruption of global oil supply are the attacks on the Nigerian pipeline such as the one that was aimed at the Royal Dutch Shell. The Iraq war also led to a disruption in oil supply as a result of attacks by the Kurdish and Turkish forces. Nigeria is the 8th largest oil producer and the main hindrance to its production capacity is the internal conflict that started in 2006. The separatists who are active at the Niger-Delta have led to a disruption in its oil producing capacity. This in turn affects the global oil distribution and hence causing an increase in oil prices (EIA, 2008). The most recent one is the 2011 Libyan civil war which caused the price of oil to rise up to $103 the moment the coalition forces started to bomb the Libyan forces (Gorondi,2011).
Investor speculation has been noted to be one possible cause of rise in oil prices. American Drycleaner (2006) indicated that a report that was release by a group of Attorneys Generals for a rise in natural gas prices during winter was most likely as a consequence of unregulated speculation in the global commodity markets. This therefore pointed out the fact that some of the unprecedented rise in oil prices could be happening outside the influence of market forces (demand/supply).The attorneys suggested the need for an elevation of federal oversight for the entire energy markets to make sure that what the consumers actually pays for are a reflection of the demand and supply of oil quantities.
The devastating hurricanes along the Gulf of Mexico have been cited to be have a direct effect on the American oil production. This is because it led to a reduction of supply to the American market be about 25% (BBC,2008).The oil spill along the gulf of Mexico also has similar effect.
The weakness of the dollar
Chinn (2007) tried to establish a correlation that exists between the value of the USD and that of crude oil. His argument is that the price of oil is denoted in USD. A weakness in the dollar results in a rise in the price of oil. This is due to the fact that dollar is used as the denomination for oil. The analyst argues that the weakness of the dollar makes it less expensive against other currencies.
Others say that the easily extractable natural oil is getting depleted. In countries outside Saudi Arabia, it is getting increasingly difficult and expensive to access the oil. These include places like under the oceans floors, under the sands (like in Canada) as well as shale oil that are found in Colorado. It has also been pointed that the shale oil that exists in the Utah, Alberta and Colorado oil reserves are much greater than the ones that exists in liquefied form in Saudi Arabia. The only solution therefore is to employ technology at extremely high price to extract the oils. This is economically not feasible.
It has been noted that several oil field have been undergone nationalization by various oil producing countries. Examples are Russia and Venezuela. This has been noted to result to certain short-term benefits. Poor leadership and political inclinations have caused countries like Venezuela to witness a decline in oil production from the time Chavez came into power. In the western world however, governments try to regulate oil reserves as a result of economic and environmental concerns. In America for example, the offshore drilling as drilling of wells is prohibited by the U.S. government. Some governments also try to use oil in the regulation of inflation. This is noted by Bradley Jr. (2006) as wrong since the market forces should always be left to cure themselves.
The ethanol mandate
Webb (2008) pointed out that the increasing reliance on the imported oil coupled with the environmental concerns have made several nations such as the U.S. And Australia to embrace the mandating of a blend of petrol and ethanol in the domestically produced oil. It usually involves the blending of 10% by volume of the ethanol. The purpose of the mandate is to advocate the security of fuel, reduction of the trade deficit as a result of low oil imports as well as regional and environmental concerns. A reduction in ethanol supply would result in oil prices since the market would rely on imported oil. The demand of oil is highly elastic meaning that a relative change of the demand of oil or its supply can cause a relatively large price change.
Why the prices of gas is high in America
The major causes of high gas prices comprise the increased demand for oil in the nations like China and India, very great gasoline taxes, civil wars in Venezuela, numerous wars taking place in the Middle East and political insecurity in nations like Nigeria. The demand will be kept high by individuals who favor the comfort and well-being of large trucks despite their inferior fuel economy.
Supplies of gasoline are obstructed by rules that need particular combination of gasoline for some regions of the different countries. Earlier, gasoline used to be fundamentally similar; however, there are several “flavors” of the gas that is presently in the market. Normally this causes the price of gas to be higher in and around big cities.
An additional factor that makes the price to be high is the political resistance to offshore drilling.
Another reason why there is an increase in the prices of gas all through the early months of summer is the crowd of people driving to their holiday destinations. A large amount of individuals are driving. Increasing fuel prices over the previous years have resulted into huge rise in the costs for public transportation agencies. Since the prices of fuel are continuing to move upward, the costs that are added are an important issue for the transport officials. A probable advantage that is got from high prices of gas, however, is a rise in public transportation ridership. Because the cost associated with fueling the cars will increase, individuals might come up with ways of reducing the consumption of fuel, they will thus use public transportation. When a rise in the prices of gas results into an increase in transportation ridership, the revenues from fare are likely to rise, and the extra costs of fuel for the transport operator will be offset partly. Numerous news reports in the United States are indicating that transportation ridership has gone up with the increase in the prices of the gases; however, little research has been done to prove this association. When there is an effect on ridership, it will be fascinating to notice whether the result is short-lived or a long lived phenom-enon. Therefore, a rapid price increase is capable of resulting into a jump in transport ridership. To become accustomed to the high prices of gas, transporters might buy additional vehicles that are fuel-efficient. On the contrary, individuals may commence using transportation after a spike in the prices of gases, and their behavior may possibly transform permanently in a way that they carry on with transportation even when the prices of gas drop. It is also probable that the prices of gas might not affect ridership in similar manners for every transportation agency. Transport buses operating in longer routes, like the ones that are found in the rural areas, might be affected in a different way than the ones that are operating in the routes that are shorter. Somebody who usually travels for distances that are longer will probably be very responsive to changes in the prices of gas.
Effects of Spikes in the Price of Gasoline on Behavioral Intentions:
The prices of gasoline have highly affected the customers in North America for many years. Because of the current hurricanes taking place in Katrina and Ike beating the Southeastern United States that are the major oil producing places, present global economic crisis, and also the conflict that is going on in the Middle East, customers have been frequently exposed to the huge spikes in the prices of gasoline in the current years.
Responses of the consumer to gas spikes
Subjective evidence suggests that very sharp increases in gas prices are capable of having a considerable effect on customer behavior. For instance, approximately 75% of Americans are reporting that high prices of gas have made them to cut their total discretionary spending (White, 2008). This is rather astonishing as a recent study has exposed that customers frequently abandon financial costs connected with driving (Feiler & Soll, 2010), and are also generally not concerned about the energy cost and the results of their behaviors (Larrick & Soll, 2008). Nonetheless reports of customers calling off their travel plans that they have scheduled for long and placing much emphasis on extremely fuel efficient new cars have been widespread (Krauss, 2008).
There are several negative effects of increase in the price of oil. They are forced to change their shopping habits and lifestyles. They also default the paying of their bills as well as fueling of their vehicle therefore leaving them with very little options of commuting to work. Consumers are generally left with less expendable income.
Changes in driving habits as well as lifestyle
Consumers are forced to stay at home and eat less. Their entertainment is also affected since it becomes reduced and limited (no going to the movies). Vacations are cancelled.
The consumer shopping habits are affected
Consumers are forced to shop online in order to eliminate the cost of fueling their cars. They are forced to get rid of their fuel guzzling SUVs for more fuel efficient cars. The consumers are forced to change their jobs for ones that require shorter commute or to telecommute and not to travel at all.
Effects on businesses
Businesses have to cope with the loss of employees due to the inability to commute. They are forced to change their strategies of operations to include telecommuting. They are also forced to increase prices to cover for the increase in fuel prices. Vendors are forced to include fuel surcharge for all deliveries (Personal communication, 2008).
Larger businesses such as airlines are also hit hard by the rise in fuel prices, some go bankrupt due to huge operating losses. Other undergoes strategic mergers and acquisitions to counter the effect of rising fuel prices. Some adopt job cut policies and charging of other in-flight food and amenities. In the automobile industry, certain companies have changed their production schedules to exclude SUVs. Some have cut down some jobs. This therefore means that there is a seriously high rate of unemployment due to increasing fuel prices.
Rise in oil prices has devastating effects on global economy. The consequences of fluctuations of oil prices are felt in all sectors of global economy. It is important for the nations of the world to start relying on sustainable energy sources.
American Drycleaner (2006). Rising gas prices may be due to speculation. Rising gas prices may be due to speculation. American Drycleaner, 00028258, Apr2006, Vol. 73, Issue 1
Bradley Jr.,RL (2006) Market Forces Only Cure for Oil Prices. Available online at http://www.cato.org/pub_display.php?pub_id=6418
British Broadcasting Corporation (2008,September). Oil prices rise on hurricane fear.Available
online at http://news.bbc.co.uk/2/hi/7603685.stm
Energy Information Administration (2008). A Primer on Gasoline prices.
Feiler, D., and Soll, J. (2010). A blind spot in driving decisions: how neglecting costs puts us in overdrive. Climatic Change, 98, 285-290.
Gorondi, P (2011), Oil jumps to $103 as allied coalition bombs Libya/Available online at http://www.msnbc.msn.com/id/42187982/ns/world_news-africa/
Krauss, C. (2008, October 30). As gas prices go down, driving goes up. NYTimes.com.
Retrieved March 29, 2011 from http://www.nytimes.com/2008/10/30/business/30gasoline.html?partner=rssnyt&emc=rss
Larrick, R. And Soll, J. (2008). The MPG illusion. Science, 320, 1593-1594.
Webb, R (2008)the economic effects of an ethanol mandate. 22 January 2008.Avai;lable online at http://www.aph.gov.au/library/Pubs/rp/2007-08/08rp18.htm
White, J.B. (2008, November 3). Repeat performance: Buyers return for pickups,
SUVs. WSJ.com, Retrieved March 29, 2011 from http://online.wsj.com/article/SB122546849531488311.html?mod=dist_smartbrief
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