The Oil Industry and How It Affects Our Economy - Essay Example

The policies and decisions made by various institutions can and in fact, changes the nation's economic performance. One of the most significant players in the economy of the United States as well as the whole world is the oil industry. As the nation and the world as a whole, are becoming more and more industrialized, we also became more dependent on oil to fuel our technologically more advanced equipments. Nowadays, the importance of the oil industry can never be overstated. Insufficiency in this resource will surely facilitate the spillover of negative externalities in the entire economy.

This paper will examine the oil industry and its great role in the US economy. The first section will give a brief history of the oil industry followed by its influences in the whole economy. The paper will then examine the historical oil prices and the cause of the recent oil price hikes and their implications in the economy. Currently, it is estimated that the economy of the United States consumes 20 million barrels of oil per day. This huge consumption of oil is to support the country's highly industrialized economy especially in the production of different goods.

However, the United States is not self-sufficient in oil production as 60% of its total requirement is sourced from foreign exporters. In other words, only 8.71 million barrels of the 21 million daily demand for oil is absorbed by the domestic oil industry (Some Factors 2005). From here, we can conclude that the US economy is strongly tied to its oil industry. Therefore, the movements in oil prices also have direct effects in the production and the volume of goods produced in the country. Figure 1 shows the behavior of oil prices in the world market from 1861 to 2004.

Values are shown in current (green) and constant (orange) prices. Since constant prices are already deflated to illustrate consistency with the base year 1861, their values are lower than the current prices. We can see that sharp increases in prices are brought about by various events in the world economy. For example, the highest historical price of nearly $100/barrel was experienced during the 1960s as a response to the Pennsylvanian oil boom. Another is associated with the Iranian revolution in the 1980s.

We see a significant drop in current oil prices started during the 1980s which is also followed by the downward trend in constant prices. However, oil prices started to mount in the late 1990s following the Asian financial crisis (Oil Prices 2005). Presently, the price of oil in the domestic market continues to skyrocket. The current price of a barrel of oil is estimated to be at 61.83. This huge oil price hike can be attributed to a lot of factors in the economy (Energy Prices 2005). First, it is an impact of the high price of crude which reached as high as $70 per barrel.

This is consequent to the tight supply of crude in oil market and the high demand for it from Americans. International demand for oil is also high to support the growing economies of prospective economic giants like China. It is estimated that crude oil imports in China leaped by 30% in 2003 (Some Factors 2005). The refinery capacity of the United States has also an impact on the high prices. Currently, the country's refinery