How does oil and gas market effect on world economic - Coursework Example

? Introduction There is no contention or doubt that oil and gas are the major sources of energy in the world, despite the invention of other sources of energy like Nuclear and geothermal energy, oil and gas remain the most crucial and fundamental source of energy. The economy of most countries in the world is dependent upon oil and natural gas; this has been greatly evidenced by the effect of global oil and gas prices on the prices of other basic commodities and the cost of living. This vehemently indicates that the global economy is inextricably bound with the global oil and gas market. Political crisis and interrupting in major petroleum producing countries has often had tremendous effect on global prices of all other industrial commodities. This is because oil and gas energy is the backbone of industrial activities and development. . Other factors affecting the global oil market include technical factors, pricing and marketing, Environmental issues, national security, and public policy choices and debates in global oil markets. According to a report released by the International Energy Agency in the year 2011, the top ten oil producers accounted for 63% of the oil produced worldwide. These giant oil producers who have a large share of the Market greatly influence the international oil market. It is also projected that USA is going to overtake Russia as the largest oil producer by 2017. The greatest share of oil production is in the Middle East and political crisis in the last few years has seen a significant increase in global oil and gas prices. The USA for instance is now seeking ways of shielding its economy from the effects of Middle East crisis or any other future crisis affecting major oil producers (EconomyWatch, 2010). Global Oil Market Currently the leading oil producer is Russia with a market share of about 13.28% followed closely by Saudi Arabia and USA, which have a market share of 12.65% and 10.93% respectively. Other oil producing countries in order of market share include Iran, China, Canada Iraq, United Arab Emirates, Venezuela, Mexico, Kuwait, Brazil, Nigeria, Norway, Texas, Algeria and so on. We can see that the Middle East region produces the greatest percentage of oil in the world. The aspect of market regionalization is important in that if markets were regional, then importers would not necessarily access oil. Market regionalisation would see very great oil price disparities which is mitigated by the oil controlling cartels like OPEC (Organisation for Petroleum Exporting Countries) OPEC has dominated the global oil market for a very long time and has somehow been effective in pushing the price of oil upwards in favour of oil producers. Due to the impact that the cartel has on the prices of oil and the market in general, there have been claims that the global oil market is not a fair market. This has seen petroleum producing countries realise a lot of wealth from the oil importing countries. The cartel has been effective in keeping the prices of oil higher than it would probably be if controlled by competition in a liberal market. However oil prices are at times greatly affected by world crisis or disasters and also speculation by the traders in this multi Trillion industry The petroleum producing countries greatly impact on the global oil prices by regulating production and supply, especially OPEC is very instrumental in regulating production by member states thus affecting supply and demand. The organisation is also involved in marketing of oil of the member states giving them a bigger bargaining power. If traders speculate a reduction in oil, prices they push the prices up, the availability of oil in strategic reserves also affect the global oil market. These include the oil stored in American reserves and refineries and also Saudi Arabia which has a very big reserve. If Saudi Arabia for instance allows release of oil from its strategic reserves, global oil prices tend to go down. Demand of oil and gas also greatly impact on the prevailing prices, this is especially during the summer season in Europe and USA where consumption and demand of oil and gas goes up. There has also been a general increase in world oil demand with no considerable increase in supply which has contributed to increase in global oil prices. This increase in demand is attributed to the tremendous economic growth experienced by countries like China, India and other developing countries. Chinese demand for oil was indeed a significant contributor to price pressure after 2000 and especially after 2008 (Lawrence, Edwards and Lawrence 2013, p.171) Effect of crisis in oil producing countries on the global oil and gas market It is intuitive that potential crisis in oil producing countries greatly affect the global oil and gas prices. History of Petroleum price show that the world enjoyed a period of relatively stable oil prices between 1950 and 1973 after which a rise in cost was triggered by the famous Yom kippur War of 1973 and the Iranian Revolution of 1979. After this period, the world has had various instances of oil price volatility. In 2011 for instance when there was a wind of revolution blowing across North Africa with political unrest in Egypt, Tunisia and Libya, the global oil prices rose from 70 dollars a barrel to 100 dollars a barrel, this happened due to speculations of reduction of oil supply emanating from the crisis. During this revolt period, which came to be known as the Arab Spring, investors were worried that the supply of oil would be, disrupted which would see a further escalation of oil and gas prices (Max, 2013). A similar situation was witnessed in 2012 when there were reports that Iran was very close to manufacturing nuclear weapons grilled with threats from the USA and possibilities of an Israeli attack Speculations of an outbreak of war made the prices of oil to go up. Natural and manmade catastrophes also have an impact on global oil prices for instance in the year 2005 when USA was hit by the famous Hurricane Katrina, oil prices escalated with three dollars per barrel and gas prices hit five dollars a gallon. Natural gas prices also went up when the Mississippi river flooded in May 2011. Investors had fears that the floods would damage gas refineries. Effects of escalating oil and gas prices on the economy Currently, the global oil and gas prices have not yet recovered from the escalation coursed by the crisis in the Middle East. This has left consumers struggling with high energy cost thus elevating the cost of living. Fluctuation in oil and gas prices has a direct and an in direct effect on price of commodities as well as the economy in general; therefore, increase in global prices of oil has effect at both the microeconomic and the macroeconomic level. Escalating prices of oil lead to an increase in prices of gasoline and gas used for cooking in households by consumers. This automatically increases the budget of the households who are left without enough money for spending on other things It also increases operation cost for businesses who need to transport their goods from one point to another and also the transportation industry in general. High operation cost in the public transport sector leads to increase in transportation fee further hitting the consumer. Skyrocketing oil prices also have a great effect at the macroeconomic level. Generally, fluctuations in oil prices result in increased inflation rate and a slow economy growth rate. Inflation increases because the prices of goods manufactured using oil and oil products go up and it also indirectly affects the cost of other goods and services as we have seen in transportation. Due to an increased cost of manufacturing the cost of other goods also go up as traders pass on the burden to consumers. The increase in price of a commodity varies depending on how important oil is in its manufacturing. Effect of increase in oil prices tend to be higher on firms at the top of the industry chain (Bradley, 2013). High oil and gas prices also slow down the growth of the economy as it interferes with the supply and demand of other goods as it increases their cost of production significantly. Higher oil prices also reduce wealth thus reducing the demand of other goods which are termed not necessary at the time of recession. Inflation also increases uncertainty and scares away investors further deteriorating the economy. The effects of oil price shock on an economy take approximately three years to wear off (Koval 2007, p.7) While the citizens in petroleum importing countries are greatly affected by fluctuations in global oil and gas prices, citizens of oil exporting countries are cushioned through government subsidies. The results show that key petroleum exporters are stereotypically net subsidizers of petroleum goods, while oil-importing countries are net taxers (Negative subsidies). The subsidies by the petroleum exporting countries vary depending on the country itself, the product and time. High petroleum subsidies are however discouraged as consumption of oil and gas is associated with certain negative effects like environmental pollution especially the greenhouse effect and traffic congestion. Oil is therefore highly taxed in most countries so that the money realised should go to the society. References Bradley, R. 2013. The American Oil & Gas Industry Is Rescuing The Obama Economy. Forbes. [Online] Available at: http://www.forbes.com/sites/robertbradley/2013/06/17/the-american-oil-gas-industry-is-rescuing-the-obama-economy/ [Accessed 25 July 2013] EconomyWatch. 2010. Oil and Gas Industry. [Online] Available at: http://www.economywatch.com/world-industries/oil [Accessed 25 July 2013] Koval, I. Y., 2007. Petroleum and the Peso. ProQuest. Lawrence, R., Edwards, L. and Lawrence, R.Z. 2013. Rising Tide: Is Growth in Emerging Economies Good for the United States?. Massachusetts: Peterson Institute for International Economics. Max, A. 2013. Oil And Gas:U.S. unconventional oil ignites chain reaction that redefines global markets – IEA. E&E Publishing. [Online] Available at: http://www.eenews.net/stories/1059981148 [Accessed 25 July 2013] Read More