What caused the surge in oil price during the period 2000-2005 - Essay Example

This projection is mainly attributed to the changes in demand and supply by the non-OPEC and OPEC members. The oil price surge is a major economic issue as it slows down global economic recovery. This paper highlights the major issues that are behind the oil price surge during the 2000 – 2005 periods. In this essay we seek to address the question of the effects of additions to OPEC capacities and economic activities on oil prices (mostly in the future) and why oil prices are literally depend on the OPEC’s ability to maintain control over the marginal supplies of oil.

Global oil demand had a slow increase in the year 2000 – 2005 periods than it did in the last five years. Each time when the demand growth accelerates annually, the prices are always seen to rise and vice versa. The yearly rate of demand growth has changed markedly over the last few years with this kind of growth dipping into a low of just about half a percent in the year 2001 and a then having a sharp rise through 2004. During the year 2004, the oil demand had surged by 4% and this was the fastest rate since 1977.

In the year 2005, the demand growth fell callously although its growth rate was maintained above 1%. A significant part of this growth was contributed by China and most of the rest of the developing Asia (Menecon Ltd. 2006, p1). The United States and other non-Asian developing countries accounted for the bigger share of the volume increase in demand during the 2000 – 2005 periods. With the supply capacity going high in the recent years, the rise in demand has squeezed spare capacity in pushing up prices.

Causes of Oil Surge during the 2000 – 2005 Period During 2000 – 2005 period great oil surges was experienced, the possible causes of this surge in oil prices include: supply, monetary inflation and the value of the US dollar, demand and investment demand. Supply Lower supply of oil is considered to be a main lasting fundamental cause of the rising prices during the period 2000 – 2005. The intermittent supply contributed majorly on the surges in oil prices and therefore, the oil price crises.

Monetary Inflation and the Value of the US Dollar Price inflation develops from monetary increase and other economic policies. Wobbly monetary policy attained from the Federal Reserve and other central banks is listed as one of the major contributor to the increase in the oil prices. It therefore forms the main cause in the dollar devaluation and commodity speculation characteristic with changes in oil prices. The value of the US dollar also had some impact on the oil prices as oil is normally quoted and traded in US dollars.

This means that the value of the dollar determines the rise or fall in the oil prices. Demand High demand for oil is also one of the main causes of the surge in the oil prices. The demand for the crude oil was seen to be growing at an average of 1.76% per year. This effective growth (in percentage) was recorded from the year 1994 to 2006. Still, during this period (1994 to 2006), a higher rise of 3.4% was experienced in the year 2003 to 2004. As the demand for oil is on a high rise all over the world an increase in demand of 37% is expected by 2030 hence the demand for oil is projected to have an increase.

Normally, increase in oil prices reflects on the global demand rise for oil. Prices usually affect the demand as the relationship between them is considered to be not a way street. If the demand gets a certain shift a direct impact on the oil prices will take place; when the oil prices get affected thy in general will lead to a (United Nations staff 2005, p6). Investment Demand Invest demand is also one of major issues to the surge in oil during the 2000 - 2005 period. Investment demand usually occurs when investors pay for future