Economic Effects of Higher Oil Prices Upon U.S. Households - Research Paper Example

Economic effects of higher oil prices upon U.S. Households The available stock of oil is exhausting day by day because of the increased and injudicious consumption of oil by the human. It is assumed that the worst problem the world may face in future could be the energy crisis. Because of the developments in science and technology and the subsequent advancements in industrial and automobile sector, the available stock of energy may not be sufficient for our future use. Most of the energy sources we are using at present are nonrenewable ones and oil is also a nonrenewable energy source. It is estimated that the available stock of oil may be sufficient enough for thirty or forty years more, if the automobile industry develops in the current rate. Because of the increased demand and shortage of supply oil prices are increasing or fluctuating rapidly. Recently, crude oil prices increased even up to $ 150/barrel even though it is around $ 100/barrel at present. Looking at the increasing demand and shortage of supply, oil prices could be increased in future in all probabilities. Many people are of the view that oil price increase may affect only the vehicle owners. In fact oil price increase can destroy family budget drastically since the prices of the households are heavily dependent on the prices of oil. The transportation of Households from one place to other needs the services of vehicles and when the transportation cost increases, the prices of the households can also increase. This paper analyses the effects of oil price hike up on U.S households. According to microeconomic principles, the price of a commodity is determined by the supply and demand theory. When the supply of the commodity increases, price may decreases whereas when the supply decreases, the price may increases. In the case of oil, it is hard to believe that the supply may increase beyond certain limits in future because of the rapid exhausting of oil sources. Even though the correlation between oil price and interest rates is controversial, many people believe that oil price increase may increase the interest rates. Interest rate increase may strengthen the dollar value against other currencies. When the dollar is strong, this helps American oil companies to buy more oil with every U.S. dollar spent, ultimately passing the savings on to consumers. Likewise, when the value of the dollar is low against foreign currencies, something that can happen with sinking interest rates, U.S. dollars buy less oil than before. This, of course, can contribute to oil becoming costlier to the U.S., which consumes 25% of the world's oil (Are oil prices and interest rates correlated?) At the same time some people believe that oil price rise may decrease the automobile use and the decreased automobile use may decrease the demand for oil. In such circumstances, the oil producers may force to decrease the prices of oil. However, the above argument seems to be illogical since oil is a nonrenewable energy source. Oil producing countries definitely know that people cannot avoid the use of their own vehicles for a long time and they will be forced to use it again in the future when they realize that the alternate options are inconvenient. In fact oil companies produces more oil when the oil prices increases and they produce less when the oil prices come down. They know very well that they will get higher prices in future because of the absence of other feasible energy sources. Dollar value fluctuates heavily in the global market because of the fluctuation in oil prices. "As the dollar declines in value, so does the price of oil in non-dollar terms," said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon. "Consequently, foreigners bid up the price of oil and other dollar-denominated commodities. The result is that the price of crude oil and other commodities rise in dollar terms as the dollar falls in value against other currencies" (Twaronite) Since United States is a superpower and one of the most advanced countries in the world, most of the other countries in the world are currently associated with America in one way or other. American technology is essential for many of the other countries and there are many items exported from America to other countries. On the other hand, America’s dependence on other countries is small and therefore the bargaining power of America would be more than that of other countries. When oil producing countries increase oil prices, America can implement strategies to increase the exchange price of dollar against other currencies. However, at present America economy is not in a good shape. The recent recession and the increased spending on war terror destroyed American economy and the bargaining power of America decreased considerably in global market. Moreover, America’s reliance with other countries increased a lot in recent times, and tis i difficult for America to implement strategies to increase the dollar value, especially when its economic growth is not in a good shape. Thus America currently remains as a silent witness even though the oil producing countries exploiting the market injudiciously. In other words, the prices of the household increasing day by day, not only in America, but also in the parts of the world. The U.S. Dollar is continuously devalued (inflated) by Federal Reserve and U.S. government monetary policies. Due to recent ‘super-inflation’ of the Dollar, oil producing nations are losing money – or rather, wealth – by selling oil in Dollars. To prevent losses, oil producing nations will sell some or all of their oil in other currencies (Euros, for example). This further devalues the Dollar, since oil buying countries no longer need them to purchase oil (Dollar Inflation the Primary Cause of Rising Oil Prices, ‘Peak Oil’ a Myth) To conclude, oil price increase is drastically affecting the prices of households and other commodities. American economy is not in a good shape to challenge the oil price hike and the situation is exploiting by the oil producing countries. The devaluation of dollar against other currencies forced oil producing countries to sell oil in other currencies, which is another shock to Americans. Works Cited 1. “Are Oil Prices And Interest Rates Correlated?”. Web. 90 June 2011. 2. “Dollar Inflation the Primary Cause of Rising Oil Prices, ‘Peak Oil’ a Myth”. 2008. Web. 90 June 2011. http://echochambers.wordpress.com/2008/05/21/petrodollar-inflation-oil-prices-rise-when-the-dollar-falls/ 3. Twaronite,Lisa . “Weak Dollar Adds To Upward Pressure On Crude”. 2007. Web. 90 June 2011. Read More