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Sometime in the future oil will become more expensive. investigate the effects of this on the market for oil and the market for - Essay Example

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One of the major steps towards averting the looming crisis and to save economies that are incurring huge expenditures in importing oil is to adopt other substitutes to fossil fuel. Solar energy is among the key substitutes of oil…
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Sometime in the future oil will become more expensive. investigate the effects of this on the market for oil and the market for
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Sometime in the future oil will become more expensive. investigate the effects of this on the market for oil and the market for

Download file to see previous pages... Nations must now come to terms with the harsh reality that dependence on oil is as short-term solution and the other sources of renewable as well as green energy must be considered. Hubbert (1956) had predicted that the production of oil in America followed a bell shaped graph trend. He stipulated that the peak of oil production was to be attained in 1970 after which production will assume a downward trend. His prediction reigned despite sharp criticisms. He then predicted a global peak to be witnessed in the year 2000. Michael Lynch fronted that the production of oil must be closely tied to oil prices. He argued that Hubbert committed a mistake in assuming that geology is the motivating factor to the discovery, production and depletion of oil. He advocated for supply and demand as the key determinants in the oil industry. "To an economist, the drop in exploration reflects optimal behavior: they do not waste money exploring for something they will not use for decades.” he added. Factors that influence the price of oil. Economic growth is one of the key factors that affect oil prices. A steadfast economic growth will result in an increase in the demand for oil and its byproducts. It thus exhibits a direct relationship with the price of oil. Even as countries seek to experience a rapid economic growth, they need to focus on other sources of energy so that their increased demand for energy can be met adequately. Another factor according to Watson (1987) that affects the price of oil is the seasonal changes. It has been observed that during winter oil prices increases rapidly in Europe and the U.S.A due to the increased demand. Before the beginning of winter, consumers tend to buy excess of oil and its products due to fear of possible. However during summer, demand tends to decrease especially that of domestic use. Energy substitutes such as coal, natural gas and nuclear energy that can replace oil will also determine its price. If more alternative sources of energy are discovered, overreliance on oil will decline and the prices will tend to decline. Foreign exchange affects oil prices since oil is traded internationally and the U.S dollar is the main currency used. Therefore appreciation or depreciation of the local currencies against the U.S dollar will significantly affect the price of oil. When the dollar weakens, the prices of oil will escalate. Increase in oil prices will also lead to high export bill resulting in trade deficits and a further weakening of the dollar. Policies of Organization of the Petroleum Exporting Countries (O.P.E.C) also affect the demand and supply of oil. This further affects prices. Being one of the largest oil regulatory body, their actions will greatly affect production levels as well as international prices. Countries with high production capacity as well as high oil reserves have got high bargaining power in terms of prices. Causes of high oil prices. Instability in the Middle East is a key factor that has led to increase in oil prices. Middle East countries such as Iran, Saudi Arabia and United Arab Emirates form major producers as well as exporters of oil. Iran has not had cordial relationship with the west especially the U.S.A. At times they have threatened to hoard their oil so as to frustrate them. A decline in the exportation of oil by these countries will create a serious shortage thus increasing the prices. Political unrest being witnessed in other oil producing counties in Africa has also affected greatly the production of oil thus resulting in an increase in prices. The recent political turmoil witnessed in Libya, led to a decline in the ...Download file to see next pagesRead More
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