Why Are We Facing a Severe Drop in Oil Price - Research Paper Example

Oil-A major player in Today’s World Economy Introduction Holding a history of centuries, oil has emerged as an autonomous tyrannical source of impacton the world’s economy since the birth of revolutionary growth of industrialization in 19th century. With the emergence of modern human and commercial needs as driving forces, the continuously increasing demand of the world’s most important commodity (Hubbard, 1998)1 is the main agent that aids the ruling capability of oil to the world’s economy. The significance of the said commodity is incredibly high in driving the global economic indicators of growth, competitions, trade and civil life. The outcomes of the dominance of oil over the world are enjoyed by the father economies of the commodity in monetary as well as supremacy terms. Due to the worldly accepted supremacy of blessed oil producer economies and vulnerability of other economies towards agreement to dictated terms, the prices of said commodity always peaked higher after operative birth with huge fluctuations during developed high supply/demand surges and political moves of the globe as depicted below in terms of today’s currency. 2 Due to the said implications above, the industry witnessed crisis in many regards including political to dominance, reserves to shortage and in terms of prices. Not only supplying but also consuming economies’ actions were the reason of crisis for most of the times. OPEC’s foundation in 1960 was a strategic move by large suppliers of the commodity to balance the unguarded demand structures, disparity of distribution and supporting aid for emerged economies after reformation of the world. Cautious consideration of the said scenario, dependability on a handful of oil producers and vulnerability to be dictated for running the gauge of economy many of the developed economies are urged to discover other competitive energy sources as cheaper options including coal and gas as an ancient source as well as emerging sources in terms of recycled energies. Eating the large share of a sole energy player the resources are gaining wider concerns of countries all over the world with a considerable share in current energy mix of the world. As depicted, the share of oil in world’s energy mix is declined to 29.1% only in 20153 from 41% in 19654. 5 However, still the role and dominancy of oil cannot be challenged for upcoming decades due to highly increased demand of energy from developing economies. As reported, the growth of world’s population will be 1.3billion heads by 2030 as well as the demand for energy will be increased 1.4% year while oil will witness a growth rate of 0.8% for every year till 20356. Referring to the current scenario, after witnessing the apex of prices in 2008 which in turns ruined the well-being of world’s economy the oil is entered in the price stagnancy regime for last three years and now experiencing the continuous sharp decline for last few months. The scenario thus once again highly provoked the never-ending debate of oil prices, its well-being in terms of demand/supply growth and balance in future and impact of emergence of other energy sources as cheaper substitutes. Critics are now focusing on questing that is it the current scenario outcome of current surplus dilemma and/or impact of increasing demand of share capturing cheaper energies. Considering the vital role of the commodity in shaping today’s economic scenario of the world and importance of the matter, the paper is aimed to craft an exploratory descriptive research in order to gain insight of the underlying matter as well as present a supportive to the discipline. For the purpose below presented a comprehensive theoretically and empirically evident critical review of the overall journey of the commodity in modern world, current scenario and future shaping prospects for the industry. History Level and Facts Oil consumption holds the grounds of emerging deeper in the 450 BC chronic time of the world. With the economic growth of the world, the commodity witnessed its growth continuously and come into sight as a recognizable important need of the world. Afterwards second half of the 18th century witnessed the rapid growth of the commodity in terms of economic activity via drilling, refining, selling and purchasing means. Business entities were started to develop then for trading and 1861 recorded that first country level trade of the commodity7. A historical price view since ending decades of 18th century to current era are depicted below. 8 Attributed to rapid drastic growth of industrialization in term of change, 19th century is accounted for witnessing the booms, downturns, disputes, fluctuations, formation of laws and legal institutions and many other phenomena associated with the commodity. Spindletop gusher is found in 1901 and become a milestone for the industry afterwards 1500 company registration in one year was done in the industry9. There were continual growth and downturns are reported till 1960. In 1960, the five governing countries of the industry in terms of holding natural oil reserves made a decision of founding an organization to balance the trade of the commodity via supply/demand and need recognition of reshaped world. The effort was to stabilize the prices of the said commodity with fair return on investment via supplying commodity to consuming economies10. Foundation of OPEC, initiated a new era of history for the commodity and now OPEC is the authority to define price mechanism of the commodity and balancing other indicators for the purpose of equal distribution of natural resource. Finally, 2008 witnessed the peak of oil prices after 18th century due to credit bubble burst in the developed countries specifically bad economic downturns of US and Europe. Afterwards, the prices of the commodity are continuously fluctuating but in a high range. However, currently the prices are declining and capturing the attention of world. Crisis of Oil and market reaction As reported in the history, numerous worldly incidents affected oil in terms of crisis. Phenomenal increase after decades of stability is depicted in presented graphics above. As reported, in October 1973, the first worst oil crisis after formation of OPEC is exploded the world as the outcome of fourth war of middle-east. The result was obvious to the world economy as being dominated by the commodity. The crisis resulted in the form of higher uncontrollable inflation all over the world and companies was vulnerable to control the prices due intervention from government11. In 1979, Iranian producers’ conflicts once again aggravated the situation and thus effect than balanced by the nationalization of Iranian oil industry12. The nationalization is applauded by the world and aid in controlling peaked prices. The impact of 1973 to 1979 crisis is still present on the industry in terms of continuous rise in oil prices as after effects. Afterwards, 1980-81’s Iraq war again emerged as crisis for oil prices. Prolonged war of two said countries and lowered production of oil framed the great oil prices crisis till 1986. After recovery of Iraq’s oil production level in late 80’s, the 1990 war of Iraq and Kuwait deteriorated the situation for collectively 9% of oil producing countries. The outcome was ninth recession of US economy. The era of 1997 to 2010 is accounted for phenomenal transition in industrialization and reforms that declined the oil consumption up to a level and thus balanced the power of oil producing economies. However, 1997-98 crises were the outcome of eastern Asian economies failure in managing their currencies. Reforms were made in 2000-2001 but not lasted long due to prolonged impact of prior crisis on the world’s economy13. The situation once again aggravated in 2008, due inflation adjusted dollars in 2007. The year not only witnessed the apex of oil prices but also a decline in US dollar of 14% against euro and the well-known debt crisis of the year contributed to worsen the situation. Resultantly, businesses collapsed, economies fall and many become vulnerable to get aid from developing economies. The roots of this cause are connected prior to 2008, as reported OPEC admitted it vulnerability to control the prices in 200514. Chronic crisis of oil production and prices badly injured the world’s economy and as a result of that the world is now struggling in the era of sluggish growth. Currently, finding alternative the world is still vulnerable to be dictated by the oil industry turns. However, fighting spirit in terms of corrective measures after each crisis is applauded by critics in quest of balancing the counter effects of the fluctuation in commodity prices and markets. Read More