The Extent to Which Governments Shape the Global Oil Economy - Essay Example

GLOBAL OIL ECONOMY The Extent to Which Governments Shape the Global Oil Economy The Middle East is considered as the “focal point” ofthe world oil industry. The importance of oil can never be overlooked in either foreign or domestic perspective, which plays a very critical role politics while importing or exporting. Oil is the one of the most valuable resource that a country can use to feed its population (OECD, 2011). In most countries oil determines the dynamics of economy, when oil prices rises inflation is bound to rice significantly and vice versa. It doesn’t mean that oil producing countries are not affected economically by oil prices, since it is the major economic activities in such countries factors such as political corruption, foreign debt, militarization, and power intervention are problems that this countries experience. Energy is a key driver of growth and industrialization in this century. The current global economy relies heavily on oil as a form of energy, manufacturing, transport and other key industry depend on oil either directly or indirectly. Some of the household goods as well as cooking gas is as a result of oil, hence, the global population depends heavily on oil. Due to this reasons oil prices have been reported to be very volatile, and this has affected both developed and developing nations. Fluctuations of oil prices shift political balances around the globe. When the oil prices are high the exporters tend to gain power, but face severe challenges when the prices drops (Bridge and Le billion, 2012). The need to control sources of oil has historically made many countries to go to war. For instance, the US paced an oil embargo over Japan, which obstructed 80 percent of its oil supply. This then prompted Japan to join World War II with the embargo being one of their key motivator. Industry structure Oil industry is a continuous process that involves extraction of oil from the earth. There are two levels in this industry structure, upstream and downstream. Upstream comprises activities such as explorations, looking for oil bearing lands, construction of gas separators and oil well infrastructure. Downstream comprises of activities such as transportation that is sometimes done through pipelines, railroads and tankers; refining, which is the process of converting crude oil to usable products such as gasoline and fuel oil; and finally marketing that is done by setting up petrol stations. This industry is capital intensive despite using sophisticated technology in present times (Bridge and Le billion, 2012). Everything from production requires large amount of capitals and this has made private investors to find it difficult to enter into this market. The only way that private investors find it easier to engage in oil industry is through distribution of the final product such as setting up petrol stations. The intensity and volatility that oil industry has to the economy of a particular country has seen government get involved in the industry to a large extent. The oil industry is very easy to be used as a political tool, some pipelines transverse across nations. It would hence be very possible to paralyze the economy of a particular country by cutting down the pipelines supplying oil to that country, which can be said to be a form of cold war. Oil as a weapon The importance of oil to majority of economies around the globe has prompted some key player around the globe to use it as a weapon. Using oil as a weapon can be traced back in history in the year 1948 where oil weapon was used in the Arab-Israel. This war included sections of the Iraq Company pipeline, when they were struggling to control Palestine. Another instance is when Arab governments used oil weapon during the Suez crisis, which they did by making numerous oil supply interruptions. Arab countries have also used oil weapon by issuing embargos to the countries that seemed to support Israel in 1967. Historically oil weapon has proved not to be very effective, and this is attributed to many factors. One of the reason is lack of willingness from some non-Arab OPEC members, in relation to expanding production during the embargos. The politics that have been used by the oil producing countries have to some extent been used to shape the world economy. A good example is the 1967 oil embargo Oil prices and how they shape global economies When the prices of oil falls or rises they directly affect the monetary and fiscal policies of countries around the globe depending on whether the country is an oil importer or exporter. From the assertions analyzed in this paper the oil prices can be manipulated by oil producing countries. Reduction of oil prices for the importing countries can ease pressure, and this can make more room for accommodation. For the exporting countries it means that the central government will have to balance the need to support growth against the need to contain inflation and the pressure of currencies. In regards to fiscal policy any loss for oil revenues to the part of exporter will strain public finances, while any saving from the oil importer can refurbish the fiscal space. It can be seen that the oil prices can influence the economies of either oil importing or exporting countries. In recent times prices of oil have greatly declined due to usage of new technologies in explorations and extraction (Benes et al., 2012). Oil been a very important factor in world economy, oil producing countries realized this fact that led to the famous oil revolution. The main purpose of oil revolution was to revolutionize the price, before 197 most OPEC members were controlled by multinational oil companies. By deliberating themselves from these companies the government of such countries gained more power in world politics. Negotiations became easy with other non-producing oil countries. Oil prices have the propensity to cause geopolitical tension that can cause a long shadow. The conflict in the Middle East in the year 2014 and Eastern Europe had an impact in the supply of oil. Despite the rise of ISIS in Iraq the output of oil was and is not disrupted. The sanctions that were provided by due to Russia and Ukraine conflict had a little impact to oil prices. This is a clear indication that the conflicts in some oil producing countries can have an impact in the economies of some countries. US dollar is used as the major currency in oil trade, this currency is affected by supply and demand of oil prices around the globe (Muttit, 2011). Whether the dollar will strengthen or weaken will greatly determine the economy majority of countries especially if they are oil importers. When the dollar strengthens in oil importing nations the local currency of those actions weaken, which puts the governments of such countries on the receiving end sing the economy will deteriorate. Conclusion It is clear that most oil producing countries have attained some form of political power as well as some sense of economic security, which are meant to enhance their political bond with states that are poor especially developing countries in Africa. Governments have shaped themselves by gaining some form of economic independence, oil wars are now seemingly replacing the notion of military war. Conflicts among oil producing countries causes’ economic impact to countries that relies on the importing oil from such countries. Governments of oil producing can be said to also shape the world economy by forming strategic alliances with other countries around the globe. References Benes, J., M. Chauvet, O. Kamenik, M. Kumhof, D. Laxton, S. Mursula and J. Selody. (2012). “The Future of Oil: Geology versus Technology”, IMF Working Paper No. 12/109. Bridge, G. and Le Billon, P. (2012), Oil, Cambridge: Polity, Chapter 2, Capturing Oil Muttitt, Greg (2012), Mission Accomplished for Big Oil?, The Nation, 23 August 2012 OECD (2011). “The Effects of Oil Price Hikes on Economic Activity and Inflation”, OECD Economics Department Policy Notes, No. 4. Read More