How Oil and Gas Could Affect the Economy - Research Paper Example

Introduction Different resources that are in the economy continue to change the growth and decline of various regions of the world. A resource that various countries rely on to stimulate the economic situation is oil and gas. The production of oil and gas as well as the consumption that is used by different individuals continues to affect the economy and leads to fluctuations within various areas of the world. This specific resource is able to redefine monetary resources as well as how it leads to the growth and decline of economic situations. More importantly, the use of oil and gas may continue to change and affect the economy, dependent on how it is used within various regions of the world. If this resource continues to fluctuate, it can lead to either a recession in the economy or growth and expansion of various regions. Building a World Economy The use of oil and gas is no longer one that is based in different regions of the world. It has now become a dependent resource from every region, with most resources coming from regions such as the Middle East and being outsourced into different places of the globe. Each of the areas that produce oil and gas first have to find the natural resource through an oilfield that can continue to produce the right demands for various regions of the world. The current demand has led to most oilfields producing an average of 260 billion barrels a year, some which produce as much as 25 billion barrels a day. As the gas and oil continue to be produced, it leads to instant fluctuations with pricing. The equation that is used is based on the amount of oil and gas that are available for different regions of the world, specifically with estimates of how much oil and gas can be recovered from the selling prices of the oil and gas. For example, if not as much oil and gas can be produced from an oilfield, then the prices will begin to rise in the economy and will alter how much one spends on the amount of gas or oil for their needs (Simmons, 2005). The main effect that the oil production has on the world economy is based on a rise and decline of pricing and production. As the rise of oil demands continue, there is the inability to continue with the amount of production that takes place through the oil that is available. The geological constraints and the technological problems are making it so that there are limitations in the amount of production. The result is that political influences and other factors begin to affect the economy by raising prices and creating different ways to find oil. The continuous movement into a world economy, influences by the government and the limitations on a natural resource are all known to affect the outcome and availability of oil and gas. As this continues to change, there will also be alteration in the world economic system and the available resources that contribute to the needs of different communities (Aleklett, Campbell, 2003). Effecting the Economy with Oil and Gas The different demands that are a part of the oilfields, as well as the fluctuations that are continuing to occur with oil and gas are able to change the world economy from various levels. The first way that the economy begins to become affected through the oil fields and the available resources is through the general pricing of the resource. The inability to produce as much oil immediately changes the pricing demands for the export of oil into different regions. As the export demands for pricing continue to rise, demands on the general pricing also begin to increase. There are also some that have found that the lack of demand for oil and gas leads to a fluctuation in prices, which instantly increases the pricing that is in demand for oil. As the prices decrease, the demand for oil and gas also slightly alter by decreasing because there is a fluctuation in the pricing of exporting the goods (Mory, 1993). As the prices for oil and gas increase or decrease, it begins to affect other areas of the economy which are directly associated with oil. The high return on capital that begins to be associated with the pricing and the demand then leads to corporate structures being pushed to change what is offered within the company. For example, those that are expectant on the demand of oil and gas from oilfields, as well as from companies that sell gas, such as Texaco and Exxon, expect individuals to continue to demand the oil and gas, even with changing prices. If this decreases, then it directly affects the return on capital that is in the corporations with decreasing amounts of revenue that are available to the firms. In return, the firms begin to suffer from the lack of demand that is a part of the oil and gas that is sold. If the demands increase, than the corporations are also able to remain stimulated from the amount of sales that come from the gas and oil. The firms are expected to alter and change the revenue and return dependent on the amount of oil and gas that is being sold. If not, changes in employment, demand and other expectations begin to affect the way that the corporations operate. If the corporations don’t strategically work toward an alternative plan, than there isn’t the ability to get the results expected for revenue (Kolk, Levy, 2001). The oil and gas industry is one that then becomes dependent on the supply and demand of the products through multinationals. The economic changes that are a result of the corporate strategies as well as the changes in demand from the supplies lead to elasticity of the companies. The first incident that showed the need to have elasticity within the market was based on the oil shock of 1973. During this time frame the oil prices went too low which didn’t allow corporations to make substantial profit for continuous production. At the same time, the demand for oil and gases continued to increase, which caused the corporations to continue to order from oilfields without making the necessary profit to get the required oil and gas. The result was that the corporations had to create an elastic model, in which the demand of oil and gas directly resulted in pricing for the corporations. From the oil shock and this changing strategy, it can be seen that the demands for oil and gas directly affect the economic standards with oil companies (Krichene, 2002). Macroeconomic Factors from Oil and Gas Supplies The production of oil and gas within the internal environment through corporations, changes in pricing and the elastic that is needed for supply and demand is only one of the determinants for the economy with oil and gas. The large amounts of supply and demand that are associated with these resources is also known to affect the surrounding economy and external environment that is associated with these resources. There are several factors and determinants that make a difference in the macroeconomic environment. Each of these will fluctuate not only the pricing and the stimulation of the economy. More importantly, the environment will change the overall economy and the reactions that occur in other markets and with the flow of finances in the world economy. The main way that oil and gas begin to change the macro economic environment is through the stock market. Each of the multinational corporations has different shares that belong to the market and which makes them shareholders in the corporation. As the individuals invest in the oil and gas industries, it is expected that they will get a return or loss from the amount of oil and gas that is being sold. In return, the shareholders and others in the stock market will be directly affected by the investments that are made for oil and gas. If there is a change in the amount of oil that is produced and sold, then shareholders and those in the stock market will be directly affected. More importantly, there will be alterations in the market impact as a whole. This may not only affect the oil and gas reserves, but can begin to accumulate to affect other areas that are related to the industry or to the stock market, either directly or indirectly (Lev, 1989). The changes that begin to occur in the stock market, as well as in the macroeconomic environment then lead to what is known as oil shock. As the oil prices begin to change, the GDP also begins to rise. It is known that the overall GDP that is associated with the economics of a country will directly affect the economy outside of oil and gas. In most countries, the demands for oil and gas are so much higher that they directly affect the way in which the macroeconomics is affected every year. For instance, if the oil and gas prices rise because of the changing demands, then it can also be expected that the GDP will begin to rise and fluctuate to higher prices. Eventually, this leads to an inflation of the products and will create alterations in the pricing of the economy on various levels. If the prices decrease with oil and gas, it is known to not affect the environment as much as other areas. The specific changes made in the economy will slowly begin to lower; however, the inability to lower as much is usually consistent with the other affects of the economy. This model is known as a non – linear affect of the economy from oil and gas and leads to the oil shock of one product leading to a rise in the economic standards for a country (Hamilton, 2002). The economic changes and variables that continue to be affected will then lead to different areas of the economy that will change in specific alterations. For instance, taxes will be one of the first areas of the economy that lead to rising prices from the changes in oil and gas prices. Since many of the demands of oil and gas come from connections through corporations, there is also an expected percentage that has to be paid from taxes. If the amount owed from taxes also increases, then it leads to direct taxes on consumers. More importantly, each of these begins to alter the way in which the political realm changes other taxes, specifically because of the fluctuations that begin to occur. As this happens with increased prices, other products and suppliers have to raise the prices to match the tax demands that are associated with the changes in oil and gas prices. The result is a continuous increase in pricing because of the macroeconomic demands. There are several that have tried to alter the inflation that occurs through different policies and implementation of other structures; however, the prices continue raising with the expectations within the economy (Hunt et al, 2002). The result of raising prices and inflation eventually leads to other problems within the economy in other areas. If the GDP continues to rise with inflation, then it eventually changes the economy because of the strained prices that are within the environment. Specifically, the inflation of prices in different areas can lead to a recession within the economy. If too many of the prices rise and there isn’t a demand, then companies won’t have the ability to make the amount of revenue that is required for profit and sustainability. This leads to levels of unemployment and layoffs, as well as individuals not having the monetary needs to continue with the same demands of oil and gas, as well as other products and services that are available. While the prices and taxes from the inflation can’t go down to lower prices, those that are within the economy don’t have the ability to continue to stimulate growth of different prices. Each of the factors within the economy, including oil and gas prices, then becomes dependent on each other. The more that one price increases, the more likely others will follow. As this rises, there is the inability to meet the demand, which can lead to crashes within the economy from the inability to match the supply and demand that is within the macroeconomy (Hamilton, 2005). Conclusion The various considerations that are a part of oil and gas not only affect corporations and the economy that is set in place for the supply and demand of oil and gas. The internal network of oil and gas supply causes changes in pricing as well as the amount of supplies that are given to a specific country. As this changes it not only affects the corporations and multinational associations from a world economy. More importantly, it begins to affect the macroeconomic factors. As the oil and gas prices begin to rise or fall, other supplies within the economy follow the same rise and fall. This begins with the structure of taxes and continues with fluctuations that change with areas such as the GDP and the stock market. The overall result is a direct change in the overall pricing in the economy as well as the changes in supply and demand because of inflation that begins to occur in the economy. If this rises too much, then the changes can lead to a recession within the economy because of the expectations. The effects on the macroeconomic factors are known to be a direct result from the supply and demand module that the gas and oil companies follow. Outline I. Introduction a. Thesis Statement: Gas and oil changes the macroeconomy because of the amount of supply and demand II. Building a World economy a. Oil and gas are part of a world economy – the supply that is given from one area of the world goes into exports in a different world b. Changes in oil and gas are led by the amount of the resources available in oilfields c. If not as much oil is available, it directly affects the prices of oil and gas in other regions of the world III. Effecting the Economy with Oil and Gas a. The oil and gas industry have a microeconomy that is affected by supply and demand of this resource b. Pricing is the first factor affected by the economy – as it rises, it changes the demands from oil companies and vice versa c. The corporations are also affected by the amount of pricing and have to change their strategies according to the market d. Supply and demand is the main drive of the industry – oil and gas corporations have to incorporate an elastic model because of this IV. Macroeconomic Factors from Oil and gas a. Outside environments of the economy are also affected by oil and gas b. The Stock market fluctuates from shareholders and investments that come from the rise and fall of demand in oil and gas c. GDP is affected by the amount of oil and gas that is within an economy d. If the prices in oil and gas rise, so do taxes e. When taxes rise, so do the taxes and prices from other businesses and corporations f. If there is too much rise in the pricing from businesses, then it can lead to a recession or can stimulate the economy g. There is a linear and symmetrical relationship from oil and gas to the macroeconomy V. Conclusion a. The economy is directly affected by oil and gas b. The changes include alterations in the economy of the oil and gas corporations as well as fluctuations in the macroeconomy, all which are dependent on each other References Aleklett, Kjell, Colin Campbell. (2003). The Peak and Decline of World Oil and Gas Production. Minerals and Energy (18), (1). Hamilton, James. (2002). What is an Oil Shock? Journal of Econometrics (113), (2). Hamilton, James. (2005). Oil and the Macroeconomy. University of California. Hunt, Benjamin, Peter Isard, Douglas Laxton. (2002). The Macroeconomic Effects of Higher Oil Prices. National Institute Economic Review (179), (1). Kolk, Ans, David Levy. (2001). Winds of Change: Corporate Strategy, Climate Change and Oil Multinationals. European Management Journal (19), (5). Krichene, Noureddine. (2002). World Crude Oil and Natural Gas: a Demand and Supply Model. Energy Economics (24), (6). Lev, Baruch. (1989). The Impact of Accounting Regulation on the Stock Market: the Case of Oil and Gas Companies. The Accounting Review (54), (3). Mory, Javier. (1993). Oil Prices and Economic Activity: Is the Relationship Symmetric? The Energy Journal (4). Simmons, Matthew. (2005). Twilight in the Desert: The Coming Oil Shock and the World Economy. New Jersey: John Wiley and Sons. Read More