Recent Oil Price Spike - Essay Example

RECENT OIL PRICE SPIKE Introduction Since year1980 to year 2003, there has been an increasing inflation rate. In fact, in year 1980, the price of a barrel was under $25. By year 2003, the prices increased above $30 mark, year 2005 marked the highest price where a barrel of crude oil coasted $60. Additionally, year 2008 marked the peak, where the price reached at $147. During this time, a vast majority of authors, scholars and commentators have attributed this scenario to a number of factors. These factors include decline in the available oil reserves, Middle East tension, price speculation and falling value of the U.S dollar. This period had a lot of geo-political events and natural disasters that in one way or the other affected the oil market. Practically, they often had short-term affects to this market. Cases such as Iranian nuclear plans, Hurricane Katrina, conflict between Israel and Lebanon and North Korean missile tests among many others, often resulted to short lived effects. In the beginning of year 2008, these factors seemed to have a smaller effect. This is the case, since the global recession began at this period (Falola & Genova, 2005, p. 25-26) . The global recession caused a significant effect with respect to the global oil market. In fact, there was a rapid decrease in demand, additionally, prices decreased where from $147 per barrel in January year 2008 to $32 in December year 2008. Recent years have not been an exemption concerning the increasing oil prices. In fact, year 2013 has marked a rapid increase in oil prices, where the prices have hit $109.71 per barrel. While there are, a lot of reasons that have caused this aspect, the ousting of the elected president of Egypt have been attributed to be the main cause. In extremes, there would be closure of the Suez Canal because of the unrest (Inkpen & Moffett, 2011, p. 100-102). On the other hand, it is important to note that investors are confident, owing to the fact that the global economy is growing. In year 2012, oil prices often rose faster as opposed to the earlier year. In fact, by February, the price of a barrel was $100. Additionally, there was an increase in the Gas prices, where a gallon coasted $3.50.it is also in this year where there was an increase in the oil prices in winter. Normally, during this time prices are expected to decline. Contrary to this fact, the prices rose even with the relatively lower demand. Gregory Mankiw principles Analysing what has been happening in the global oil market with respect to Gregory Mankiw principles of microeconomics reveal some interesting facts. To start with, Gregory Mankiw introduces ten principles that he uses to analyse economic conditions. These are: People will face trade offs This is the first principle, according to this author; there is no free products and services. For any person and/or individual to access anything there must be something to give. Practically, this author argues that for one to make decision there must be forgoing of one, in order to create space for the other. This author offers two examples to clarify this case; this examples include efficiency and equity. By definition, efficiency is the process where the property belonging to a particular society has and/or acquires maximum benefits at the expense of the scarce resources (Mankiw, 2012). On the other hand, equity refers to the process that involves distribution of economic prosperity with respect to fair terms amongst members relating to a particular society. One notable example is the case where tax is collected from wealthy individuals from places such as India and distributed to the poor. This causes two significant effects. To start with, equity is practised at the expense of hard work amongst the wealthy Indians. Relating this aspect with respect to the rapid increasing prices reflects that oil prices have been heavily influenced by the motives of leaders in the Middle East and other oil reserves globally. Practically when increasing prices, there are certain results that are anticipated. A good example is the recent change in oil prices because of the air strikes in Iran. The cost of something determines what you get In this principle, this author argues that cost will be relative to the desired goods or services. As such, the decision making process heavily relies on the costs and benefits that are resultant. Additionally, alternative courses are often considered for arriving to a wholesome decision. Within this model, opportunity cost plays an enormous role. Conclusively, these principles suggest that decision-making is based on opportunity costs. As such every action must arrive from this fact. Rational individuals employ rational thinking at the margin In this principle, this author argues that economists assume that people are rational. As such, a vast majority will often do whatever it takes to achieve certain objectives and/or goals. On practical grounds, consumers will only purchase the goods and/or services that will attract maximum satisfaction in their lives. On grounds of a business, there will be measures that lead to maximum profits. As such, making decisions has been attributed to the marginal benefits and costs. People will often respond to incentives Incentives are aspects that will lead to someone acting. Since, rational individuals make decisions on the grounds of weighing costs and benefits, the underlying decisions are bound to change on the grounds of incentives. Practically the prices of a particular commodity will determine the demand of goods and services. The oil industry has often experienced this aspect. A good example is in year 2008, when oil prices rose to $200 a mark causing a decline in demand (Shojai, 1995, p. 80-85). Trade will often make everyone better Unlike competition where one party gains while, the other looses. This author argues that trade will benefit both parties. Whenever parties engage in a particular trade, they will often be specialization, leading to quality goods and services. Governments can improve market outcome According to this author governments determines what the markets has to offer. They can bring either market failure or sources. Market failure will often occur when a particular market has been left on its own. On the other hand, market success occurs when a allocation of resources is mandated to a particular government, where the market is carefully monitored. Government’s policy often come in handy when there is market failure; they can either shift this condition or make it worse (Mankiw, 2012). Governments have heavily affected the oil industry. There are numerous examples to illustrate what government policies have done with respect to this aspect. One notable example to illustrate this fact is the Syria case. This happened in year 2013, where Syria often engaged in war at the beginning of the year. This case was a threat concerning numerous shipping lanes. Practically, the shipping planes would be destroyed, leading to transportation problems. This factor caused a rapid increase in the price per barrel, where it reached $118 per barrel. Another example is the case witnessed in august year 2013. During this period there was a rapid increase in oil prices. Two governments caused this. These are: USA and Syria. This case begins with accusations from the USA, according to this government; Iran has used chemical weapons to annihilate innocent civilians. As such, USA initiates punishment mechanisms involving strategic air strikes. This drew mixed reactions where there were some that criticized this move while others supported it. Traders offered higher bids, a scenario that caused an increase in the oil prices. Although Syria is not a major oil provider, the decision by USA has often caused varying result with respect to traders and investors globally. Conclusively, Mankiw’s has developed his principles based upon three categories. These categories include; how individuals, how the economy works and the interaction between individuals make decisions. This work has explored what has been happening in the oil industry. While not every model that has been laid out by this author addresses what has been happening in the oil market. A vast majority of event can be categorised in the three categories that have been laid out by this author. The happenings that have been witnessed in this sector lie within the categories that have been laid out by this author. Practically, the technicalities are involved in making decisions that oil supplies were able to make decisions during the 2008 global recession. During this period, investors often shifted their funding to oil futures. Futures are usually a condition where buyers agree to buying goods and/or services at a particular time in future, usually at an agreed price. It is also through this model that we get to understand the reactions of investors during this time, where they are stampeded out of real estate’s that are considered to be falling and are seen to embrace the futures. Additionally, this model helps us to understand the varying reactions that are evident in year 2008. We get to understand why developing nations are subjected to starvation while food prices rise in developed ones. The recent prices are different from the ones that were evident in year 2008. This model helps us to understand why there are lower prices even though there is a stable global economy. As for the principle on how economics work, we get to explain the happenings that have been witnessed in this market as from year 1994. We get to know why there is a 1.76% increase in oil demand in year 1994 to year 2006. Additionally, there is good comprehension as to why there is an estimated 37% increase by year 2030. As for the last model- how individuals interact with each other, cases such as the strong ties that are evident between governments such as the USA and Israel are put into perspective. The conflicts that have happened in Egypt because of the removal of the elected president –president Morsi is explained. Conclusively, although this work has numerous facts that can be used to analyse what has been happening in this market. This work is also dependant on other works for clear analysis. References Falola, T., & Genova, A. (2005). The politics of the global oil industry: An introduction. Westport, Conn: Praeger. Inkpen, A. C., & Moffett, M. H. (2011). The global oil & gas industry: Management, strategy & finance. Tulsa, Okla: PennWell. Mankiw, N. G. (2012). Principles of microeconomics. Mason, OH: South-Western Cengage Learning. Shojai, S. (1995). The New global oil market: Understanding energy issues in the world economy. Westport, Conn: Praeger. Read More