Relationship between Economics and Politics - Essay Example

ECONOMICS & POLITICS OF GLOBAL OIL INDUSTRY Prepared by Student’s Name Professor’s Name Class Name Institution Date Introduction Over the years, researches have made efforts to establish whether or not there is an existing relationship between politics and economics within a given market system (Stastny, 2002). In fact, different views have been put forth to ascertain this level of relationship that are clearly discussed in the paper. The recent plunge in oil prices has certainly identified the fact that there is definitely an economic influence on its undertakings. Thus, the paper will note the possible linkage between economics and the overall integrated oil market. The focus of this paper is on identifying the relationship between economics as a social science and politics especially how the latter impacts on the former. It also tries to examine the impacts of economics, mainly micro and macro economics aspects, on the global oil industry. Relationship between Economics and Politics It is argued that within any given market system there are definitely two ways for which subjects can acquire wealth, which is through economics means that is focused on aspects related to production and exchange and also, through political means, which is based on looting (Stastny, 2002). Oppenheimer’s perception of politics means in acquiring wealth indicated people that embraced modes of violence or even coercion in order to accumulate wealth. The numerous forms of political influence on economics can be seen in the following ways; First, the relationship is vehemently explored in the public good theory. In fact, it is considered to be a direct product of the need for looking at market failures since it expounds on why it is economically rational that some forms of goods is provided by the government and their resultant provision provided through taxation means (Stastny, 2002). The theory provided the much-needed justification for activities that politicians were already engaging in long time before. Consequently, it also provided a perception that indicated that non-existent but rather valued goods can be scientifically identified through economics however; their provision is entirely linked to matters related to politics, who is mainly viewed as a policy maker or even a bureaucrat’s work (Stastny, 2002). The economic policy thus ascertains that in cases of market failures so that there is a hindrance to deliver some of the important goods then it is deemed to be a public good that should only be provided by policy makers (Stastny, 2002). The public good theory thus fairly illustrates the emergence and by the extension of its underlying meaning that might fairly indicate the influence of politics over economics while the use of selective adoption of the specific section of the theory like the application of the term and pro-intervention summation and neglecting the rest points out the level of influence of economics over policy aspects (Stastny, 2002). Notably, the emergence of the perfect market competition as an economic concept attracted political influence especially because it fostered the perception of a failed market that needed interventions of policy makers for full functioning (Stastny, 2002). Political influence was a necessity for inclusion because it allowed the possibility of improving on the policies especially in areas where it was deemed to be a challenge and, further it allowed for the inclusion of certain new factors as well as government privileges that might limit the prowess of competition. Other areas for which politics and economics are linked involve price regulation by the government-based policy makers especially in aspects related to minimum wages so that the wages of the least productive or poorer people is efficiently improved through development of specific policies as well as in the case of rent ceiling so that subjects of an economy are provided with cheaper places to live (Stastny, 2002). Another important relationship is seen in the aspect of protectionism especially in the international trade platforms. Political influence is seen to play a key part in this form of aspect because policy makers or politicians’ intervention is deemed important to ensure that safe practices are executed so that local sellers and buyers are not exploited by malicious international policies (Stastny, 2002). Government’s Perception of Oil Industry Government expounds on the importance of the oil industry within an economy using different fallacies that are discussed as follows; first, the government note that it should focus on limiting imports in order to secure oil sources. This is effectively conducted by the government putting measures to limit consumption (Stastny, 2002). Secondly, the sector is further deemed to be important because regulation facilitates minimisation of possible disruption of oil supply by ensuring that oil reserves are promptly updated to avoid collapse of the energy sector as a whole. Subsequently, governments make sure to pay attention to the global industry in order to maintain an effective balance of payment connections that is mainly attributed to foreign indebtedness and aspects related to external accounts for that matter (Stastny, 2002). Policy makers or rather politician understand that it will be important to adopt a microeconomic principle of comparative advantage; which ascertain that it is government should import oil since the cost of domestic oil production is slightly higher in comparison to foreign oil. Micro and Macro Economics in Oil Industry Micro economics is focused on the individual decisions made by people in relation to the underlying allocation of resources as well as prices for both goods and services. Certainly, it is based on the supply and demand functions as well as other factors that will determine price levels as postulated within n economy (Stastny, 2002). On the contrast, macroeconomics focuses on studying the immediate behaviour of an economy as a whole in relation to all industry sectors. Particularly, it focuses on identifying such important facets as the GDP and how it affects unemployment rtesm national income and, also the rate of growth (Stastny, 2002). In the oil industry, governments adopt fiscal policies that, in turn affects the level of prices. For instance in the case that government makes a bid to purchase oil, the bidding process is done in the short run. The resultant effect is the crowding out of other persons that are priced out of the market (Stastny, 2002). Subsequently, the governments can also use their microeconomic policies to alter the quantity of goods available (supply) and the amounts of finances that can be apportioned to the oil product (demand). Of particular interest, these governments can go ahead to term some of the oil trade as being illegal under certain conditions or even illegal altogether. It is noted that the influence of politics on the economics of global oil industry rest with the correct pricing of carbon emissions. The fundamental objective of this goal is to ensure to adopt policies that will make sure that oil prices are indeed stabilised, sustainable into the future and it is aligned with the carbon pricing mechanisms (Stastny, 2002). In relation to world oil supply, political influence should be devised and implemented in order to promote development and production by all producers irrespective of whether or not they will benefit from underlying domestic consumers or even producers. For instance, the world oil price is likely to lowered on an equal measure by a resultant increase in production by specific oil producing economies like the US, China and even India. It also ascertains that economies should devise political policies aimed at subsidising domestic oil production capacities (Stastny, 2002). The other fundamental aspect is to encourage the formulation of political policies that will ensure to lower the existing demand for oil on an international scale and not just within specific regions (Stastny, 2002). This can be accomplished through a reduction of subsidies to underlying oil consumption in the event that they occur. The adoption of subsidy policies have a significant impact since they are costly and possess indefinite spillover effects that acts to steer the world market oil price upwards (Stastny, 2002). On a macroeconomic level, the influence of politics on the economics of oil is perceived in different areas and especially the balance of payments section. Policies on this aspect highly relates to the implications the level of oil consumption will have on a nation’s balance of payments, foreign indebtedness as well as the existing external foreign reserves (Stastny, 2002). This is vehemently explained using the competitive advantage mechanism given that oil importation is perceived to lead to a high cost of domestic production as opposed to the costs related to foreign oil imports. Certainly, the BOP of oil industry provides imminent information on macroeconomic matters relating to trade deficits and surpluses. Trade deficits and surpluses are mostly related to national and world saving capacity as well as well as imminent investment patterns (Stastny, 2002). Supply & Demand Curves For Oil Industry The relationship between supply, demand and oil prices can be fairly expounded using an equilibrium diagram as shown below; Figure 1 Equilibrium is attained where the demand and supply curves meet. The point ascertains the area upon where aspects related to oil price and amount sold are established. In the event that the market price is set below the equilibrium, then individual decisions for both buyers and sellers will be compelled to push it on an upward direction (Stastny, 2002). Since oil is a scarce good, this position would result to the price being bid upwards by the people that will be willing and able to purchase the oil. It is important to note that the current newer uses of oil in such economies as China and India re mostly related to consumer taste and preference while the number of these increased buyers postulates higher demand for the product as shown in Figure 2. Due to this factor, it is expected that the demand curve will certainly shift to the right side postulating a result of higher prices and enormous quantities of oil sold (Stastny, 2002). Factors that act towards altering the overall oil market so that there is an increase in production costs is set to shift the supply curve while the changes will affect the demand moving the demand curve altogether. In the case of long term change in oil prices certainly result to consumers feeling a pinch of the extremely placed prices for gas hence affecting their respective patterns for demand for gas (Stastny, 2002). They will thus opt for other forms of transportation like public transport while a significant number of them will opt to purchase fuel-efficient vehicles. Figure 2 Conclusion To sum up the discussion, it can be noted that the relationship between economics and politics is mutual one and it can be perceived correctly in such theories as the public good theory and the theory of perfect market competition whereby political influence is deemed to be key in ascertaining how goods can be availed to the public as a whole. It has also been noted that governments have a direct involvement in the oil industry because it fosters the development of GDP as well as the need for regulating consumption of the product. References List Stastny.D.2002. Economics and politics: Mutual relationship. A Working Paper for the Australian Scholars Conference 8, Auburn, AL. Retrieved on January 1, 2015 from http://www.libinst.cz/Files/KqLFy4r2/profile/2417/asc8_stastny.pdf Read More