Rising Oil Prices: Benefits Amidst Rapid Fuel Inflations - Research Paper Example

Rising Oil Prices: Benefits amidst Rapid Fuel Inflations OBJECTIVE: To show how the rising oil prices contributed beneficially to some areas like the environment, road congestion, and energy conservation. METHODS: Data gathering from current news as well as other research articles published by scholars relating to the issue of rising fuel prices. This paper will provide discussion of the causes and initial impacts of the rise of fuel in the world market and economy as well as on low-income households. RESULTS: The rising oil prices do not affect the world economy in a macroeconomic stance but the negative impacts are experienced by the less developed, oil dependent economies including the low-income households. The benefits of the increase are evident on the conservation of energy, utilization of renewable sources of energy, reduction of pollution and traffic congestion. CONCLUSION: Based from the findings, more focus on the development of renewable sources of energy must be done in order to reduce oil dependency of many developing countries for economic growth. I. DISCUSSION OF THE CASE A. Current Reports on Oil Prices Fuel prices have risen and affected every nation in the world since the early years of this decade. Nandia Mongia (2008) reports that crude oil prices have increased in the world market from 22 U.S. Dollars up to almost $90 U.S. Dollars per barrel. This affected the prices of petroleum products like diesel, kerosene, propane, and gasoline and hit lower-income households. Figure 1 shows the rising trend of oil products from 2000 up to 2006. Figure 1 (Oil Prices, Quarterly Prices 2000-2006) B. Causes of the Increase in Oil Prices Mongia (2008) mentions five (5) reasons for the rising of oil prices: (1) increasing demands for oil in the world market, (2) reduction of buffers, (3) uncertain oil supply, (4) assumption in the global oil market, and (5) lack of investments on exploration and refining. Robert Hirsch et al. (2005) mentions the notion of oil peaking. They note as perceived by geologists, oil is a limited source found under the earth's crust and its production will soon reach its peak or maximum and from there production will decline. They also emphasize that oil peaking is not related with running out of oil but it only describes the maximum production rate of an oil reservoir when half of its oil is recovered. (Hirsh et al. 2005) Oil peaking can be attributed to rising oil prices since the decreasing supply of oil may not meet the required demand so prices will go up in order to decrease the demand. Figure 2 explains the shift of the supply curve (S1 - S2) and the rise of equilibrium price ($1 - $2) because of the decrease in oil production. Figure 2 C. Implications of the Rise in Oil Prices Mongia (2008) finds that the macroeconomic effects of the increase in prices of oil are not yet seen. As shown in Figure 3, the inflation brought by the increase in the average price of crude in 2000's was matched by the growth of the world's real GDP although signs of slowdown were seen. For the developing countries in Asia, the effects of inflation hampered GDP growth which has not changed since 2004. (Mongia 2008) Oliver Blanchard and Jordi Gali (2008) prove four (4) reasons for the mild impacts of the recent oil price increase: (1) lack of adverse shocks which happened in the 1970's, (2) lesser share of oil in production, (3) highly flexible labor markets, and (4) enhancements in the monetary policy. Figure 3 (Real GDP Growth, Crude Price 1990 - 2006) On the other hand, the microeconomic effects of the rise in oil prices were experienced by the poor. As stated by Mongia (2008), many developing countries are oil dependent and spend more resources on importing oil. Poor households use petroleum products like kerosene, liquefied petroleum gas, diesel, gasoline, and chemical fertilizers in their daily living. The rise of in the prices of oil will force them to use other sources like biomass or fuel wood and crop remains. These effects will harm some Millennium Development Goals (MDG) such as health, education, and women. Mongia (2008) also mentions the oil price vulnerability index (OPVI) which is based on the strength and performance of the economy and its dependence on oil for growth. Reports state that many countries have high OPVI compared to medium and low OPVI's.1 II. BENEFITS FROM THE CASE A. Renewable Sources The dramatic increase of oil prices in the world market is making alternative sources of energy more competitive. The MSNBC Press report that wind power is starting to compete with other traditional sources in the United States. The cost of wind power is at 4.2 cents per kilowatt hour while coal costs 4 cents. Other sources like natural gas, oil and nuclear power cost 6.8 cents, 9.1 cents and 10 cents respectively. The advantages of using renewable sources of energy are they have continuous supply of power, less impacts to pollution, and more stable prices. On the other hand, the cost of making power plants requires much resources, the degree of the supply of power depends on the condition (wind power is triggered by wind blows), and the ability of these energy sources to meet the demands for energy is still in question. (MSNBC 2004) B. Environment The global warming brought by the greenhouse effect is one adverse effects of burning oil for energy. According to economist, Gregory Mankiw (2006), higher prices of gasoline can lessen the carbon dioxide emissions which are the principal component of the greenhouse. C. Road Congestion Mankiw (2006) also argues that higher prices of gasoline will make people drive less and thus, will reduce the number of vehicles in the streets. People may opt to take public transportation for travelling than using their own cars to go to offices. This will not only reduce traffic congestion but also will lessen pollution. D. Energy Conservation The increase in the prices of oil will force people to conserve energy. The notion of "going green" is one step of being concerned about the adverse effects of burning too much fuel in the environment. Lisa Cullen (2007) mentions some green policies by companies in reducing the impacts of burning gas. Nike, a shoe company, promoted a green policy entitled, "Travelling Responsibility Accept the Challenge" (TRAC) which rewards employees who get to work without burning gas. In 2006, Nike workers conserved 719,343 miles or 35, 907 gal worth of gasoline by riding bicycles or taking mass transit. (Cullen 2007) III. ASSESSMENT AND CONCLUSION The rising of oil prices has both risks and opportunities in different sectors of the society globally. Findings show that the current situation does not affect the overall economy of the world. However, the figures do not show the adverse impacts of the high prices of oil on developing countries especially the poor households. The development of the renewable sources needs to be intensified in order to lessen the oil dependency of many countries for economic growth. Works Cited: Blanchard, Oliver and Jordi Gali. "The Macroeconomic Effects of Oil Price Shocks: Why are the 2000s different from the 1970s". 25 March 2008. Pp. 1-76. Cullen, Lisa Takeuchi. "Going Green at the Office". 07 June 2007. Hirsch, Robert, Roger Bezdek and Robert Wendling. "Peaking of the World Oil Production: Impacts, Mitigation & Risk Management". February 2005. Pp.1-91. Mankiw, Gregory. "Raise the Gas Tax". 20 October 2006. Greg Mankiw's blog. http://gregmankiw.blogspot.com/2006/10/pigou-club-manifesto.html Mongia, Nandita. "Overcoming Vulnerability to Rising Oil Prices, Options for Asia and the Pacific". 29 January 2008. Pp. 1-26 "Rising oil prices boost renewable energy". 21 October 2004. MSNBC Press. Notes Read More