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Oil Crisis - Essay Example

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If the factors which have lead to an increase in the oil prices are considered, there is an endless list to be provided. A few important factors which are leading to this drastic change in the economy would be discussed in this essay. …
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Oil Crisis
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Download file to see previous pages Oil is the major source of energy worldwide and it is expected to remain so over the next few decades. Ever since, then crude oil has become the main "raw" material in every economy no matter it is a developed one or it is in the developing process. The changes in the prices of the crude oil are making positive and negative implications on every economy (Itzkoff, 2008).When these changes of prices are severe ones, one might easily conclude that an economy is going to face problems such as unfavorable supply shocks. When these kinds of problems arise in the world oil market, it is usually described as a world oil crisis. The world has witnessed 2 major oil crises and it is facing another one at the moment (Campbell, 2005).
In order to discuss the recent oil crisis and its economic implications I am going to refer to the appropriated economic theory. As mentioned previously the major problem that an economy is facing during every oil crisis is the adverse supply shock. Adverse supply shocks are unexpected events that reduce aggregate supply and therefore the output decreases and prices increase. In the language of economy it can also be said stagflation (Venn, 2002).
Firstly, the basic economic tool of demand and supply would be examined in reference to the oil prices. The overall world demand of oil has risen over the period mainly due to the increase in the number of automobiles, which as a matter of fact is a result of higher living standards. Considering local factors, leasing and the easy loan repayment options have made it easy for the every individual living in this world to afford a certain motor vehicle. This in turn has lead to the consumption of oil to the highest. So accordingly, when demand is high and supply is low the prices obviously will tend to rise. Secondly, if the oil pricing mechanism is considered it can be known that oil is a leading resource used by all the industries in this world in one way or the other. Some industries use it in the transporting sector while some use it to produce goods (Prince, 2008). Oil prices are set around the world by OPEC (The Organization of Oil Exporting Countries). What OPEC basically does is how cartels work around the globe; they limit output to guarantee high oil prices and profit margins. Again when the output is limited, the demand supply function puts itself to work and the result is a surge in the oil prices. Thirdly and most importantly, oil is used as a lubricant and raw material in this era of industrialization and again the rise is population speaks for itself why the world demand for oil has risen (Frieden, 2007).
Increasing oil prices have far reaching effects on an economy. Just recently, when the oil prices rose to as high as $140/barrel many important countries were seemed to be undergoing a tough time with their budget management (Klare, 2008).
On a wider perspective, the effects are far more on ground level then at the macro economic level. When oil prices rise, the prices of those commodities which are dependent on oil also rise. Now when the prices of the latter product rise then the products which use this latter product as a raw material, even their prices rise. The point conveyed through this paragraph can also be known as the multiplier effect in economics. Multiplier effect leads to inflation on a grand scale and its results are mainly felt by the poor who are thus brought into the limelight (Eccleston, 2008).
Linking to the upper paragraph, concerns about inflation depress the stock market and even when that does not happen, speculation itself acts as a rodent and thus this diverts away investment from a country. Studies have proved that an increase in the rate of inflation leads to an increase in the poverty level, crime and suicide rates. This is one of the reasons ...Download file to see next pagesRead More
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