Rising of Oil Prices - Essay Example

On the one hand, the western world led by the United States as the world’s largest consumer of energy, has been practicing geo-political policies that would ensure control and supply of this vital natural resource; on the other, the realization of the value of this near monopoly resource by the world’s leading oil producers has upset the supply, demand and price equation in a most significant manner. This conflict of interest has resulted in what we are witnessing today: cartelization of the oil industry, soaring oil prices, weakening the dollar, rising inflation and worst of all, war/threat of further wars in West Asia - the major oil-producing region of the world.

At USD 110 per barrel, there are ominous signs of not just in the US but a serious worldwide economic downturn. In the West Asian region, Saudi Arabia, Iran, Iraq, and the Gulf countries are among the world’s largest oil producers. The US, UK, and other European oil corporations were controlling the oil exploration and refining industry here and setting the price of this vital commodity. The growing economies of the western countries and Japan needed ever-increasing volumes of the oil products, which had to be imported mainly from the Gulf region.

The Arab-Israel conflict and the formation of the oil cartel – Organization of Petroleum Exporting Countries (OPEC), led to the first oil price shock. In the words of Meyer et al., “…possession of a monopoly resource by OPEC countries …a rising tide of nationalist self-awareness, old resentment at exploitation …would force renegotiation of the terms on which petroleum was to be made available… The outbreak of the Yom Kippur war in 1973 and the subsequent oil embargo led to a quadrupling of the oil prices” (Meyer et al., p.6).

The days of cheap oil were over once and for all, although the later fluctuations in the prices were generally in tune with the increased availability of non-OPEC supplies, the occasional breakdown of cartel arrangement, supply/demand situation etc. For example during 1982 – ’83, oil prices fell by 15% (Meyer et al., p.95) due to a decrease in US demand. Disruption of supplies due to the recent militant events in Nigeria, Africa’s largest oil producer, has also impacted oil prices (Shanmugam & Singh).

Similarly, Russia’s stranglehold on supplies of oil and gas to east European nations dictates the energy prices.