Gasoline Crises Based on the Oil Price Variations - Research Paper Example

Gasoline Crises Introduction Any fluctuations in oil supply and its prices can create immense changes in world economy especially in the current era of globalization and liberalization. Variations in oil prices can affect Gross Domestic Product (GDP) growth, unemployment, inflation and also the oil producers as well. Oil is also required for the production of electric power which is the most important component of every industry. The available oil resources are exhausting day by day and the exploration for new oil sources has not yielded much successes. Global economy is directly linked with oil and its prices. Oil is essential for all the vehicles irrespective whether it is moving on air, water or land. Though many alternative solutions have been suggested as fuel instead of oil for vehicles like solar energy, electrical energy etc, nothing evolved as a permanent and convenient option yet. The exhausting of current oil sources has created major crises in the current world as many experts believe that the available oil resources may last for maximum 30 to 40 more years considering the nature of consumption at present. This paper briefly explains gasoline crises based on the oil price variations and its impact on global economy. Oil trade between countries Oil is an essential commodity for the world’s economy. It is impossible for us to think about our body without blood. Same way oil is the blood of world economy. Any problems in occurred in this blood (oil) can cause severe damages to the body (economy). Oil is an essential commodity required everywhere, but unfortunately the oil resources are confined to some areas or regions only which made oil trade an essential economic activity in the current world. Major oil producing countries have monopolized the world market and they have varied the prices of oil as per the supply and demand theory. Around three years before the oil prices has reached an all time high of around $ 150 per barrel whereas it has come down to as low as around $ 30 per barrel recently because of global financial crisis and low demand of oil products. America is one of the topmost oil consumers in the world because of the huge amount of automobile vehicles used for different purposes in this country. Irrespective of developed, developing or underdeveloped, all the countries need oil and the oil trade has started between countries as early as the oil and automobiles were discovered. One of the rapidly growing economies in the world Brazil has reportedly engaged in a, bilateral trade of US$ 8.192 billion in 2004 with the Arab countries. (BRAZIL: TRADE BETWEEN BRAZIL AND THE ARAB COUNTRIES REACHED US$ 10.5 B) Major oil producing countries and their market share Gulf countries are the major oil producing region in the world where as Russia is the single largest country as far as daily oil production is concerned. As per the 2008 statistics available, the list of major oil producing countries and the largest oil fields are as follows; Major oil producers Largest oil fields (David) Backgrounds of the countries that control most of worlds oil The major oil producing region in the world is belonging to an ethnic community which have conflicts with other communities in the world. For example, Middle East is dominated by Muslim population and rules and they have differences with other countries like America, England or India because of the contrasting religions in these countries. So quite often these conflicts reflect in the oil trade between these countries. On the other hand the single largest oil producing country Russia have political difference between America and England as Russia is ruled by communist administration whereas democracy is prevailed in other countries America and India. So the political, economical, cultural and ethnic differences in backgrounds affect the oil trade between countries up to certain extent. These factors often lead to controversies and conflicts between countries. The last Gulf war between America and Iraq has been widely witnessed as the result of above conflicts even though the reasons cited were different. Game theory is widely used in oil trade between countries. In economics, it is a theory of competition stated in terms of gains and losses among opposing players in the market. Sellers often form secret alliances in order to reduce market competition and to increase the prices of their products. (Oil and gas liquids, 2004 scenario) Impact of oil price on business OPEC has raised the prices of oil drastically around three years before when the economic recession has not there even in the distant dreams of economists. On the other hand the unexpected economic recession has resulted in fewer demands for oil resources because many people started to use line buses leaving their vehicles behind in order to cut their expenses. Thus OPEC forced to reduce the barrel prices of oil and it has reached almost $ 30/barrel at one stage. Since the movement of goods across a country and beyond the boundaries of a country are essential for economic developments, transportation of goods plays a vital role in controlling the economy. On the other hand, transportation depends, on the prices of the fuels and hence OPEC can control the world economic growth as well. Oil prices have fluctuated a lot in the last five years. As stated above at some point it almost touched $ 150/ barrel while at some other point of time, it has come down to around $ 30 per barrel. (Inflation adjusted monthly crude oil prices) (Inflation Adjusted Price Of Crude Oil) Effect of oil price on global economy 1973 -1975 oil price hike has shocked the world economy. The growth rate fell to 2.1% in 1974 and to 1.45 in 1975. The worldwide trade growth rate also dropped heavily from 12% in 1973 to -5.4% in 1974 and -7.3 in 1975. Foreign Direct Investment (FDI) has dropped from 40% in 1973 to half of it in 1974 (Oil prices and global economy) The above statistics clearly shows the relation between oil price and global economy. In fact oil is the blood of global economy. The world is moving with the help of the energy provided by the oil. Most of the activities in the industrial world, and the real life situations are heavily depend on the availability of oil. For example, consider the case of transportation activities without oil resources. In fact 99% of the transportation facilities depend oil for the fuel needs. All the vehicles which use petrol or diesel engines require oil and any scarcity of oil or price hike of oil may affect the transportation industry drastically. Higher oil prices affect the global economy through a variety of channels: There will be a transfer of income from oil consumers to oil producers; There will be a rise in the cost of production of goods and services in the economy (IMF Research Department) Oil price hike will positively affect the oil producing economies while it will negatively affect the oil consuming economies. For example, the economies of gulf countries which are heavily dependent on oil revenues will be benefitted immensely if the oil prices go high. On the other hand, America, India like countries which depend heavily on gulf countries for the oil requirements will be affected drastically by any price hike of oil. Effect of oil price on unemployment From the table given above it is clear that even a 10 dollar price hike of oil can increase global unemployment rate from .1 to .2. In other words the unemployment rate may be doubled when the oil price has increased just $ 10 per barrel. Thus oil price have huge impact on employment sector. Oil price hike will result in lesser economic activities in industrial field and agricultural sector as well which were considered as the strongest employment providers in the world. Less economic activities may result in less employment opportunities. Effect of oil price on inflation Inflation is the progressive price hike of essential commodities in the market. When the inflation attains higher levels everything will get more values except the money. Oil price hike can affect the inflation rate heavily. “Its magnitude will depend on the degree of monetary tightening and the extent to which consumers seek to offset the decline in their real incomes through higher wage increases, and producers seek to restore profit margins” (IMF Research Department) When the inflation increases, the daily expense of people also will increase and even if their income increases, it may not be sufficient enough to meet their daily expenses. Inflation has both direct and indirect effects on the financial markets. Oil prices can affect the value of the money also. Exchange rate of currencies may be drastically affected by inflation. Impact of oil price on consumers High oil prices always negatively impact the consumers because of the high pricing of consumer goods. Most of the economic activities are dependent on the oil availability and its prices, manufacturers will be forced to increase the prices of their product when the oil prices go high. Many other essential commodities of everyday life like plastics, medicines, clothing, cosmetic items; all depends on oil for its production. Goods movement across a country or between international countries depend on transporting vehicles like, ships, train, cargo planes, trucks etc; all require oil as fuel. Price hike in oil and gas can increase the transportation cost and thereby the cost of the goods also. My opinion about the crises In my opinion, we should concentrate more on developing renewable energy sources in order to overcome the energy crises. As everybody knows, oil will stock will exhaust one day and we need to find out an alternative as soon as possible. The problem with other energy sources is the increased processing expenses. For example, the storage and conversion of solar energy to other forms of energy is an expensive process at present. Nuclear energy and solar energy technologies need to be developed more since many people believe that the future energy sources will be nuclear and solar energies. Conclusions Oil is a precious material which controls the world economy. World economy has a direct relationship with oil prices. Oil prices are controlled by OPEC because of their monopoly in oil market. Oil prices have undergone heavy fluctuations in the last five years because of the variations in demand. The price hike of oil can negatively affect the world economy, inflation rates, GDP growth, unemployment etc. Even a slight change in oil prices can have wide impact on global economy. Oil is essential for the transportation, industrial and the agricultural sectors. It is necessary to use the oil sources judiciously and also to find out new substitute energy sources in order to stabilize the economy in future. References 1. “Brazil: Trade Between Brazil and the Arab Countries Reached US$ 10.5 B”. 2006. 29 September 2009. 2. David. “Top Oil Producing Countries in 2008 and World’s Largest Oil Fields”. 29 September 2009.< http://topforeignstocks.com/2009/08/27/top-oil-producing-countries-in-2008-and-worlds-largest-oil-fields/> 3. IMF Research Department. 2000. “The Impact of Higher Oil Prices on the Global Economy” 29 September 2009. 4. “Inflation Adjusted Price Of Crude Oil”. 2009. 29 September 2009. 5. “Inflation adjusted monthly crude oil prices”. 29 September 2009. 6. “Oil prices and global economy”. 29 September 2009. 7. “Oil and Gas Liquids 2004 Scenario”. 29 September 2009. Outline 1. Introduction This portion briefly introduces the topic gasoline crisis with respect to its importance in the current world 2. Oil trade between countries Oil trade between different countries and the importance of oil trade have been analysed in this part. 3. Major oil producing countries and their market share Oil producing countries, regions and their market share has been explained in this section 4. Backgrounds of the countries that control most of worlds oil Political, religious, and cultural reasons which affect the oil trade between countries has been analysed in this section 5. Impact of oil price on business Oil prices can influence the business activities across the world which is described in this part. 6. Effect of oil price on global economy Global economy is directly linked with the oil production and oil prices which is explained in this part 7. Effect of oil price on unemployment Oil price variegation can affect the new employment creation and also the existing employment as well which is explained in this part. 8. Effect of oil price on Inflation High inflation rates are not favorable for economic growth and the oil prices can affect the inflation rates. This part analyses the relationship between oil prices and inflation 9. Effect of oil price on consumers Oil price hike always increases the prices of essential commodities which is explained in this part. 10. My opinion about the crises My personal opinions and about the current gasoline crisis and recommendations for improving the current crisis scenario has been explained here 11. Conclusions The whole summary of the paper has been concluded in this part 12. References Sources used to write this paper has been explained in this section Read More