The price of oil intends to spark the chaos in the world economy. This spark lately has been in Middle East. In recent history, the spark came from, “the Arab oil embargo of 1973, the Iranian revolution in 1978-1979 and Saddam Hussein's invasion of Kuwait in 1990...” (Economist). “The Middle East and North Africa produce more than one-third of the world's oil.” (Economist). The situation in Libya are worsening which causes the oil output of Libya to halves. Unrest across the region are spreading, threatening a wider disruption. The price of Brent crude has jumped 15%, reaching $120 a barrel on February 24th. (Economist). Supply disruptions causes oil price to increase and could increase inflation. The lasting effects may bring stronger needs for oil substitutes .
The firms who run oil business are oligopoly. Oligopoly firms are a few but typically large that controls the industry. They intend to have strong pricing power and put up a difficult barrier against business newcomers. For oil oligopoly firms, business is going very well because in 20th century and so far in 21st century, the world is running on oil thanks to a very strong reliance almost without any successful substitutes. Oligopoly firms in this industry almost never have to worry about potential entrances since it is estimated to set up an oil business cost roughly 50 thousands dollars in the 19th century but now in the 21st century, millions of dollars will be required.
Consumers and businesses have an almost unbreakable reliance on oil for their needs. The demand is inelastic. The prices for oil may slightly increase or decrease and no one will truly notice the difference in gains or losses of demand. Again, the demand is inelastic because th...
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In the long run regarding the Libya crisis, it is predicted that the substitutes of oil becomes more and more of preferences by the consumers. The oil firms may recognize this as a threat to their oligopoly businesses. They might take more of burden to keep prices lower as possible to prolong the rise of successful and efficient substitutes over oil. The firms may realize that the occurrences of oil hikes suggest them as a need to create a sub-division inside their firms (akin as Scion under Toyota cars) for a purpose of developing substitutes to make their firms more secure in financial future.
Works Cited
"Oil and the Economy: The 2011 Oil Shock | The Economist." The Economist - World News, Politics, Economics, Business & Finance. Economist.com, 3 Mar. 2011. Web. 11 Mar. 2011..
Simmons estimates crude oil prices to average $24 WTI for 2000 and $21 WTI for 2001, with 1Q00 at $28, 2Q00 at $24, 3Q00 at $23 and 4Q00 at $21. For 2001, they see 1Q01 at $22, 2Q01 at $20, 3Q01 at $21 and 4Q01 stable at $21. Their thesis, relying on inventory-price dependence, is as follows.
Crude oil is a strategic product, in the sense that it is a most necessary fuel for all industries of nations in the world. While crude oil is a most strategy input for productions, transportations, and national defends, whoever have control over this source of energy will dominate over other countries, so in addition to supply and demand factors that affect the price, consumers must pay attention to the producers and export countries that can use this product as a weapon. Such as during and after the 1973 Arab-Israeli War, the oil giant Saudi Arab, members of the Organization of Petroleum Exporting Countries (OPEC) imposed an oil embargo against the United States and other Western European countries, which including the Netherlands, Portugal,
In 2004, crude oil producers around the world expected a 1.5% growth in the world’s demand for crude oil. The actual growth rate was more than double the projections at 3.3%. This growth was due to rapidly industrializing of foreign countries such as, China and India. Therefore the lack of crude oil affected the supply of gasoline to consumers at the pump.
People need oil for daily life and work. Since World War II, oil had caused many serious problems in United States and throughout the world. Remarkably, economic and social problems were heightened by the emerging energy crisis. By 1974, the United States gained a third of its oil by importing from the Middle East.[ James Oakes, et al. Of The People: A History Of The United States (Oxford University Press, 2011), 881.] When the heavy war between Israel and Arabia erupted, the United States was not able to gain enough petroleum because it supported Israel. To show the dissatisfaction with the United States’ support to Israel, Arab members of the Organization of Petroleum Exporting Countries even raised oil prices. “Overnight, OPEC raised the price of its oil from $3 to $5.11/By ”[ Merrill, Karen R.. The oil crisis of 1973-1974: a brief history with documents. Boston: Bedford/St. Martin's, 2007, 22.] Not surprisingly, the United States was strongly affected by the oil shortage and the the high price of oil. Homes and businesses could not easily solve the serious problem. Drastic protests occurred in many states such as Arkansas, New York, and Florida because a huge number of drivers could not accept the high price of gasoline.[ Merrill, Karen R.. The oil crisis of 1973-1974: a brief history with documents, 1.] Transportation was decreased in order to use less oil. Faced to the great challenge, several presidents analyzed the seriousness about the oil crisis and provided effective ways of reducing the use of oil.
Economic instability is perhaps the category that engulfs most states with petroleum-depending economies, including economic giants like Russia. The downfall of these producers is particularly evident given the current and increasing downfall of oil world prices of more than 50% in the last six months. The increase in domestic supply of oil in North America that rendered the United States less dependable on petroleum imports undermined the influence of exporting countries, particularly the leverage that the once powerful tycoons of the OPEC possessed over international trade. These countries can no longer engage in an embargo like in the 1973, for they are even struggling with enormous deficits to meet their citizens’ basic
America is dependent on other nations for their ability to create energy. The United States is the world’s largest consumer of oil at 18.49 million barrels of oil per day. And it will continue to be that way for the foreseeable future considering the next largest customer of oil only consumes about 60% of what the U.S. does. This makes the U.S. vulnerable to any instability that may arise in the energy industry. In 2011, the world’s top three oil companies were Saudi Aramco (12%), National Iranian Oil Company (5%), and China National Petroleum Corp (4%). The risk associated with these countries being the top oil producers is twofold. One, they are located half way around the world making it an expensive to transport the product logistically to a desired destination. And two, the U.S. has weak, if not contentious,...
The unrest in the Middle East would be a valid disruption in normality of prices if the Middle East were exporting less oil than it did before the many revolutions. However, Saudi Arabia has said it will make up the difference in the supply if the supply were to drop of significantly (source). Other members of the Organization of the Petroleum Exporting Countries (OPEC) have vowed to “do more” if the region continues to become destabilized. Libya for example only accounts for 2% of the world’s resource of oil (source). Libya’s oil is special only because it contains 0% to .5...
The modern world of today runs on fossil fuels with crude oil being the live blood of industrialized countries. Though much of the twentieth century old was plentiful easily acquired and low in cost it has only been in the past thirty years that we have seen oil prices rise substantially. This can be attributed to many different reason. These price changes have challenged the industrialized world to become more creative with their techniques of both acquiring oil and using it.
Campbell, Colin J., Laherrere, Jean H. "The End Of Cheap Oil." Scientific American Mar. 1998: 78-83.
Economist has analyzed the causes of decline in world oil prices. Typically, the price of oil is determined by demand and supply of the world market and forecast advance to invest in which level of demand depends on the level of economic activity and behavioral use of energy from humans. The oil price decline has a benefit for oil importers like China, India, Japan, Europe but unfortunately for oil exporters such as: Kuwait, Venezuela, Nigeria, and Iraq. Crude oil prices fell steadily in the past seems to be a result of two main factors being the levels of demand declining and a level of increased supplies (Economic, 2015)
The worlds usage of oil has had a major impact on political development. One major outcome was the creation of OPEC. The Organization of the Petroleum Exporting Countries was created during the Baghdad conference that took place in 1960 on September 10th to the 14th. This committee was founded by Iran, Iraq, Kuwait, Saudi Arabia, and Venezuela. Over the next few decades, other countries began to join OPEC. OPEC’s purpose is to watch over oil trades and work on policies with member countries. They make sure that prices from producers are fair and that consumers are getting their fair share of oil. OPEC is the outcome of the high dependence the world has on oil and there are conflicts that happen because of this commodity. One major conflict was the oil embargo set on the United States from OPEC in 1973. This was in retaliation to the U.S.’s choice to aid Israel during the Arab-Israeli war. Other countries affected were the Netherlands, Portugal, and South Africa because of their support of Israel. Since the US depended so heavily on foreign oil, the economy was impacted negatively.This sent the US into a crisis for the next year. These major politic...
The U.S dependency on foreign oil presents many negative impacts on the nation’s economy. The cost for crude oil represents about 36% of the U.S balance of payment deficit. (Wright, R. T., & Boorse, D. F. 2011). This does not affect directly the price of gas being paid by consumers, but the money paid circulates in the country’s economy and affects areas such as; the job market and production facilities. (Wright, R. T., & Boorse, D. F. 2011). In addition to the rise in prices, another negative aspect of the U.S dependency on foreign crude oil is the risk of supply disruptions caused by political instability of the Middle East. According to Rebecca Lefton and Daniel J. Weiss in the Article “Oil Dependence Is a Dangerous Habit” in 2010, the U.S imported 4 million barrels of oil a day or 1.5 billion barrels per year from “dangerous or unstable” countries. The prices in which these barrels are being purchased at are still very high, and often lead to conflict between the U.S and Middle Eastern countries. Lefton and Weiss also add that the U.S reliance on oil from countries ...
Before the 70’s, oil from the Middle East was very cheap, and in North America, it was about $4 a barrel. But then, the leaders of the Middle East discovered that everyone needed their oil, so they formed OPEC (Organization of Petroleum Exporting Countries). Practically overnight, they jacked up the prices of oil by limiting the supply. This was the first oil crisis. It lasted for a while, but then they got greedy, and started supplying more oil, in hopes to make more money. But then there was more supply than demand, so t...
Price fluctuations affect almost all the industries around the globe and industries within oil and gas production & marketing. The increase in Oil & Gas prices will directly force to inflate the daily commodities, food industry and transportation in major. According to Standard & Poor’s, energy spending will continue to stay at high levels for the next 25 years with projections of global energy demand to increase by approximately 1.5% annually between 2005 and 2015, and approximately 0.9% annually between 2015 and 2035. To be able to meet this increase in demand an estimated $26 trillion (in 2008 dollars) of globa...
OPEC stands for “Organization of Petroleum Exporting Countries” and is comprised of the largest oil-producing nations of the world. Through OPEC, these Member Countries work together to control the price and availability of oil--one of the most significant commodities in today’s worldwide economy. Founded in September of 1960 with headquarters in Vienna, the OPEC organization is currently comprised of twelve member countries (History of OPEC, 1). OPEC’s mission is defined in a formal organizational statute that identifies their role “to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilization of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry” (Our Mission). The OPEC website (OPEC.org) is designed to provide information to the general public about the function of the organization, the benefits that the organization provides, and the milestones that have been achieved. Through highlighted material and carefully selected topics on their website, the OPEC organization strives to convey an appearance of being a supportive and unbiased charitable organization focused on improving the global economy through supply and demand principles. The OPEC website contains a wealth of resources that help to explain the current state of oil production and how it affects the global economy, but it does not elaborate on potential downfalls of price-fixing and the impact that oil “cartelization” has historically caused to the world economy.