Analysis of the Impact of Oil Prices on the Global Economy

1. Introduction

The price of oil becomes the bone of contention recently. Oil price seems to be hitting new highs with the regularity of a metronome. It is a bad news for customers who have to pay more on it. More frightening still, this situation may get worse before it come back to normal. No one can exactly predict when the pendulum will soon swing back again since all uncertain factors existing. From the supply side of view, the OPEC is the main producer, being prepared to add or subtract production to balance demand. Moreover, Russia is another major producer of oil in the world. They usually produce more when demand more and subtract when demand reduce to control the price of oil. Anyway, speculator is another factor we have to consider in short run. From demand side of view, every country is trying to reduce the consumption on petroleum, the government use tax strategy to control the oil price. Further more, government strategic oil reserves have to be considered as a factor which causes oil supply shortage. Next, let¡¦s discuss in detail how the demand and supply relation affect the price of oil.

2. Microeconomic Analysis

2.1 Analysis of Market Form

There are not so many oil producers in the world; the countries that produce most of the world¡¦s oil have formed a cartel, which called Organization of Petrolum Exporting Countries (OPEC). Those countries controlled about three-quarters of the world¡¦s oil reserve. Within the OPEC countries, they tries to raise the price of its product through reducing in quantity produced and OPEC tries to set production levels for each of the member countries. From this point of view, oil market belongs to oligopoly which only a few sellers offer similar or identical products. In this form, the producers produce a quantity of output greater than the level produced by monopoly and less than the level produced by competition. The oligopoly price is less than the monopoly price but greater than the competitive price. Therefore, supply and demand theory can be applied in oligopoly form of market.

2.2. Supply and Demand Analysis

2.2.1 Oil Supply Analysis

Supply refers to both the ability to sell and the willingness to sell by the producer. Actually, many factors can determine the quantity and individual supplies¡Xinput prices, technology, expectations.

The quantity supplied rises as the price rises and f...

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...by tax. When the oil price goes up, the government will tax more on fuel, vice versa. Therefore, it will benefit the domestic consumers.

Other factor is the Iraq influence, political unrest can leave the world without enough oil to go round.

3. Conclusion

There are too many uncertainties existing in the world oil price. According to the analysis, the price may keep going up due to the shortage of supplies and increasing of demand without considering the speculators factor in short-run. In long-run, the oil price will definitely go down. On the other hand, the price may be peaked already. This will result of the speculators unloading their oil inventories, causing prices to fall sharply.

Reference:

1. http://blondesense.blogspot.com/2005/04/crude-futures-crudely-exploited.html

2. kjhj

3. A titanic struggle between supply and demand, http://www.occupationwatch.org/analysis/archives/2005/04/a_titanic_strug.html (visited on 29th, April)

4. Oil and the Economy, http://www.federalreserve.gov/boarddocs/speeches/2004/20041021/default.htm

5. Time for OPEC to plump up its cushion, http://www.economist.com/agenda/displayStory.cfm?story_id=3759213