Causes and effects of fluctuation in oil price

This report discusses about the most essential energy resource and the core in economics that is oil. Since it is now used in a variety of ways to operate any machines for everyday life especially automobiles, its needs and wants has been grown rapidly. However, such unsustainable and finite amount of oil now does tremendous matters to global economics. When it was not fully used for running machines, people in history used for constructions and medicines. However, with its discovery of many usable ways such as lighting, the wants of oil has been rocketed. After many years have been used oil for running machines and other fields, economists found that oil price is actually affected by some crucial reasons and events occurred. Following this, it explains with examples about how such natural disasters, wars, recession, and oil crisis can cause the oil price changed. Also, it talks about effects as what would happen to politics and economics after the fluctuation in oil price. Since there is high in demand of oil and limited supply, the price of oil is very high. Also, environmentalists claim that even it has replaced coal successfully in running machines and automobiles, it still emissions harmful pollutant to nature. Therefore, many researchers have been made a research for an alternative energy source to oil. Actually, there are many renewable energy sources found to use as alternative energy to oil after it is depleted, but it still has to study more on it due to new technology required to be usable. Hence, there are many arguments about whether we should keep oil as main energy source or change it to new energy source to lessen the current oil price and care about remaining amount of crude oil even it costs a lot. We infer that the oil price fluctuation can make significant changes economically, socially, and politically. We also think that searching for alternative energy sources can help the environment and maintain more stable economy.

1.0 Introduction

The oil, which is used for everyday life, is just as important as water and air. Oil is used not only for running automobiles and producing electricity but also producing plastics, clothes, and electrical goods as well. Thus, we could say oil is a fundamental material to produce goods we need in everyday life. This research paper will mainly discuss oil and recognize how the money in exchange for oil, in other words, the oil money affects global economy. Also, we will see how other economists think about viable alternatives to oil in future.

2.0 History of Oil use

Oil has been known as one of the most significant and essential energy sources used and progressed for numerous purposes since thousands of years. Despite modern major oil use is to run automobiles such as cars, buses, trucks, and ships, ancient people used in many other ways. According to history, ancient people used pure oil not only as a material for binding materials and as a sealant for waterproofing various surfaces but also as worked materials to pave asphalt on walls and roads. With its numerous effects has brought economic growth, the world started to recognize the importance of oil use. It was also discovered that the Chinese were the first knew the importance use of oil and to discover underground oil and drew from the wells in order to use for lighting around 500 B.C. Ever since that time many countries has begun to find oil wells around the world due to the important roles for the use of oil (BERA – The Oil & Gas Industry). Moreover, oil development has been quite active since long time ago. For example, Poland was the first country in the world trade the oil that was in 1853, and then comes Romania in 1857. In North America, the first commercial was in 1858. In 1959 Titusville was very famous for its oil well production of twenty five barrels a day. The U.S started to produce millions and millions of barrels during the past 50 years after the first production. For example; 2000 barrels in 1859 after 40 years 57 million barrels were produced in a year and still increasing until now. (Wilson, 2010)

3.0 Causes of fluctuation in oil price

Knowing the reasons for oil price fluctuation is very important; since knowing such information can help the investor to invest at the right without any risk. It is very perplexing to know the exact cause of fluctuation in oil price; however, we will highlight the main causes and effects of phenomenon.

3.1.0 Causes

There are four main causes change oil price; hurricane Katrina, middle-east wars, recessions, and oil crisis in the 1970s.

3.1.1 Hurricane Katrina

Hurricane Katrina in 2005 caused the oil production in the Southern Gulf Coast in the U.S to stop completely, and due to the demand and to the lag of oil production; the price of oil barrels increased suddenly to $70 per a barrel. The prices declined when the U.S government decided to release 30 million oil barrels from the Strategic Petroleum Reserve (SPR) (Editorial Dept, 2009).

3.1.2 Middle East wars

The wars happened in the Middle East between Iraq and Afghanistan in July, 2008 caused the prices of oil to increase to more than $136 per barrel. The Middle East is known that it is one of the richest regions of oil. Therefore, due to the high prices of oil at that time, the demand for oil dramatically decreased; people started to demand less and save money. Due to this low demand, the prices of oil started to return back to normal (Editorial Dept, 2009).

3.1.3 Recession

Recession caused the oil prices to change in two ways. First, the recession caused the employees to work lesser, and some even started to work from their homes; therefore, they are not demanding often for oil (e.g. transportation). Hence, the prices of oil decreased due to the low demand. Secondly, the demand for other products (e.g. electronics) decreased due to recession. The manufacturing countries which supply these products started to supply less since they started to lose proifit, so less shipment of products occurred – less use of oil and this caused the prices of oil to decline (Editorial Dept, 2009).

3.1.4 Oil crisis in the 1970s

The prices of oil in the Middle East were low, most of the developed countries such as the U.S decided to rely more on importing the oil. The Organization of Petroleum Exporting Countries (OPEC) decided to limit their production of oil in order to make the higher oil price (Wright & Boorsw, 2011).

3.2.0 Effects

There are two effects showing what would be likely results of politics and economics after the changes in oil price.

3.2.1 Political effects

Because of the negative effects of oil price fluctuation in the United States, the citizens decided to vote for Barack Obama in the 2008 elections. (Crenshaw, Maniam & Subramaniam, 2010).

3.2.2 Economical effects

There is a relationship between oil price fluctuating and income rate. For example, when the price oil increase, the income rate of the labors decrease in order for the industry to make up for the loss and make profit. Also, when the prices of oil increased, some storeowners couldn’t pay for the gas deliveries and they had to shut down their businesses. Not to mention the increase of shipping fees, transportation, and food prices (Crenshaw, Maniam, & Subramaniam, 2010).

4.0 Alternative energy sources to Fossil Fuels

Countries around the world are reconsidering other energy sources to oil due to its increasing prices, polluting waste and the remaining amount left of it. Oil is formed over millions of years from the remains of animals and plants, covered with a layer of sand and silt. Crude oil and petroleum are also known as rock oil, developed by heat and pressure on the layers. Today oil is used to fuel vehicles, heat houses, and make numerous products ranging from medicines to plastics. However, a great pitfall of oil is the emission of harmful gases when burnt.

Before the age of oil, coal was the dominating fuel, as stated by BBC (Alternatives to oil, 2000).Not only was it a reliable provider of electricity, “it [was] also an essential fuel for steel and cement production, and other industrial activities” (World Coal Association, N.D). However, it lost its popularity due to the fact that a large amount of poisonous gases, like carbon dioxide and sulphur dioxide are produced in its burning process, contributing negatively to the change in climate.

Moreover, nuclear power is said to be friendly regarding the global warming. For example, the United Arab Emirates has been depending on oil for a very long period as a main income generator. However, the emirates are trying their best to stimulate other inflows from tourism, manufacturing and plans for research and development of new energy programs since they know that oil would eventually run out one day. According to the Emirates Nuclear Energy Corporation (ENEC), the development of nuclear power plants in Abu Dhabi will help serving the growth in energy needs in the future. On the other hand, some countries fear to take the risk of having nuclear plants because of the rising rate of tragic accidents. The recent leakage of nuclear and radioactive substances in Japan, due to the 8.9 Richter scale earthquakes, is an example.

Technology innovations are creating a path to the usage of new, more environmentally sociable fossil fuels. Renewable fuels include hydro-electric energy, solar energy, biomass energy, wind energy and hydrogen. Renewable fuels promote countries to use nature and a high technological plan to produce power. In Norway for instance, hydro-electric power is used to the fullest as reported by BBC (Alternatives to oil, 2000). Wind and wave power are another promising fuels. “Solar power is coming on by leaps and bounds. There are already photo-voltaic cells which will provide power on a cloudy … winter’s day, or even by moonlight” (Alternatives to oil, 2000). However, the hesitation and reluctance of countries to use such power sources falls under the aspect of price. A lot of money will be required to build wind turbine, solar panels, and hydrogen in conversion of technologies.

All in all, there is a wide variety of alternatives to oil, however the users should evaluate the benefits and drawbacks for each power source and the effects generated to the society from the global view.

5.0 Conclusion

To sum up, our world consists of variety of sources. Oil is one of the most important sources that are used in today’s life, yet it is a non-renewable source. Therefore, looking for alternatives for oil can help stabilize economy and environment. Furthermore, due to some environmental and humanistic behaviors, oil prices began to increase and decline; this affected the world in many ways economically, politically, and socially.