Crude oil is a basic globalcommodity. Fluctuation in its price affects the global economy both directlyand indirectly. They have a heavy impact on the businesses and industries.Higher the prices go, more the cost of energy would become, which will drasticallyaffect the industries that are dependent on energy. Therefore, its pricevariations are watched vigilantly from all over the world.
Soaringcrude oil prices:
Crude oil prices ranged between$2.50 to $3 from 1948 to 1960. The sharp spike in oil prices started during the70s during the oil embargo, Iran revolution during 1978, and Iran-Iraq warduring the 80s. During 1973, prices were around $3 and quadrupled to $12.21during 1975; within a span of two years. At this time, the Yom Kippur Warstarted when Syria and Egypt attacked Israel. With US and many other countriessupporting Israel, the Arab nations exporting oil imposed an embargo on thecountries supporting Israel. The Arabian nations curtailed their production by5 million barrels per day. The Iranian revolution and the Iran-Iraq War causedthe crude oil prices to double from $14 during 1978 to $35 a barrel in 1981.
Pricevariations of crude oil since 1946
Later the Persian Gulf War during1990 caused an economic recession. During the later years, oil prices declinedconsiderably. Later prices started hiking once again since the last five years.This time, the price was rising steadily and gradually, and so was lessdisruptive on the consumer spending patterns. Oil prices has risen 25% in thelast four months, and 400% since 2001. During May 2008, it was $117, and surgedfurther to $138.54 for a barrel during June.
Factors that influence crude oil prices:
- A huge quantity of crude oil consumed globally is being produced by OPEC (Organization of Petroleum Exporting Countries). If the production is decreased, or prices are increased by these OPEC countries, it affects the global crude oil market substantially.
- Demand for crude oil is rising due to the requirement from emerging economies. But, the quantity of crude oil produced still remains the same. This creates ripples in the global market and causes an upward trend in the price graph.
- Dollar value fell sharply against the Euro which further triggered crude oil prices. When dollar value decreases, investors turn their attention towards commodities to hedge themselves against the declining dollar value.
- In Nigeria, production declined after the anti-Government militants attack on the oil pipelines. In Iraq, exports from the north border of the country were affected due to the cross border raids by the Turkish forces against Kurdish insurgents.
- Natural calamities like hurricane hitting the oil producing countries cause its prices to soar.
- Sometimes, oil producers store oil for speculating the prices. This creates friction in the demand and supply ratio, and creates volatility in crude oil prices.
Future Crude Oil Market - Industry Opinion:
A projected upside of $145 per barrel, and downside of $130 per barrel can be observed in the market. A long term tight demand and weak supply indicates further increase in prices. Energy strategists contemplate a bullish trend and believe that by the end of July prices will reach $150 a barrel, and in the next six months, if supply does not meet demand, prices would soar up to $200 a barrel.
Global Consequences:
Prices of essential commodities like crude oil are one of the important drivers of economy manipulating the countrys inflation. Increase in oil prices will cause a global economic downturn. World stock indexes declined as an effect of the surging oil prices. As a result of declines in Asia, stocks fell back in Europe as investors worry that the economic slowdown may hurt their earnings. Various companies like airlines, banks, and carmakers are affected by the price rise. Countries like Asia and Africa will be affected more as their economies are more dependent on imported oil. African countries spend approximately 4% of their GDP on oil imports. Fluctuations in oil prices cause drastic changes in their current account balance. Economies of Thailand and China are also oil intensive. The economic downturn of the developing countries due to surging oil prices are further exacerbated by their inability to shift quickly to alternative fuels.
Increase in crude oil prices directly affects the cost of gasoline, home heating oil, and electric power generation. 96% of transportation, 43% of industrial products, 21% of residential and commercial products, and 3% of electric power relies on oil. So; when oil prices rise, subsequently, the price of natural gas which is used as fuel for power generation, residential, commercial, and industrial production also increases. This ultimately induces inflation, causing the purchase price of all commodities to increase. Consumers will have to spend more of their income for oil based products by restricting their expenses on other goods and services. With higher prices, interest rates tend to become higher. While high prices cause unemployment, it also lowers the total cost of employment, thereby causing slow price growth in the economy.
Countries all around the globe are striving to meet their routine feed requirements due to the sky rocketing oil prices. Economic impact of increasing oil prices is a challenging issue and continues to attract considerable attention. The past decades have proved the extent of damage due to the surging oil prices. During the 70s and 80s; the damages were substantial following a recession. The economic threats imposed by increasing oil prices remain real, causing macroeconomic consequences for importing countries like high level of unemployment, increased interest rates, downward trend in consumer confidence, and affecting the economic durability of economic upturn.
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