Term Paper on "Oil and the Affects of Increased Consumption by Competing Economies"

Term Paper 10 pages (3967 words) Sources: 1+

[EXCERPT] . . . .

Oil and the Affects of Increased Consumption by Competing Economies

Crude oil is an important commodity in the world of today where it provides the major source of energy for keeping economies running. This has seen very high swings in terms of price when there are shortages or excess supply. This price cycle may last over several years as the demand in spread over OPEC supply and non-OPEC supply. (Oil Price History and Analysis) the entire petroleum market is very highly controlled in terms of marketing, and all of the seven companies which control the international market, either directly or in collaboration with other companies, sell all the petroleum products through different subsidiaries and affiliates in all the important markets of the world. (the International Petroleum Cartel) So far as the U.S. is concerned, the price has been directly controlled through production and price controls over the greatest part of the twentieth century. During the entire period after World War II the price of oil has been about $19.61 a barrel and this price is being measured in terms of the value of dollars as in 2000. During the same period, the price paid for local American crude was about $15.25 in terms of 2000 prices. This means that prices of crude during the entire period from 1947 to 2003 has exceeded $15.25 only for half the time. (Oil Price History and Analysis)

In terms of importance, there are seven companies that control the oil market throughout the world and that include five American companies - Standard Oil Co. At New Jersey, Standard Oil Co. Of California, Socony-Vacuum Oil Co., Inc., Gulf Oil Corp., and the Texas Co. There are also two British Dutch companies - Anglo-Iranian Oil Co., Ltd., and the Royal Dutch-Shell group. (the International Petroleum Cartel) the interesting part is that it rose very slowly in the earlier years and was only about $3.00 in 1957 from the low figure of $2.50 in 1948. During the period of the end of the century, it was an entirely different situation and the prices ruling then were between $14 and $16. These prices do not clearly show any increase but are reflections of the inflation that was taking place. (Oil Price History and Analysis) the oil companies have very good controls over their operation and this is even through the directors serving more than one company as directors when they are affiliated to one group. (the International Petroleum Cartel)

International Oil Regime:

When we consider the international situation, the total control on the petroleum industry has two major sharers. One of them is the state monopolies and the other the seven large international petroleum companies. These international companies are already noted above. The control by these companies involves reserves, production, refining, transportation and marketing. (the International Petroleum Cartel) However, in spite of such controls, the prices of oil has reached very high levels in recent times, and recently the price of U.S. light crude has gone over $56 a barrel before dropping down to saner levels. (Higher oil prices hit U.S. growth)

Major Producers:

As already mentioned in terms of companies there are seven companies which rule the world. This connection is seen in the tie ups that exist between the oil companies in the local companies. Iraq Petroleum Co and its entire group of subsidiaries are owned by Jersey Standard, Socony, Royal Dutch Shell and Angle Iranian. Similarly, Kuwait Oil is owned jointly by Gulf and Anglo Iranian. There are a lot of linkages between standard of California and Texas co through the group of Texas California group of companies. They are also tied up with Jersey Standard and Socony through the Arabian American Oil co and Trans Arabian Pipe Line Co. (the International Petroleum Cartel) the importance of U.S. In the market of world wide oil sales is because the sales are mentioned in U.S. dollars.

Thus the increase or decrease of the value of other currencies in terms of U.S. dollars affects the pricing by OPEC of the amount of oil that they should produce. Thus when the international price of dollars go down, the members of the OPEC receive lesser revenues in their currency and this decreases their buying power, as they receive their payment in dollars and that is converted to their currency. This led to a situation when Iraq demanded that it be paid in Euro and the currency had just been introduced. It was felt that this decision could hurt the American economy very seriously if this had been taken up as a precedent and followed up by the other members of OPEC. (OPEC: Wikipedia, the free encyclopedia) at the levels of current price, this is nearly double of what it was last year, the price of oil has become a very important factor in the economy of the world and it cannot be left alone by the leaders of most countries. (Oil and Stagflation)

OPEC:

At present OPEC consists of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, United Arab Emirates and Venezuela. The organization has its headquarters in Vienna, Austria. The organization is for the purpose of negotiation with the oil companies regarding petroleum production, prices, and future rights of concession of the oil companies in the different countries. (OPEC: Wikipedia, the free encyclopedia) Thus, it is clear that OPEC is only a pricing agency for crude oil and does not have further control on future processing. These rights are controlled by the oil companies and these seven international petroleum companies own 65% of the estimated crude oil reserves in the world, and through that they have the control over all oil supplies in future in the world. This is of course with the assumption that different fuels do not start getting used by people.

When one looks at the position of reserves outside the United States, the position is even clearer and these "seven sisters" hold 82% of the reserves after owning 34% of the reserves in United States. (the International Petroleum Cartel) the importance of the agreements taken up by OPEC is to help the members earn more from the two thirds of oil reserves that they own. In conditions of today, they supply about 40% of the world production and half the oil supply to the world. Their position gave the 11 countries over $338 billion from oil exports, and this was an increase of 42% from 2003, as per the figures released by Energy Information Administration. A comparison of these figures can be made to the earlier figures of 1972 when the amount collected by the oil exporters was $23 billion from their oil exports. Even in 1977, when the prices were at the highest because of the 1973 oil crisis, their collection was only $140 billion. (OPEC: Wikipedia, the free encyclopedia)

At the same time, one should remember that the dollar figures do not show up the complete picture and one has to take into account the impact of inflation on the world economy. This is reflected in the consumer spending, and that has not been much affected by the high oil prices, though there has been some decline over the last year when the prices slowly increased. The effect is clearly shown in the current year when the prices have climbed over $50 a barrel. This effect on inflation is being seen in the modest pressure due to the higher oil prices. (Prospects for U.S. Economy) the belief of most analysts is that the increase in the second quarter of 2005 could affect the economic growth of United States badly. (Higher oil prices hit U.S. growth) the impact of OPEC on controlling prices has been rather poor even in the past, and this is probably the reason why one cannot define OPEC as a cartel. The primary reason for this is that OPEC is not able to enforce the member quotas, and has not been able to do so from the start. This was seen even in the 1979-1980 period when prices were increasing fast. At that time, the oil minister of Saudi Arabia, Ahmed Yamani told other members of OPEC that if the prices were increased fast, then there would be a corresponding lowering of demand. This was not accepted by other members of OPEC. (Oil Price History and Analysis)

B. Wars and Inflation

Oil Embargo:

The concept of oil embargo did not start in 1973, and one of the first attempts was by the United States and Netherlands on Japan even before World War II. This was a concept that came before the first attempt by the Arabian countries to use oil as a strategic weapon in 1956 and 32 years before 1973, the year of the world famous oil embargo. Even in 1960s, the United States and Western Europe were restricting the import of oil from the Soviet Union. They were afraid that the Soviets would stop all oil supplies once the countries were using Soviet oil in large… READ MORE

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