Thesis on "Oil Prices the Effects"

Thesis 6 pages (1772 words) Sources: 4 Style: MLA

[EXCERPT] . . . .

Oil Prices

The Effects of the Recent Prices and prices Changes of Oil on the Global and American Economies

The interconnectivity of globalization has provided a great deal of opportunity to many businesses, opening new markets and providing for new methods of production and distribution. At the same time, the interconnectedness of the global economy also means that shifts and difficulties in one region or industry will necessarily have larger and more direct effects on the rest of the global economy. The laws of supply and demand, as well as other important and influential economic concepts, are not dissipated across the vast reaches of the global economy, but rather are accentuated through the increased concentration of trade that the global system has created. This can be clearly seen in almost any example of a globally traded commodity in any economic situation -- even the current upheaval.

Perhaps nothing illustrates the degree to which the various industry and regions of the world are connected better than the price of oil. This is a commodity that is intimately and (at this point, at any rate) inextricably tied to almost every other industry and business endeavor in the world. Oil is necessary for transportation, for the manufacture of many goods, and at its most basic oil is essential for energy -- industry needs it like human beings need air. As a resource that is found in distinct and discrete pockets throughout the world -- and in some regions far more abundantly than in others -- oil can also serve as an illustration of many different economic concepts, including, demand, supply, price level, the complexities of international trade, and even monopolistic competition.

Demand

Like all things that are considered goods in the economic sense, there is a certain demand for oil by the consumers of the economy -- in this case, of practically the entire world. When demands change, prices are necessarily affected. Generally, a greater demand tends to lead to a higher price being charged for the given commodity (everything else being equal). In the case of oil, this can be seen in the case of gasoline prices rising in the summer and during holiday weekends -- more people are planning on driving, and are willing to pay more for their gasoline because they feel a greater need to drive during vacations and holidays. Yet on a global scale, gasoline demand alone cannot account for the massive fluctuations, and especially the sudden and unexpected spikes, in the price of oil.

It is common for rises in the price of oil, such as the recent rise to one hundred and forty-five dollars a barrel, to be attributed to gasoline consumers, probably because gasoline is the most common oil product that people come into direct contact with. A great deal of the demand for oil, however, is actually attributable to the shipping industry for which huge amounts of diesel fuel are made, as well as to heating oil for homes and miscellaneous other petrochemical industries (Reynolds par. 4). The large rising trend in oil prices that began in 1999 and has shown several spikes (and some less significant though still noteworthy drops) in price cannot in reality be attributed to increased demands brought about by SUVs, as is sometimes claimed, but rather other industries -- as well as the complex interplay of other economic forces and factors -- has more to do with these fluctuations.

Supply

The other side of demand, which is the consumer's basic economic relationship with a commodity, is supply -- the producer's basic economic relationship with the same commodity. Everything else being equal, an increased supply tends to drive the price of the commodity down as competition for consumers increases. Conversely, a decreased supply leads to higher prices -- assuming demand remains the same, as it essentially does for commodities considered necessities like oil -- as consumers effectively compete to get the commodity (Econbrowser). Knowing what has been stated above, namely that demand alone doe not really account for the full extent of the price fluctuations observed in oil prices over the last decades, it is reasonable to turn to supply as a likely explanation for the fluctuation.

Here too, though, the evidence suggests that supply cannot accurately account for the immense fluctuations and the generally rising costs of oil. Oil production worldwide has actually increased throughout the first decade of the twenty-first century, and as demand has not increased significantly enough during the same time period, there is no real reason that the price should have gone up (Reynolds par. 5). If anything, the large increases in the production of oil should have lowered its per-barrel price on the international market, as the abundance of a commodity is expected to create more diverse availability and thus require competition among producers to retain consumers -- under normal circumstances.

Monopolistic Competition

The oil industry, however, is not exactly normal. The laws of supply and demand as described (in admittedly simplified terms) above only work when there are numerous unconnected suppliers creating a competition for consumers -- or more accurately, for the consumers' money. The oil industry, however, does not have a great deal of competition, and in fact much of the world's oil that is available on the free market -- and that the United States of America purchases the bulk of -- is controlled by an organization known as OPEC, the Organization of Petroleum Exporting Countries. Though these countries and their various oil producing and/or refining companies (which are often semi- or entirely state-run entities) are ostensibly separate, hey engage in a great deal of collaboration and cooperation when it comes to determining production levels and pricing, which essentially eliminates (or at least drastically reduces) the mount of competition in the oil industry. This ushers in a form of monopolistic competition, wherein the various competing entities can basically all be assured of the same security and profit.

Monopolistic competition is better than no competition at all, which would consist of a single producing entity being able to charge whatever it wanted for its commodity, but it is only slightly better. As the United States of America imports a huge amount of the oil it uses for the diverse ends listed above, it is extremely susceptible to the manipulations of price and availability that a monopolistic entity, whether it be a single company or a conglomeration like OPEC. There are other source for oil imports, but they cannot adequately fill the U.S. demand -- and thus the price actually does follow the law of supply, but only in that so much of the supply is controlled by a single industry entity.

Price Levels

The effect of oil price spikes and fluctuations on the American economy -- and indeed on the other economies of the world and the global economy as a whole -- has been a subject of much interest and debate over the decades. As might be expected, the effect of changing price levels of oil affects countries that are less dependent on petroleum and its products (Lorde et al.). Developing nations such as Trinidad and Tobago, for instance, are actually in a better position to whether changes in price level than developed nations whose entire infrastructure and trade industry depends on the use of petroleum and the various fuels and other chemicals that are created from it (Lorde et al.). When supply decreases -- or when prices go up for other reasons -- demand in these nations simply sinks, and though this does cause a general economic slowdown and loss, the impact is not as great as might be thought in the developing regions of the world (Lorde et al.).

In the United States of America, however, the macroeconomic effects of changes in the price level of oil and its products are magnified by the size of American industry. This trend might be changing, however; as the decade has progressed and several unexpected spikes have occurred, the American economy (or more accurately, the people that make up the economy) seem to have grown used to the unexpected, and the effects of oil price shocks seems to be lessening both in degree and in duration (Katayama). This has done little to affect the price of oil, of course, and there is still a noticeable effect in a reduction in oil consumption when these price shocks occur, but these effects are increasingly minor (Katayama; Econbrowser).

International Trade

The manipulation and far-reaching effects of the oil industry, and particularly of price levels of oil, clearly indicate some of the problems with globalization. International trade sounds like I could provide nothing but extended and increased opportunities; greater competition both for the production and the consumption of limited resources. In the oil trade, however, the massive domination by OPEC has actually created a global monopoly (in effect) on oil, meaning that instead of increasing competition globalization has, in this case, decreased it. In addition, though demand in the United States is rising at a fairly… READ MORE

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