Oil and world Economy
Question: Examine the oil industry in relation to the world economy, utilising any economic theory / theories you think appropriate.
One of the most important energy resources since human invested the machine is oil and its products. But as all resources scarce, oil is limited even more. Only few countries in the world have oil fields and produce oil for the rest. Therefore, in nowadays where factories, cars and oil-fired central heating increased significantly, oil has become a necessity for the society.
People’s demands for oil and its products, fuel, gas and oil for central heating is unlimited, but supplier countries produce a fixed number of barrels of oil everyday so as to maintain a technical shortage and, of course, higher profits. These few countries are the oligopoly of the industry, have a market leader and there are barriers to the entry of new countries (Sloman 1997 : p.124). These countries are dominating the market of oil and created the Organization of Petroleum Exporting Countries (OPEC) in 1960’s. OPEC is an intergovernmental organisation that offers stability and prosperity to the petroleum market. Membership is open to any country which is a great net exporter and which shares the same ideas of this organisation. OPEC has now 11 members and supplies more than the 40% of the worlds oil market.
The price of oil over the last year has increased approximately over 100%, reaching the highest levels over the last decade. Consequently all oil products : fuel , oil for central heating and gas become more expensive. Furthermore transportation expenses increased and several imported products became more expensive, for consumers as well. Inflation rises too, affecting the economy of the whole world and the income of the households. This large increase in the price of oil estimated to decrease the demand of all its products but mostly of the oil for central heating. In Greece, for example, truck drivers, fishermen and farmers protested for fuel prices, asking for subsidies from the government. The Greek government decreases every winter the tax of oil for central heating, to help households, but this year the price of oil is doubled comparing to last years price.
OPEC at the beginning, denied to increase production, in order to cover the exceed demand, but finally increased production as much as the cartel’s price adjusted mechanism allowed. As this did not help, Greek government gave subsidies for central heating to the low income households. Although the subsidy given, this could not help much as journalists estimate. Then again a crisis in Middle East, between Israel and Palestine gave a new bust to the oil prices once again. United States and European countries trying to...