Oil Prices

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Oil Prices

Case Study: Volatile Oil Prices

Describe how the oil price has changed since 1960. Identify in particular the extent to which the 2008 oil price was exceptional

From 1958 to 1970, prices of oil were stable. The prices were stable near £5 per litter, but in real terms, the price of oil declined from above $19 to $14 per barrel. Established in 1960 OPEC took over a decade to establish its influence in the world market. The first biggest oil crisis was faced in 1973 when OPEC oil export embargo was imposed by many of the major Arab oil-producing states in response to western support of Israel. Again 1979 brought in its wake Iranian revolution and oil crises. Similarly, Gulf War has also affected the oil prices. From 1980 to 1990 the prices of oil remained at the low level. In the year 2000, the prices began to increase. From the year 2000, the price was increasing but to a slighter extent. In 2008, the oil price rose so high that it even crossed the peak of 1980. By the end of 2008, the prices of oil again began to fall. In 2011, the price of oil is again showing a rising trend (Khan 2003, B2).

Why has the demand for oil been increasing?

Transportation, heating, power generation, the plastics, pharmaceuticals and synthetic fibre industries are the main ways in which oil is consumed. Demand for oil is greater in the developed nations rather than the developing economies. The costs of exploration of new oil sources are very high, and that is the reason why demand always exceeds the supply. In order to counter this issue, they are trying various measures to reduce their dependency on oil. There are certain factors like efficiency of other energy resources, such as natural gas that are working to curtail oil dependency but still oil is considered a commodity on which the US and its countrymen would depend. If we consider the oil peak theory according to which, there will be a sharp decline in supply because demand is continuously increasing whereas the speed of finding or exploring new oil sources is not matching that then we come to know that the oil reserves reached its peak fast in the US. Despite being one of the biggest oil producers of the world USA attained its peak in the 1970 because it had the highest consumption for the oil (Burn 2002, A4).

How is the increase in the price of oil likely to affect the demand for oil in the short and the long term?

It is also very important to note the significance of the factors and relationship of demand and supply when we talk about oil and its prices. The factors of demand and supply keep the market of oil alive and competitive. If the oil supplier raises the prices by few bucks, then people may prefer to lower down the amount of oil that they use to travel from one place to another, they ...
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