Prices Of Oil Have Been Built
Prices of oil have been built on fear, speculation, war and geopolitical turmoil, supply and demand. Crude oil is the finite resource that controls a large amount of the economy. Prior to the release of any reusable energy, crude oil was a highly inelastic commodity. The price of oil is often indicative of how the economy is fairing financially. The past 20 years, from 1998 to 2018 have sculpted oil price fluctuations caused by natural disasters to political insecurities and speculation. Some influences can be controlled with government intervention and proactive approaches, whereas some, such as the sudden death of a Saudi Arabian king, produce immediate speculation and turmoil which can fluctuate the price of crude oil. In instances such as these there was a high rate of fluctuation although most only lasted a few hours or days. More recently, new forms of energy and extraction started to affect the economy. The U.S government have designed a method to extract crude oil from the earth. Hydraulic Fracturing is the process of injecting liquid at high pressures into subterranean rocks. This process has been seen to have negative health and environmental concerns. One of the world’s biggest economies has become less dependent on the Middle Eastern countries. U.S fracking, together with renewable energy have driven the price of crude oil down due to a decrease in demand from consumers and sellers. Although fracking can be positive for the economy and market dominance, both fracking and crude oil mining pose a large threat to the environment and nearby populations’ standard of living. Safety standards depend on the moral compass of the local government and the company that produces the commodity. The choice of the consumer assists in the market share of the particular resource.
Natural disasters such as Hurricane Katrina that occurred in late August of 2005 and lasted just over a week before dissipating, causing world-wide implications. An already high global demand for crude oil and the damage to the refinery from the hurricane created limited supplies and caused a brief spike of about $70 per barrel. The U.S government released 30 million gallons from the U.S’s Strategic Petroleum Reserve (SPR) to alleviate the problem.
The price of crude oil is volatile. Even speculations of geopolitical tensions can impact and drive up prices considerably. After news of a successful nuclear test coming out of North Korea in October of 2006, the price rose past $60 a barrel. Although this did not last long as the price fell back to $40 the next day.
A product of the global financial crisis was the oil price bubble burst, as the price rose to historic highs of $144.29 (July 2008) and plummeted to $33.87 per barrel five months later. As crude oil is used in powering infrastructure and is an additive to many solutions that makes this resource a relatively inelastic commodity. According to ‘Oil Gas 360’ the demand for oil decreased as the economy went through the ‘great recession’. This major recession saw large multi-nation companies declare bankruptcy. The consumption and production dropped 1.5% and 1.2%, respectively. As seen in figure 1 the production remained relatively steady with a slight increase whereas the price has major fluctuations with an approximate average increase of $6.50 per barrel from January 1998 to January 2012.
Prior to the political uncertainty in the Middle East, the growing demand from emerging markets placed significant pressure on oil prices. According to the Carnegie Endowment for International Peace, with every 50% increase in oil price, global economic growth will diminish by 1.5%. This could prove difficult for the European countries such as Greece who were already facing severe financial debt. The decrease in economic growth, paired with higher oil prices has pushed millions of people worldwide further into poverty. The indirect correlation is due to the other commodity prices, such as agriculture. The food industries are heavily dependent on fuel and transport. The global spike in wheat prices by 68%, was followed by a domestic price hike in Bangladesh, Sri Lanka and Tajikistan by 16-45%. Subsequently an increase in global rice prices of 21% was followed by a similar local price rise in these countries. As of 2010 the price of crude oil for December was $90 per barrel.
The BP oil spill off the Gulf of Mexico was an environmental disaster but according to an article by Kimberly Amadeo in ‘The Balance’ it actually boosted the economy. Although over $700 million was lost in the fishing and tourism market, BP spent $6 billion in hiring 4000 people to clean up the spill that year. During this period there was an increase in the price of oil to $111 a barrel, up from $76 just prior to the spill. The total bill for BP equated to $61.6bn in lost revenue, fines and clean-up. The pipe leak led to a decrease in the quality of life for both humans and animals as the water ways were poisoned and fishing areas contaminated. Many areas along the gulf had negatively affected growth, some calling it “a slow-motion (hurricane) Katrina” (Michael Snyder). Post to the clean-up of the oil, BP lowered costs by axing jobs, putting off around 10% of its work force to offset tough trading. The direct local economy was heavily affected throughout this whole process with the five effected U.S states claiming $4.9bn and a further 400 local government claims totalling $1bn. Under U.S government regulations BP was ordered to pay $5.5bn under the Clean Water Act.
The rise of renewable energy sources has made headway in protecting the environment from the effects of crude oil mining. In September of 2014, the world watched as the price of oil dropped considerably. The rising investment in clean energy from government and private agencies has increased from approximately zero in 2004 to $110bn in 2015 (Figure 4). The fast-growing industry in the future will provide the energy market with diversification. In turn this will help to stabilise the economy as it provides means of alternative energy which releases dependency. The beginning of 2015 saw an average price of oil hover around $40, deviating to $63 and dropping as low as $26 during that period. The significant drop in price level has produced negative effects on the
renewable energy overhaul. Although with government subsidies and private investment at an average of $266bn per annum globally the clean energy alternative is able to progress. Crude oil still makes up 40.6% of the globally produced energy, even with the rapid technological progress of renewable alternatives.
With the death of Saudi Arabia’s King Abdullah, the price of oil was on unsteady ground as political unrest brewed. Not even two hours after King Abdullah’s death the price of crude oil rose more than $2. The rise over such a short time frame caused uncertainty among larger buyers and investors about the Saudi oil policy. In terms of GDP, in Saudi Arabia oil equates for 80% of its income. Saudi Arabia possesses 16% of the world’s oil reserves and with the recent crash in oil prices in 2014 demonstrates the need for Saudi Arabia to reduce its reliance on oil as a means for production and income (the national.ae). The price of oil was negatively affecting trade, restaurants and hotels sectors, as it only grew 3.7% in 2014 in comparison to the year prior that showed growth of 8%.
The Economist magazine coined the phrase ‘Sheikhs vs Shale’, used to describe the power shift from OPEC to the U.S. The American’s oil industry used fracking techniques, which led to an over-supply because neither OPEC or the U.S were willing to lower production. Saudi Arabia was allowing the price to fall as supply increased with the U.S fracking techniques.
This had the potential to send high-cost producers out of business. This strategy should in turn slow supply, causing prices to rise.
The rapid fluctuations in price level of crude oil is indicative of many factors. Over the past 20 years fear, speculation, war and geopolitical turmoil, supply and demand as well as unforeseen natural disasters have sculpted the price of oil. From 1998 to 2018 events such as hurricane Katrina and the Global Financial Crisis have immediately affected the price of oil. Others such as the Gulf of Mexico oil spill impacted the wider economy and price for a longer period. The invention and integration of renewable energy has begun to slightly release the reliance of crude oil and its negative effects on the environment. In the long term, diversifying the economy away from oil can help cushion the impact of low oil prices and ensure economic stability in the face of extreme oil price fluctuations.