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Write a 10 page essay on Oil Price Rise: A Literature Review of the Causes.Download file to see previous pages... It is this petroleum over which this industrial revolution bloomed. With very few nati
Write a 10 page essay on Oil Price Rise: A Literature Review of the Causes.Download file to see previous pages...
It is this petroleum over which this industrial revolution bloomed. With very few nations producing oil but being required by the whole world, Oil has been one the most sought after commodity with oil producing countries having their coffer flushing with dollars. Changes in oil prices have caused great impact on the performance of the world economy. It has its association with almost each and every period of recession and inflation (Barrell, 2004, p. 2). Oil shocks of 1974 and 1979 brought an economic slowdown with it. But since 1980, its price remained steady till 2003 when prices started increasing and is currently hovering around $55 -$58 per barrel. The condition is so precarious that it can cause a new oil shock. A 4 percent fall in global shortfall in daily supply could result in 177 percent rise in oil prices i.e., the prices will have a dramatic rise from $58 to $177 (National Commission on Energy Policy [NCEP], 2005, p. 2).
Delving deep into the issue of price rise, a number of causes came into focus. The list of reasons starts with restrained production policy of OPEC nations. Organization of Petroleum Exporting Countries or OPEC nations has reversed the upward trend of oil production since 1999 (International Monetary Fund [IMF], 2000, p. 4). Before that rate of increase in oil production was kept at the pace in accordance with the rise in demand. But the Asian crisis of 1997 made further dent in oil prices which got diminished to $11 per barrel. This fall compelled all oil exporting countries irrespective of being a part of OPEC or not to reduce production so that further decline in oil prices is avoided (IMF, 2000, p. 4). This decision started causing effect from late 1999 with oil prices got doubled by the end of the year while the production was forced to fell below consumption causing a deficit. Global reliance on OPEC nations for petroleum is also very important in this scenario. Around two-thirds of global oil reserves are concentrated in Middle East members of OPEC. Relatively new and outside Middle East resources are small and are very expensive to develop (Organization for Economic Cooperation and Development [OECD], 2004, p.1). With OPEC's policy of maintaining lower excess capacity often fails to meet the issue of raising supply in the event of unexpected disruption. This low quantity has made the market more volatile and is highly sensitive to short term supply changes. OPEC has become important that the market pays full attention to it irrespective of the case that it is in the state of action or inaction (IMF, 2000, p. 6). OPEC nations, with the motive to maximize the profit and earn as much dollars as they can, have made a policy of artificially restricting the supply of oil (Hoguet, 2005, p.1). Though OPEC publicly says that it will behave responsibly and will do its best in maintain the oil price at the level which will not hurt the chances of growth of world economy. Analysts have predicted that a rise of $10 in the price of petroleum per barrel will reduce the growth of world economy by 0.3 percent (Hoguet, 2005, p.3). But OPEC's Long Term Strategy Document shows something else.