Oil and the Affects of Term Paper

  • Length: 10 pages
  • Subject: Energy
  • Type: Term Paper
  • Paper: #57984070

Excerpt from Term Paper :

Producer Symbolism) at that time, the oil balance of these countries was not as critical as it is today, and they were not really depending on "foreign" oil. The entire situation changed with the October War which started shortly after midday on Saturday, October 6, 1973 with a concerted attack by Egypt and Syria on Israel. (Oil Price History and Analysis)

At the same time, one has to remember three important factors regarding the situation in 1973 embargo. The first of these points is that the evolution of the situation to an embargo was not a surprise to any of the Western nations. United States and its allies had been receiving warnings from different Arab countries months before the embargo took place, and the embargo was not for any economic reasons. The second point was that there had been an energy crisis in United States for a long period before the embargo occurred and this had been mentioned by the then President, Richard Nixon. He had given a speech six months before the embargo regarding the energy shortages in United States. The third point is that the major supplier to the United States, Saudi Arabia did not want the imposition of the oil embargo in 1973. (the Failure of the Oil Weapon: Consumer Nationalism vs. Producer Symbolism)

1973 October War:

Even in the Arab region, the imposition of an embargo was not new and the producing countries had used oil as a political weapon against the Western countries in 1956, 1967 and 1973. The funny situation is that the leaders of these political efforts in those years were led by Saudi Arabia and Kuwait - the friends of United States. The aim at that time was to force countries supporting Israel to change the political stand and compel Israel to vacate the land that it had occupied during the war in 1967. (the Failure of the Oil Weapon: Consumer Nationalism vs. Producer Symbolism) the actual war started on the holiest day of the Jewish calendar, Yom Kippur. This is the day that Jews are supposed to be in synagogues for prayers and fasts. As the chosen date was a surprise, Egypt had success and managed to cross the Suez Canal and the Syrians took Golan Heights on the day after the start of the War. The tide of the war started changing after October 10th when the forces of Israel were able to go even beyond 10 kilometers of the line established in 1967 due to cease fire. (Israel and Zionism: October War: 1973)

On the Egyptian side, the Israeli victory was even more spectacular and on 14th October they crossed the Suez Canal and ended up surrounding the Egyptian Third Army. The continued fighting brought in international trouble and the two arch rivals of United States and USSR were on the point of engaging in a battle. In the meantime, a ceasefire agreement had been approved on 22nd and that had not stopped the war. At the end there was a United States and Soviet joint resolution calling for ceasefire in the United Nations that was approved by all parties on 26th of October. (Israel and Zionism: October War: 1973) it had been assumed that a joint effort by consumer nationalism and producer symbolism that "oil weapon" can achieve short-term economic goals, but it cannot achieve political goals. The importance of economic goals cannot be ignored. In the case of this war, the members of OPEC had increased the prices by 70% a few days before the embargo was applied as also a few days before the war. (the Failure of the Oil Weapon: Consumer Nationalism vs. Producer Symbolism)

Inflation:

It is assumed that there is an impact of petroleum prices, but that is not necessarily true. Let us look at the situation in 1970 before the oil shocks came, gas lines started, the term stagflation became a part of common vocabulary and OPEC was considered an important player, the price of oil was $1.80 a barrel. This increased to $2.25 a barrel after two years and that included the effect of a presidential election and the efforts of Col. Mohammad Gaddafi withholding Libya's oil from the market. Then there was the important change with the war just mentioned, and the follow up with an embargo on oil exports to United States by the Arab countries. This increased the price of oil to $11.58 a barrel, and that interprets to $43.40 in the currency value of today. The apparent increase in prices also frightened the central banks of different countries and they started with tight money policies so that the oil prices could be restricted, but that sort of efforts did not help. In the 80s the war started between Iran and Iraq, and that restricted the supply of oil increasing prices to about $35 a barrel, and that interprets to about $80 a barrel in today's currency. (Oil and Stagflation) the increase in prices today is being countermanded by Gross Domestic Product rising at about 3.1% as the consumers and businesses are tightening their belts. (Higher oil prices hit U.S. growth)

OPEC has also been warning us for quite some time as it has been saying from August 2004 that its members do not have much of pumping capacity left. This is also showing that this group does not have much influence over oil prices any longer. One of its members, Indonesia is thinking of giving up its membership as it has become a net importer and is not being able to meet the production quota required from it. (OPEC: Wikipedia, the free encyclopedia) Even the Arab oil producing countries have been able to generate large revenues from the export of oil only for a few years after the embargo. This also did not give it large gains or the international community inflation as these "petrodollars" were sent to the western countries for investment. This helped in the improvement of trade balance for United States while it hurt Western Europe and Japan. Totally this was not a good decision for the Arab countries into the embargo exercise. (the Failure of the Oil Weapon: Consumer Nationalism vs. Producer Symbolism)

C. Economic growth

Asian Giants India and China:

For China, the labor intensive manufactured goods section have now captured a large share of the international market, but the importance of this sector as an engine of growth will slow down. This will lead to high unemployment in the urban areas of the country. (Higher oil prices hit U.S. growth) So far as the petroleum demand is considered, China is the leader with additional demand of 840,000 barrels per day during the last year, and part of the reason for this is the doubling of the sale of cars, but this is expected to fall down. In India, the sales of vehicles have risen by 18% in the last year. (China, India's oil demand unlikely to decline) the problem of India is further compounded by the position that it is one of the most tightly regulated economies of the world. (India Economy Growth)

The government of India is now trying to reduce prices of oil based items over the immediate future so that inflation can be reduced, and inflation has been running at more than 8% a year. Thus though a truckers strike took place, it is not expected to reduce demand for oil. (China, India's oil demand unlikely to decline) the Indians have recently going through a period when the economic resources of a large portion is increasing. Today about 10 million Indians are considered to be upper class and about 300 million are estimated to be in the middle class. This has also led foreign businesses to try to take advantage of this large number of potential customers. The demand has been reflected in increase of sales of televisions, refrigerators, motorcycles and automobiles. (India Economy Growth) on the other hand, the Chinese government has been trying to rope in prices of energy for the average consumers in spite of the recent rapid increases. This is with an effort to protect the customers from economic overheating. (China, India's oil demand unlikely to decline)

Increased demand for oil by both nations:

It is seen that China is one of the fastest growing nations in economic terms and that has taken up the consumption of oil by the country from 2 million tons a year to over 10 million tons now. Even in last year, the growth is over 35% and according to analysis of ban credits, it is estimated that Chin will account for over 40% of the growth in oil demand. There is also a large increase in demand for oil in United States and this is boosting oil demand internationally. The demand for imports has now reached the limit of supply at about 80 million barrels a…

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