Oil Industry Background and History Term Paper

  • Length: 13 pages
  • Subject: Energy
  • Type: Term Paper
  • Paper: #63159137

Excerpt from Term Paper :

While oil is a valuable resource,

Like... The river it is also a curse. Its flow is inconstant. In drought years, the supply of water falls; in other years, floods can take their toll, leaving death and destruction in their wake. It can become polluted, causing both health and economic problems for its users.

Davis J.)

The above analogy highlights some of the essential features of the modern oil industry and the way that it affects world economies. Oil is essentially a limited commodity as well as being a vital resource for the international economy. As such it is also affected by a range of different variables; including politics, international affairs, fluctuating market prices, environmental concerns and other factors that all combine to form of complex picture of the industry in relation to the international community.

One of the central features of the contemporary oil industry is the problem of environmental pollution. This problem is summarized by the fact that; "Oil is a Fossil fuel. Burnt fossil fuels release Carbon dioxide (CO2) into the Earth's atmosphere and thus contribute to Global warming." (Petroleum industry) This is one of the central challenges facing the industry and will be discussed in section four.

Another feature that is also a challenge to the future of the industry is the fact that oil is a non-renewable resource; which means that the industry has to face the fact that the oil supply will eventually diminish. Linked to this is the issue of world politics, which is also inextricably intertwined with the way that oil impacts on economies. This subject would take a few books to analyze comprehensively.

One example serves to illustrate the impact of politics on oil production and world economics. Oil was used by the oil-rich Arab countries after the Arab Israeli War of 1973. "The "oil weapon" was "... used by the Arabs to squeeze the States - the Arab oil embargo caused a panic in the West, as oil soared and subsequently so did gas prices" (History of Oil). There is a common saying that Oil prices are driven by politics in the short run and by economics in the long-term. (History of Oil) Politics plays a considerable role in determining the supply and demand of oil and therefore has an extensive effect on the world economy. The war in Iraq and the political volatility of the region is also a security issue for the oil industry and international economy, as will be discussed in section four of this paper. As one article states "The Iraq War raises important questions about the shifting distribution of economic and financial power around the world" (Restructuring World Economic Power Relations through High Oil Prices)

3. The oil industry's impact on the international economy.

There are many variables and complexities that have to be taken into account in understanding the way that oil production and supply functions in terms of the variables in this process, and the way that these affect global economies. The following is a brief overview of the main elements of this process.

Due to the fact that oil is an essential energy source, the way that countries and industries perform is largely dependent on the oil price and the factors that accompany changes in this price. The way that oil production and consumption affects the world economy is a macroeconomic sense can best be gauged from the events and situations that result from an increase in the oil price. This is a phenomenon that we have recently experienced in this country and elsewhere in the world. This view provide an outline of the way that oil functions in relation to the larger economy and also shows the importance of this commodity or resource in the global economy.

In reality an increase in the oil price affects the performance of world economies in different ways. In general however an increase in the oil price leads to a transfer of income from the countries that import the oil to exporting countries. The extent of the effect of an increase in the price of oil depends on a number of factors; these include; the share of the cost of oil in national income, the degree of dependence on imported oil and the ability of end users to reduce their consumption and switch away from oil. (Analysis of the Impact of High Oil Prices on the Global Economy) Other concomitants factors include the following: "...the extent to which gas prices rise in response to an oil-price increase, the gas-intensity of the economy and the impact of higher prices on other forms of energy that compete with or, in the case of electricity, are generated from oil and gas..." (Analysis of the Impact of High Oil Prices on the Global Economy)

Therefore a change in the balance of supply and an increase in the cost of oil have enormous repercussion not only for the industry itself but also for the multitude of interrelated and dependent aspects of the economies of various countries; and these effects have a cumulative and ripple effect on the global economy. It therefore stands to reason that, "...the bigger the oil-price increase and the longer higher prices are sustained, the bigger the macroeconomic impact" (Analysis of the Impact of High Oil Prices on the Global Economy).

An important factor to consider in the way that oil impacts on global economies is that the impact of an oil increase and price fluctuation is also related to the status of a country as an oil importer or exporter. This again refers to the political dimension and adds to the complex picture of oil as a determining factor in global economies. Therefore for oil - exporting counties a price increase will of course increase national income via the higher export earnings. However this increase in income is also offset by losses from lower demand for exports, generally due to the economic problems and possible recession suffered by trading partners in other countries. (Analysis of the Impact of High Oil Prices on the Global Economy)

The effects of a higher oil prices have numerous repercussions in general. These include inflation, increased input costs, reduced non-oil demand and lower investment in net oil-importing countries. This can also result in a reduction in tax revenues and an increase in the budget deficit, as well as an increase in interest rates.

There is also pressure on the standard or normative wage levels in a country as a result of the various facets that result from an increase in the oil price. This in turn can also lead a rise in the level of unemployment - which would of course have a negative effect on less developed countries where unemployment is very high. There is also the fact that these aspects affect consumer confidence which further impacts particularly on world economics.

Because of resistance to real declines in wages, an oil price increase typically leads to upward pressure on nominal wage levels. Wage pressures together with reduced demand tend to lead to higher unemployment, at least in the short-term. These effects are greater the more sudden and the more pronounced the price increase and are magnified by the impact of higher prices on consumer and business confidence.

Analysis of the Impact of High Oil Prices on the Global Economy) significant aspect is the way that oil impacts on the economic relationship between countries. An increase in the price of oil can alter the balance of trade between counties and also affects exchange rates. This refers to the scenario in which the oil-importing countries experience a decline in their balance of payments. This exerts a negative pressure on exchange rates and results in the increase in the price of imports and a reduction in the value of exports. This in turn leads to a decline in the national income of that country. All of these facets have a long-term impact on the economy of countries. "The economic and energy-policy response to a combination of higher inflation, higher unemployment, lower exchange rates and lower real output also affects the overall impact on the economy over the longer term" (Analysis of the Impact of High Oil Prices on the Global Economy)

An actual historical example of the points mentioned above can be seen in terms of the macroeconomic damage in the price collapse of the economies of oil - importing countries in 1986. When the price of oil was increased in 1973 and in1979/1980, there was a sharp reduction in the economic growth of those countries in the world that imported oil. (Analysis of the Impact of High Oil Prices on the Global Economy) This phenomenon can also be clearly seen in the economic history of the United States as well as in Europe during this period. "...most of the major economic downturns in the United States, Europe and the Pacific since the 1970s have been preceded by sudden increases in the…

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