Crude Oil Price Fluctuations Between 1998-2018

History of crude oil price fluctuations

Write a report on Crude Oil Price Fluctuations between 1998-2018.

Crude is an important natural resource that keeps the world economy running.  Today, the resource is recognized as the engine of every economy of the world. Basically, crude oil is an energy source that is integral to the production processes in various industries. Therefore, stability in the supply and prices of the natural resource is most desirable because any fluctuations in the price of crude oil affect the prices of all other goods and services within the country (Oil’s Wild Ride, n.d.). However, over the last two decades, the prices of the commodity have fluctuated significantly in all economies of the world (Crude Oil Prices, 2018). For this reason, this study seeks to conduct an economic analysis of the market of crude oil. Additionally, the paper will discuss the various welfare implications that arise due to changes in the prices of crude oil within the economy.

As noted earlier, the prices of crude oil are very volatile and have been subject to fluctuations over the past 10 years a as shown in the graph below.

Source: (Trading Economics, 2018).

In the period between 1998 and 2018, the price of crude oil globally has been rising significantly with slight drops occasionally. For purposes of this assignment, the nominal prices of crude oil shall be utilized. In 1998, the price of crude oil was $11.91. In the year that followed, the price rose by $4.65 to a price of $16.56. The trend continued in the following year, as the price of oil rose sharply in 2000 to $27.39 (Trading economics, 2018). The year of 2001, experienced a slight drop in the price of the commodity and was recorded at $23.0. The decrease in price continued in the following year as the price of oil in the country was recorded at 22.81 (Crude Oil Prices, 2018). Unfortunately in 2003, the process picked up again and rose by a significantly large amount to $27.69. Afterwards, in the years that followed, the prices of oil rose significantly. For instance, in 2004, the price of oil was recorded at 37.66 (Trading economics, 2018).  In the following years, the prices changed from $50.04 to $58.30 and then 64.20 in 2005, 2006 and 2007 respectively. In 2008, the price rose sharply to $91.48 before decreasing sharply to 53.48 dollars in 2009 (McMahon, 2017).. In the year that followed, the prices picked up again and was recorded at $71.21 in 2010. Between 2011 and 2014, the oil prices were recorded at $71.21, $87, $86.46, $91.17 and $85.60 consecutively. In 2015, there was a significant drop in the prices of oil and was recorded at $41.85. Likewise, the prices dropped in 2016 to $36.34 before rising to $42.74 in 2017. Currently the average price of crude is at $67.70 (Tradig Economics, 2018).

Reasons why the prices have fluctuated in the last 20 years

It is imperative to note that the prices of crude oil in the world economy are mainly influenced and driven by forces of demand and supply of the commodity in the global market. These influencing factors comprise of:

The Organization of Petroleum Exporting Countries (OPEC) is a major influencer and a contributing factor in the fluctuation of global oil prices. Today, the organization controls approximately 40 percent of the total world oil supply. As a result, it sets the production levels of oil by its members to meet the demand for oil in the global economy. In turn, it has the power to influence the prices of oil by shifting the production levels. As such, an order by OPEC to reduce production of oil would result in a decrease in the overall supply of oil in the world economy thereby pushing the prices of crude oil to rise. In the same way, it can influence the prices downwards by permitting an increase in the production level thereby increasing the overall supply of oil in the world economy, thereby pulling the price of the commodity downwards.

It is imperative to note that political instability in oil producing countries significantly affects the supply of oil in the world market, thereby affecting prices. For instance, the continued political instability in the Middle East causes oil prices to fluctuate due to the fact that the region produces a significant share of the total world oil supply. In July 2008, the prices of a barrel of oil rose to $136 following the political unrest in the region and the fears of war in Iraq and Afghanistan (Desjardins, 2016).

Today, China is the largest consumer of oil in the world. Thus, the demand for oil and oil products by the Chinese economy plays an important role in influencing the prices of oil in the world economy (What Actually Drives, n.d.). Despite producing its own crude, the country largely depends on  oil imports to meet the demands of its industries. Other major importers of oil include India and Japan. Noteworthy is the fact that oil demand is a function of economic growth. Therefore, when the economic growth of these net oil importers is high, the demand for oil also rises. Consequently, an increase in  the demand of oil in world economy pushes the prices upwards, forcing them to rise. However, over the past years, most global economies have been experiencing weak economic growth amidst an overproduction of oil in the global economy. In turn, this has brought a downward shift in the price of the commodity.

Influences by OPEC

Today, the issue of climate change has become a major challenge for nations as fossil fuels are considered to be the biggest polluters of the environment. As a result, nations have been forced to adopt safer and greener practices to reduce the damage to the natural environment. The Paris Climate Accord clearly stipulates a clear timetable for nations to shift from inefficient power production and reduce their dependence on fossil fuels for cars. Today, many nations have taken the directive seriously and are shifting to more environmentally sustainable fuels. In turn, this reduces the overall global demand for crude oil and related products. Consequently, a significant drop in oil demand would result in an oversupply of the commodity, thereby forcing its prices downwards.

It is worth pointing out that over the past few decades, car producers have developed more fuel efficient cars. As a result, the days of fuel-guzzling American motorcars are over as more people purchase fuel efficient Japanese, European and Korean cars.  In turn, this has brought about a significant decrease in the overall global demand for oil over the years. Additionally, there has been a consistent production of electric cars by companies such as Tesla. Therefore, this will reduce the overall demand for oil in the global market. By and large, a decline in demand of crude oil in the world economy would result in a drop in the prices of the commodity.

By and large, changes and fluctuations in the prices of oil has a significant effect on the social welfare of not only oil importing countries but also oil producing economies (Kumar and Pathak, 2017). Firstly, unexpected increases in the price of oil bring about an increase in the production of goods and services in the local economies. As such, the supply chain is affected and, thus, the increased oil prices shift to production costs and producers transfer the additional cost to the end consumer (Sanchez, 2011). Thus, the prices of goods and services in the economy increase significantly due to unexpected changes in the price of oil.

In addition, any unexpected rise in the price of oil may render refined energy prices more expensive and, thus, result to households income loss. This is known as the demand channel.  Consequently, it brings about a reduction of demand of other services and goods by households in the economy (Svensson, 1984). Also, it may force a reallocation of the available income towards commodities that are energy efficient.

Conclusion

All in all, all factors taken into consideration, crude oil is an important resource and the engine of world economy. Over the past twenty years, the prices of oil have been experiencing fluctuations from time to time. Mainly, these fluctuations in the price of the commodity can be attributed to various factors in the world economy.  Fundamentally, these influencing factors include the political stability of oil producing countries, production influences by the OPEC, and a global shift from fossil fuels to environmental friendly fuels. Furthermore, the continued innovation in car technologies such as electric cars by Tesla and fuel efficient motor vehicles affects the demand, and therefore, the price of oil in the world market. Lastly, the economic growth of major oil importers may influence the price of oil globally. It is also worth noting that rises in the prices of oil have significant social welfare implications in the local economy since it results in increases in the price of other commodities.

Reference List

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