Impact of Oil Crisis on the World Economy

Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
IMPACT OF OIL CRISIS ON THE WORLD ECONOMY CONSIDERING THE PRICE
AND
OTHER ALTERNATES TO RUN THE WORLD
Student’s name
Professor
Course
Date

Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
Statement of the problem and objectives
Global oil markets face perennial low demand and supply elasticities that are susceptible to slight
disturbances, always resulting in sharp fluctuations in price on either side (Arezki, 2017). During
the recent oil decline of 2015, global crude oil prices have reduced by more than half to about 28
dollars a barrel in 2018. Unfavorable revisions to economic prospects cause reduced global
demand while supply is affected by many reasons including; terrorism and armed conflict,
alternative energy, foreign policy and changes in the system of the Organization of the Petroleum
Exporting Countries (OPEC) (Heffron & Little, 2016). Disturbances in the oil market are
amplified by overdependence on oil as the sole source of energy, in the recent past, however,
investment in alternative energy is likely to mitigate this situation (Arezki, 2017). The proposed
study aims to use a simple oil market macroeconomic model to assess the impact of the oil crisis
on the world economy considering the price and other alternates to run the world. Objectives of
the proposed study are to investigate how the oil crisis will affect the price of oil in the world
economy and to assess the impact of alternative energy sources and technologies on global
economies.
Methodology
The study proposes to use simple oil market macroeconomic model because it has the power to
project long behavior of oil prices (Thomas, 2018). This model incorporates the four market
drivers into a simple model focused on the basics of demand and supply. These drivers are oil
extraction, oil supply chain, demand factors and oil substitution and conservation (Arezki, 2017).
Simple oil market macroeconomic model assumes that, in the short run, the technology used to
extract oil can constrain its supply, in the medium to long term, innovations in oil exploration
and extraction technologies may cause a rise in supply and prices (Arezki, 2017). Growth in
global GDP, business cycles and other demand factors can lead increase in demand and prices of
oil while decisions aimed at oil conservation and substitution significantly influence market of
oil. Lastly, this model assumes that oil prices automatically and continuously adjust to clear the
market (Arezki, 2017).
The equations of the Model are presented below;