The Economics of Oil: Analysis of Price Fluctuations and Impact

This report delves into the intricacies of oil price fluctuations, examining the interplay of supply and demand dynamics alongside geopolitical considerations. The analysis highlights the impact of economic growth, regional tensions, and the emergence of alternative energy sources on crude oil prices. The report traces the historical trends, including the rise and fall of oil prices, linking them to events such as the 2008 financial crisis, the growth of developing economies, and the recent surge in shale oil production. The report also discusses the fading influence of OPEC and the impact of these fluctuations on both oil-exporting and oil-importing nations, emphasizing the need for price stability to protect both producers and consumers. The report concludes by emphasizing the importance of considering oil price dynamics within a broader economic and geopolitical framework, offering valuable insights into the complexities of the global energy market.

ECONOMICS
The price of oil like other commodities is determined by the demand supply forces. But oil is
different from other commodities owing to the geopolitical importance of the same
considering the importance of this resource in modern economy. As a result, the demand
supply factors are impacted by geopolitical considerations besides other factors such as
economic growth, regional tensions coupled with alternate energy resources (Looney, 2012).
As a result, crude oil tends to fluctuate quite often which can be also witnessed in the
following graph which captures the crude price over the last two decades.
The grey regions represent the recessionary phases when the prices fell on account of
plummeting demand which was apparent during the 2008 global financial crisis. The rise in
oil prices from 2002 onwards up till the onset of the global financial crisis may be attributed
to the robust economic growth which was witnessed especially in the developing world such
as India and China aided by a stable global macroeconomic situation. Similar recovery was
observed post 2010 also when the developing world led the recovery from the financial crisis
and the demand of oil increased coupled with rising prices (Looney, 2012). However, from
2014 onwards the oil prices have fallen sharply primarily on account of huge supplies of
shale oil and shale gas in the US coupled with a slowing economy of China. As a result,
global demand has fallen while the global supply has increased due to new players such as
US, Canada entering into the fray coupled with removal of sanctions from Iran (Sheldrick,
2017). Additionally, the fading clout of OPEC(oil cartel) in controlling the supply is also a

ECONOMICS
secondary cause of the falling crude oil prices (Kattasova, 2017). However, it is expected that
as global economic growth improves in the near future, the oil prices may firm up to some
extent.
The rapid changes in crude oil price tend to have adverse impact on the welfare of the people
both in exporting and importing nations. For instance, the recent falling oil prices has had
adverse impact on people in Saudi Arabia and other oil exports which rely predominantly on
oil to raise taxes for public expenditure. On the other hand soaring oil prices tends to
adversely impact the savings of common people in oil importing countries which happen to
also be the most populated. Hence, it is in best interest of both producers and buyers that
sudden fluctuations in oil prices in either direction must be avoided so that stability can be
ensured (Looney, 2012).
References
Looney, R> (2012), Handbook of Oil Politics, NY: Routledge
Kottasova, I. (2017, May 8), OPEC is out of options: How low can oil prices go?, CNN
Money, Retrieved on September 8, 2017 from
http://money.cnn.com/2017/05/08/investing/opec-oil-prices-slump/index.html
Sheldrick, A. (2017, June 21), Global oil price falls to nine-month low as oversupply fears
mount, Independent Website, Retrieved on September 8, 2017 from
http://www.independent.co.uk/news/business/news/oil-prices-fall-latest-oversupply-
fears-opec-brent-crude-opec-deal-a7800051.html