Effects of Oil Prices on the Economy

Effects of Oil Prices on the Economy

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Effects of Oil Prices on the Economy

In the recent past, oil has become the talk of the world because there have been a great increase in its consumption with an irregular fluctuations in the production and supply of the commodity. Oil is found only in very few countries of the world, in certain places only, and since the whole world depends on it in one way or another, it becomes a major problem when the few countries that produce and process it announce the reduction or complete cut-down on how much they would then export. When the production of oil goes down, the little amount that remains in supply can not be enough for every one which means that its price per barrel or liter would definitely shoot up.

The US is one of the leading nations as a net importer of oil and depends on it almost entirely, from gasoline for automobiles to running machines in manufacturing firms, and so it higher prices of the product hits its economy hard. Fluctuations in the price of oil affect almost everything, from the price of the tiniest pen to the cost of air tickets, and it becomes very expensive to drive and move around. Many companies suffer losses and have to adapt to new strategies to fit in the declining economy when fuel prices go up, for example cutting down on manufacturing which sometimes means temporarily laying off workers. Business firms usually record less or no profits during this period, especially because no one would really predict when the prices of oil would rise and so the goods they manufactured when the economy was better would be caught up stale. The cost of raw materials, from the producers increases with the increase in oil/fuel prices and so would the cost of manufacturing, which means consumers would buy goods and services at higher prices. As companies slow down their activities due to high fuel prices, the unemployment rate shot up and many people rendered idle and this accounted to the economic losses because of the effect on the energy bill (Maugeri, 24).

Effects of Oil Prices on the Us Economy

When these oil slumps first became a national concern, Americans realized an increase in the prices of very little things like the cost of several kinds of sports drinks which had not increased in seven years. Let alone the prices of luxuries, food prices rise steeply and this is generally what touches the final person, the consumer, because there is the need to buy food for daily use. This is especially because the fuel prices go up with an increase in the cost of oil, and because farmers would spend more on their tractors and other equipment, and also transporting goods to the manufacturer, the commodities would have a higher price tag. When people spend too much on fuel and in buying basic items, economists are concerned because the money spent on other crucial services like healthcare would significantly reduce. Expenditure by consumers contributes a great deal in the growth of the economy, for instance up to two thirds of all the economic activity and growth (Batini & Tereanu, 54).

Before the 1980s, the total energy expenditures accounted for U.S.’s eight percent of the gross domestic product with the petroleum spending being just below five percent and natural gas at one percent. These percentages rose to fourteen percent, eight percent and two percent respectively after 1980 due to the price changes of oil, but again went low when the oil and natural gas prices fell, the up again after 2002. Although the rise in oil prices affect the economic growth mostly negatively, it made it necessary for advanced countries like the U.S. to explore alternative supplies of energy like the natural gas and other sources which are thought to be cleaner and have less negativity on the environment (Norquist and John 40). American also embraced a great deal the use of energy-saving vehicles which car motor companies had to produce to generate a positive effect on the economy.

The President and Oil Prices

Many people have blamed President Obama for the rising oil prices, saying his policies have seen them pay more and more for fuel. The House Budget Chairman responded to a question saying that the President, through congress, tried to pass a national energy tax that would see energy become more expensive. It is claimed that President Obama has often tried lots of things and give many reasons to try and prevent domestic drilling of natural gas and oil on public lands, and the harsh regulations from the EPA that make it impossible to exploit energy sources from within the US. In order to counter the upsurge in oil and fuel prices, the country should now rely on its own oil well because the demand of oil will continue rising as the years go, so the president is supposed to explore this option (Maugeri 76).

Americans also claim that the national energy by the government, meaning the President, which says that oil refinery companies have to pay for their pollution, makes them put a higher price on oil products. This government’s cap and trade legislation makes it harder to create jobs in America, makes the country more dependent on other countries which in turn raises the cost of oil, the cost of home heating and the cost of doing business. It is claimed that the Obama administration stands in the way of the dream of making North America dependent on its oil fields which is what the opposing Presidential Candidate Mitt Romney was preaching over. The President has the mandate to push for the exploitation of the country’s own natural oil reserves, but he chooses to continue depending on imports from other nations. American Presidents have always been tough on the very nations from which it buys oil, for example Iran, which the US has constantly had conflicts with because of the manufacture of Nuclear Weapons. This obviously would not relax the terms and conditions in doing business, especially because they know the US has to import the oil even if the prices shoot to the highest.

Oil Refineries and Oil Companies

There is a continuous demand on oil and its products, which has surpassed the amount the producers can export, and so the rise on the oil prices would be inevitable. Oil refinery companies go through the same ordeal because their price tags entirely depend on how much they buy crude oil from the producers. Lately, there has been an increase in the price of Brent, which is cleaner and lighter to work with, and which come from the Middle East and this has increased the difficulties experienced by the refineries when adjusting the prices of their products, with many of them closing down since reporting loses. The companies affect the prices of oil products but it is not for their own benefits, but because they buy raw oil at higher prices too, so they are not to blame for the high-rocketing fuel prices (Batini & Tereanu 29).

Causes of High Oil Prices

Generally, the high prices of oil and gasoline should be blamed on the consumers, because in the case where people became more concerned and critical in reducing the amount of fuel consumption, the price of oil would surely go down. The prices of commodities and other services which contribute to the refining of crude oil also have a large effect on the pricing of fuel costs, thus if these prices are high, the oil products would be no exception (Carollo 85). Taxation on the oil also determines their final costs, for example if a country imposes low tax on oil refinery companies, they would have no reason to put the prices of their products high. Before oil’s end products reach the consumer, they have changed hands, been refined according to demand and have been moved from one hand to another, and all these accounts to their prices. Tensions, wars and unrest in the Asian countries and the Middle East have also impacted negatively on the prices of oil.

Because the global brands of oil are priced in US dollars, the strength and weakness of the dollar affects the price of oil and oil products. When the dollar weakens, the price of oil increase which means they are inversely proportional to one another. Natural calamities play a major role in raising the costs of oil and oil products, for example when Hurricane Katrina hit the US, there was a massive increase in the need for more energy and oil prices shot up. The weather is another reason for the demand for more or less energy as people need to heat up their houses during winter, and on the other hand consume fewer amounts during summer. Service stations also have a hand in determining how much to price gasoline, as they have to add a few cents to markup for their services (Carollo 91).

Countries should realize their rates of consumption of oil and try to bring it a down as possible, and adjust to the new strategies adapted by other advanced countries like the US, for example advising citizens to buy vehicles which consume less fuel. This would negatively impact on the prices set by the producers as the market demands would go down. During the cold seasons, people should be encouraged to use other sources of energy like coal and firewood to heat up their houses, reducing their dependence on gas (Carollo 110). There should be unity among people, where a large number of consumers decide to buy only from the cheapest pump station so that the rest would lower their prices to lest no one bought from them.

The Future of Oil Prices

It is not very predictable how the changes in the price of oil will look like in the coming years because it depends on the economies of countries. It might rise more since the number of consumers and demand for oil has always been increasing over time, but at the same time, more and more countries, even in Africa have announced the discovery of oil wells and this might make them self-dependent on their own oil (Carollo 150). If countries within Africa produced oil in future and trade amongst themselves, the former producers of oil in the Middle East and North Sea would see their oil export go low and so they would have to lower their oil prices. Because the prices also depend on the general economy of the consumers, the oil prices would go down when the countries’ economic growth improves.

In conclusion, oil prices have a great impact on the economy. The can encourage increased economic activity thus economic growth, or the can discourage economic growth through reducing production or increasing the cost of industrial production, transport among others. The prices of oil are influenced by many factors, but politics is the single greatest influencer.

Work Cited

Batini, Nicoletta, and Eugen Tereanu.” What Should Inflation Targeting Countries Do When Oil and Food Prices Rise and Drop Fast?” Washington, D.C.: International Monetary Fund, Western Hemisphere Dept, 2009. Print.

Carollo, Salvatore. “Understanding Oil Prices: A Guide to What Drives the Price of Oil in Today’s Markets.” Chichester, West Sussex: Wiley, 2012. Print.

Maugeri, Leonardo. “The Age of Oil: The Mythology, History, and Future of the World’s Most Controversial Resource.” Westport, Conn. [u.a.: Praeger, 2006. Print.

Norquist, Grover G, and John R. Lott. Debacle: Obama’s War on Jobs and Growth and What We Can Do Now to Regain Our Future. Hoboken, N.J: Wiley, 2012. Print.