Economic impact of oil industry

September 2011 the price was $117. 99 per barrel. (Source US Energy Information Administration) Economics is the study of using resources in a productive manner and to allocate them in the best possible way. Economics is concerned with the production and consumption of goods and the transfer ofmoneyto create and get those goods. Economics tells us how people in the markets communicate in order to achieve what they desire and fulfill theirgoals.

Economics deals with studying the wants and desires of people resulting in creating the demand for a product which dads to the production of the product by the suppliers causing supply of a good or service. This want or desire leads to interaction of people and governments which results them to act in a several ways. In July 2008 crude oil reached its peak and became as expensive as $143. 95 per barrel due to the speculation of the markets and towards the end of the year in December 2008 the price of crude oil fell to $33. 73 per barrel. This immense fall in the prices was because of the financial crisis of 2008.

Recession resulted in the collapse of many financial institutions, bail out of banks by he national government and the downturn of the stock markets leading to closure of firms causing prolonged unemployment. People lost their Jobs due tofailureof the businesses and decline in the economic activity. The main reason for the financial crises in 2008 was due to the liquidity problems of the United States Banking System. During this period the international trade declined and credit tightened. The crude oil prices shoot up in September 2011 after December 2008 to $117. 99 per barrel which was the result of the political unrest in Egypt.

The increase in the prices of rude oil is due to the speculation of the markets. Speculation means investing in a commodity to make future profits according to price changes without using or producing the commodity. The buyer and seller get into a contract where the buyer agrees to purchase a certain amount of the commodity (oil) at a fixed price. The contract makes sure that the buyer would receive the price of oil per barrel stated in the contract even if the market price of barrel is higher. The large investment in oil by the speculators has resulted in creating a higher demand for oil, which drives up its prices.

Demand is referred to the amount of quantity (services or product) wanted or anticipated by the buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is called law of demand. The relationship shows that when price of a good rises, the quantity demanded will fall and vice-versa. TWO factors determine the price of a barrel of oil: the fundamental laws of supply Economics By prairie In July 2008 the spot price of Europe Brent crude oil reached a peak of $143. 95 per barrel. By December 2008 the price dropped to $33. Per barrel. On the 8th through Libya, the world’s 13th-largest oil exporter. The price of a barrel of Brent crude now hovers around $1 15. On February 24th, however, it rose to almost $120, as traders realizes that they might have to do for a while without some or all of Labia’s exports: some 1. Mm barrels a day (b/d), or about 2% of the world’s needs. The situation in Libya is grim, as the rebels and the forces of Miramar Qaeda battle for control of the country’s only resource. Berea, the seat of the Sire Oil Company in the east of the country, has changed hands three times in recent days.

Most of the oil workers have fled, and production has fallen by two-thirds. The ports of As Sides, Berea, Rasa Allan, Debtor and Justine, which together handle almost 80% of Labia’s oil exports, were all seized by the rebels; two have now been retaken by Colonel Sadism’s forces. The rebels remain in control of Africans largest oilfield, Sari, pumping some 400, 000 barrels on a normal day. But for how long? The history of oil is marked by Middle Eastern strife, supply shocks and global recession, with the Arab oil embargo in 1972, the Iranian revolution in 1978 and Sad Hussein’s invasion of

Kuwait in 1990. To gauge the risks today you need to answer three questions. How vulnerable is the oil market to an interruption in supply? How sensitive is the world economy to oil-price spikes? And how well can policymakers cope with a shock if the worst happens? Take each in turn. Related items Saudi Arabia: The royal house is rattled ottoman 3rd 2011 Related topics International Monetary Fund (MIFF) Petrol prices Europe Asia China The troubles in Libya are only the most serious example of the impact of Arab unrest on global oil markets. Prices Jumped as Egypt citizens took to the streets to oust

President Hosing Embark. Egypt is an oil importer, but acts as a vital conduit between the huge oilfields in the Persian Gulf and markets in Europe, via the Suez Canal and through the SUMMED pipeline. Although it seemed unlikely that protesters would or could disrupt oil shipments, events in Cairo were enough to add more than $5 to a barrel. The spread of unrest to Bahrain, Oman and the Gulf has created a whole new dimension ofanxiety. North Africa produces 5% of the world’s oil, but the Middle East produces 30%. Moreover, Bargain’s problems are on Saudi Rabbi’s doorstep.

These ear on the situation in the eastern Saudi provinces, from which a huge quantity of oil is pumped into global markets. Saudi Arabia is therefore the traders’ chief worry. But it is also, in oil terms, the world’s chief hope. It is the only producer with significant spare capacity that could quickly be released if the oil price rose too high. Although OPEC, in which Saudi Arabia is the biggest force, exists to keep oil prices buoyant, it does not want to see them reach a point where the world economy is damaged and demand for oil falls. When prices spiked in 2008, the Saudi said they ad capacity to spare.

Terrified oil markets doubted its existence, and prices rose anyway, to reach $145. Yet the subsequent collapse in the oil price in the second half resulted. Saudi Arabia also pumped extra oil: nearly 2. Mm b/d on top of the 8. Mm it was already providing. Pope’s spare capacity now is put at anything between mm b/d (by OPEC) and Mm-Mm b/d (by industry analysts); Saudi Rabbi’s share of that excess is perhaps mm-3. Mm bold. The oil price has retreated from its peak in the past ten days largely because Saudi Arabia says it is pumping up to 600, 000 b/d to replace the hormonal in Libyan exports.

It has invested heavily in expanding capacity, with plans to spend perhaps $100 billion on wells and infrastructure by 2015. It has also been far more open about letting the world see what it has done. Pope’s stated aim of stabilizing oil prices relies on traders believing that the Saudi really do have the capacity to pump more when prices rise. Why, then, are traders still so nervous? The answer is that the long-term trends of supply and demand were already unfavorable when the Arab shoe-throwers intervened. Before the uprisings, a barrel f Brent crude was commanding close to $100 a barrel.

World demand grew by an extraordinary 2. Mm b/d in 2010, according to the International Energy Agency. It will probably keep growing by another 1. Mm b/d this year and the same again next, as the rich world recovers and demand surges in China and the rest of Asia. Net expansion of non-OPEC supplies is likely to be negligible in the coming years. Though the rich world’s inventories are high, with cover of around 50 days, it is not clear that Saudi Arabia can pump much more than it did in 2008; and the speed of oil released from overspent reserves, such as America’s Strategic Petroleum Reserve, also has upper limits.

If disturbances hit Algeria and threaten its oil industry too, the buffer of spare capacity would fall below where it stood in 2008. But demand now is much higher, so spare capacity as a proportion of that demand is much lower (see chart 1). When oil markets tighten, another set of problems emerges. Saudi oil is generally more dense and sulfurous than the Libyan crude it will replace. Rupee’s creaky old refineries will not be able to process the heavier Saudi crude, and fuel regulations there are sees tolerant of sulfur content than elsewhere in the world.

So the Gulf oil will have to be shipped to Sais’s newer refineries, which are designed to deal with a wide variety of grades of oil. West African oil, a close substitute for Labia’s output which usually goes to Asia, will be sent to Europe instead. If the supply situation worsens, opportunities for this type of substitution will be fewer, creating supply bottlenecks, shortages of petrol and spikes within price spikes for different cruder and products, even when spare capacity remains.

The price differential of about $15 a barrel that as built up between Brent crude, which more closely reflects global trade, and West Texas Intermediate, the benchmark for oil prices in America, is a good example of how oil markets can become distorted by local patterns of supply and demand. If supply gets even more stretched, oil could fetch a far higher price in some parts of the world than others. If supply problems become really grave, oil companies may even declare force measure, raising the prospect that, as in 1978, oil markets fail altogether.

That is still a remote prospect, and the upward march of the oil price mess to have paused for now. The crucial question is how much oil will be lost, and for how long. When oil markets operate at the limits of supply, even the smallest biggest refinery shut down after a terrorist attack. This and other assaults could knock out another 500, 000 b/d from the world’s fuel supplies. And if the raids on oil installations in previous elections in Nigeria are anything to go by, the next one, in April, may threaten another mm b/d of supplies from west Africa. Meanwhile, Saudi Arabia remains far from secure (see article).

On March 1st the country’s stockbroker, titter about the neighbors, plunged by 7%, a worrying sign that confidence is fading. In Economics the desire of a product or the want of a product or service leads to the demand of the product or service. Demand is referred to the amount of quantity (services or product) wanted or anticipated by the buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price. The relationship between price and quantity demanded is called law of demand. The relationship shows that when price of a good rises, the quantity demanded will fall and vice- versa.