The rise and fall of black gold: Reasons and Impact

1/9/2009

Submitted By: Phalguni Aneja(4801) Nipun Matreja(4814) Devanshu Shivnani(4817) Tejas Kapoor(4827)

we will be discussing:     The highs and lows of oil prices in 2008 The reasons behind it The three-fold impact in the global. squeezing their profit margins and forcing them to raise prices. it becomes imperative to analyse the whys and wherefores of the phenomenon and what it implies for the glocalized world. In our project. with the oil prices showing the see-saw effect throughout the year 2008 and consequently leading to many upheavals in different sectors and countries. Thus it is evident that. boats. By contrast. contrary to the beliefs that crude oil prices affect only big industries and conglomerates.Few commodities impact the world economy like the price of oil. and even power plants that make up the backbone of the global economy. or because of increased demand for substitute energy sources such as ethanol and natural gas. the rippling effects of crude oil prices are far reaching and can easily affect the lifestyles of the common man. Asian and Indian context The role of OPEC Consequently. Therefore. similarly affecting all the other companies that rely on them to transport products and people. the emergence of a consolidated cartel which exerted control over major portion of oil extraction and supply-crude oil was suddenly thrust into the limelight. it only served to highlight the havoc that can be caused due to permutations and combinations in oil demand-supply and corresponding prices. costs go up for transportation companies. Oil powers cars. As oil prices rise. trucks. either from higher revenues for oil. but with the formation of OPEC and thereby. most energy companies benefit from higher oil prices. it directly affects consumer spending as individuals will have less cash to spend on the . oil was like any other commodity. These rising oil prices also have an impact on individuals as well in the form of increasing transport costs and energy bills as seen from the latest diesel and petrol hikes and spike in petroleum prices in India. products and services offered by the various industries. Until 1970s. Crude oil soon became an influencing factor in making and breaking economies and with the depression during 1973-74. airplanes.

19 $54. anyone. or limiting the use of existing sources and at the same time searching for new ones. Basically.25 $45. The first. The bottom-line is that the outlook for supply and demand at this moment is .  The future prospects Solutions and conclusion Dates July 14th. halt in expansion plans of major industry players and the effect rippling down to the common man. The supporters of this view are of the opinion that making speculators the scapegoats is shying away from the actual problem of searching for alternative uses of energy. 2009 Crude oil prices $147 $127. On the other hand. 2008 January 3rd. 2008 October 13th. With reserves shrinking rapidly and consumption growing strongly. particularly in developing countries like China and India. 2008 July 30th. the sudden fall in prices is attributed to the global recession. In this scenario. to blame for a market that seemed to have turned ugly.59 The above table gives a glimpse of the haywire movement exhibited by crude oil prices in 2008. a favourite of Arab oil sheiks and non-conformist financiers. whose reduction in purchasing power led to diminishing demand for oil. It’s been estimated that if the speculation in the financial markets is limited.10 $113. two theories have been propounded that claim to explain the erratic movement of oil prices during the year. in simple terms-due to liquidity crunch. the price of crude oil would drop by $65 to $70. 2008 December 10th. they say the market is indicating that we need to economize on oil use and discover some new supplies. In contrast to this theory.50 $43. are government officials and oil industry executives. 2008 November 18th. who say that prices are simply responding to economic fundamentals. holds that market speculators are to blame. 2008 August 13th. people were looking for someone. from rising to a record $147 and then tumbling down to about $40 in the month of December. 2008 September 15th.77 $97 $81.

the oil price volatility has a bigger impact on inflation than growth in both the short run and the long run. The forecast for oil prices in 2009 remain conservative. Inflation has already risen sharply throughout the Asian region such that regional inflation rose from about 4% in 2007 to nearly 8% in 2008. for a region as highly dependent on imported oil as Asia. Demand plummeted in the latter part of 2008. mainly because of rapid development in countries such as India and China. and experts across the world peg it to stay under $50. . in the third quarter of 2008. the escalation of oil prices on a consistent basis represents a long-term deterioration of the terms of trade. demand for oil had been rocketing. World over. For instance. especially a developing Asia. the financial crisis changed that.extremely varied and jumping from one extreme to another. This loss of international purchasing power amounts to a loss of real aggregate income and output. In addition. as the actual brunt of the recession triggered off in 2008 is borne in 2009. Depending on how well these policies work. US oil consumption shrank by about 1m barrels per day (bpd) – or around 5pc. Until the credit crunch saw global markets freeze. Given that crude oil is a universal input used in the production of virtually everything. countries have put in place or are in the process of implementing various fiscal policies. prices are expected to remain subdued. it would be surprising if oil prices did not have a tangible effect on consumer price index (CPI) inflation in different economies. The higher unemployment rate and lower investment rate will have an adverse impact on aggregate output in the short run. many oil traders don’t know what to think. As for the current year 2009. in a measure to curb the global recession tendencies and pull out the economies of the financial distress. However. the demand for oil will gradually rise as production capacities start to increase yet again and liquidity rises. which is the main reason that prices are so jittery. According to a study. For instance. transportation costs affects such large numbers of firms and individuals that it is bound to affect the performance of the economy as a whole. they have to reduce the number of workers and their investments. If producers cannot pass on their higher transportation costs to consumers.

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