Oil in the World Economy

Econ 2024
• Oil is of major significance in the world
economy
• Dominant source of energy despite increasing
share of other sources
• Countries are willing to wage war to secure oil
supply
 OPEC
• The organization of Petroleum Exporting
Countries (OPEC) was established in 1960 by
Iran, Iraq, Kuwait Saudi Arabia and Venezuela
to negotiate higher oil revenues for oil
producing countries
 OPEC cont’d
• OPEC negotiated higher royalties and
introduced higher taxes on oil companies
• Companies still kept most of the profits
• OPEC introduced policy of nationalization
• December 1973 OPEC increased price of oil to
$11.65 per barrel
 OPEC cont’d
• OPEC maintains control of oil prices by
regulating supply
• OPECs control of oil market has declined in
recent years due to :
• Increased use of other fuels
• Promotion of energy conservation
• New suppliers outside of OPEC
• Cheating within OPEC
 The oil market
• Market highly volatile
• Oil prices determined by demand and supply
factors.
Supply factors:
 Government policies regarding exploration
 Political instability
 terrorism
 Supply factors cont’d
 War in oil producing regions
 Conflicts over routing of oil and gas pipelines
 Bad weather e.g. hurricanes
 Investment decisions of oil companies
 Economic growth
 Environmental regulations
 Demand factors

 Economic growth
 Energy conservation measures
 Development of alternative sources of energy
 Speculation
• Speculation on oil futures also affects the
price of oil
• Speculation affects both demand and supply
depending on the actions of the speculators