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An investigation into oil prices

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Max Pobol Mr Landor Economics 20 Sep. 04 An investigation into oil prices Oil is one of the most traded commodities in the world, which is why changes in prices will affect the economy on a global scale and will influence us as individuals and our personal finances. If we were to look at any business in the world it becomes clear that without oil (fuel, gas e.t.c) the business would not function and we begin to see the true importance of it. Many countries would just not even be today if it were not for the discovery of oil, for example Saudi Arabia, a country in which the state of the economy is 99% governed by the export of their crude oil. In 1999 people in the UK went on strike because the price of oil trebled to 30$ a barrel, which managed to sway the British economy for that period. Today the price has further risen to almost 50$ a barrel. Now the importance of oil has been set we can go on to find out what determines the price. Oil has an unlimited number of uses, and it could be said that it makes the world go around. One of the main uses of oil is for heating. In houses in businesses, in factories, heating is needed everywhere and is initially provided by oil. ...read more.


In the short term supply is controlled by several factors. Firstly political situations and current events could wound the economy very quickly, for example the war on Iraq put a stop to that country producing oil which lowered the supply for the immediate consumer. Another factor that determines short term supply is the quantity of stocks that major oil refineries have for immediate use. These are kept in case there is a sudden increase in demand so the producers can meet the rate. Finally an organisation called OPEC and other organisations not included in the OPEC countries make guidelines for the amount of oil to be produced daily. This is done with the intention of prolonging the use of oil, whilst taking into account the current demand. The Organisation of Petroleum Exporting Countries (OPEC) looks after 40% of the worlds supply of oil. With that much oil to control it gives them a governing position in directing the whole market including oil prices. NON-OPEC countries and Russia control the remaining oil. OPEC regulates how much oil they want to produce with the target of keeping the economy of the market stable. Although, recently all OPEC countries have exceeded their set targets by up to 10 million barrels a day. And even after this current oil prices are still rising! The answer to why prices rise is simple, because this market (like many other markets) ...read more.


But if it lasts for longer (like it has been recently) then all businesses are affected and as a follow up the economy crumbles. Countries that have many industries will greatly rely on oil so when the price changes then the whole economy of the country changes with it either for the good or for the bad. Other countries with small industry are less oil dependent so do not suffer as much to any changes in the oil market. And to finish off I will look at how oil prices affect the UK economy. Higher oil prices slow down the growth of an economy. This is because higher prices affect people's real income and real buying power. And because producers are selling less it will mean there is a reduction in overall capital. And the affects of negative output have even more reaching effects like increased unemployment not just in oil industries but across the whole economy. Also company shares ill decrease in value so nobody will want to buy them until the economy has settled, and the companies are loosing on potential extra money (for investment) because people aren't buying shares. The recent rise in oil prices seems like a big deal but if e ere to compare it with the inflation of 1972 then we see that this surplus is substantially lower in real terms. And with today's modern technology we are less reliant on oil than e ere back in 1973. Max Pobol Economics Page 1/3 ...read more.

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