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Explain some of the economic reasons behind the recent rise in global oil prices?

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Introduction

The Rise in Global Oil Prices a) Explain some of the economic reasons behind the recent rise in global oil prices? The price of oil, being one of the most crucial and demanded commodities in the world, fluctuates significantly not only due to excessive aggregate demand but also to sustained increase in costs. In short, if the global demand for crude oil is increasing and the supplies of the international markets cannot keep up, inflation will result. The effect on the price however is emphasised by the fact that both the demand and supply of oil is price inelastic. In recent months the cyclical demand for oil has increased noticeably following a strong recovery in global GDP growth because oil is a major input into many industries, for example the production of kerosene for cooking and heating. Up and coming market economies like China have had a seriously influential role in the rapid increase in demand. As shown in this diagram, China's energy-intensive sectors are using approximately 6 million barrels of crude oil a day and account for over 7% of world demand. It is this growth of the Chinese economy that is responsible for a third of the increase in global oil demand in 2003. On the supply-side of the economy, The Organization of Petroleum Exporting Countries (OPEC) ...read more.

Middle

This is known as cost push inflation. If wages follow prices than the effect of this inflationary pressure on the economy is made considerably graver. The trend is that as price levels rise, the workers feel more and more hard done by, demanding higher rewards for their efforts. This in turn increases the firms' costs even more and a wage-price spiral commences. If inflation is expected to rise, people want to protect their real wages, and in doing so their standard of living. But, because of the increase in production costs due to the recent surge in input costs, often the market cannot afford to pay higher wages. As a result of this higher inflation and the risk of a wage-price spiral, the monetary policy will be forced to raise interest rates. However, higher oil costs tend to work their way through the supply chain, in the end eventually resulting in the consumer paying the extra cost in some cases. In the immediate term, however it is the air fares and the cost of filling up one's tank that are the obvious symptoms. These higher prices results in one's disposable income (ones income after tax and benefits) becoming progressively less due to the highly inelastic demand, hence one spends less on other goods and services. ...read more.

Conclusion

This is a very good thing for the leading oil producers in the world because through receiving more for their exports, they receive increased injections into their economy. However, the UK has large reserves of North Sea Oil, and as shown in the following diagram the Net Balance of Trade in Oil has been positive for almost 25 years. Although the cost of imports will rise, the value of exports will also rise resulting hopefully in a positive impact on the current Balance of Payments. Countries that solely import oil products will see the rising oil prices as a negative exogenous economic shock and will have to boost exports to counter-balance the possible balance of payments deficit. On the other hand, one does have to consider the stability of the global economy; will oil prices continue to rise? Will China's economy continue to grow at such a rapid rate? Will OPEC maintain its pivotal influence on the world economy? Unfortunately I simply do not have the time to put any more hours into this ew, otherwise I would of course evaluate these questions! Sir, I would be very grateful if we could talk about UCAS and universities in the next few days. I am no longer going for geography at oxford but now hoping to read economics, hence I need to write a new personal statement asap! Sorry for not going into to much evaluation towards the end. Oil Prices Inskip ...read more.

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