Overview

Is global economy reliant on oil?

Oil prices have been very volatile and plunged to exceptional lows starting January 23 of this year when it fell to US$49 per barrel. Only in June of 2014, Brent crude oil was at a high of US$115 per barrel.

For the last 10 years, prices were relatively high mainly because of substantial consumption in large nations like China and the discord in Iraq. Suddenly, supply turned out higher compared to demand as unused crude was stored for later use. There was an oil glut worldwide.

As the prices plunged, the Organization of Petroleum Exporting Countries (OPEC) led by Saudi Arabia did not cut down on production since it did not want to relinquish market share.  OPEC oil has been threatened by the boom of US shale.  The collapse of crude prices has toppled the world economy with consequences for various nations. Low prices are beneficial for US and Japan but emerge as a bane for Venezuela, Russia and small Asian countries.

Oil Controls Economies

Crude possesses the capability to wreak chaos on economies of nations because it is the key source of power for financial affluence. Sometimes described as black gold, it is the means of support for majority of money-making initiatives. Increasing prices of oil are said to be deflationary and inflationary simultaneously. It will weaken the economy and contributes to inflation if the prices are too excessive.

Additional money spent for oil leads to a reduced amount of spending for other products and services. There is also a favorable and reverse outcome. Sooner or later, anemic demand will trigger decline of prices and oil emerges a powerful force in enhancing an economy. Nonetheless, all this has evolved during the last 10 years. Quick expansion in emerging markets has undercut the older rules. Hence, regardless of economic stagnation in wealthy nations, oil prices remain very high. It seems OPEC has also improved in controlling supply to sustain prices. Energy prices have become exorbitant to enable continuation of more normal growth levels.

In 2014, Group of Seven nations, International Energy Agency (IEA) and the International Monetary Fund (IMF) cautioned that high prices of crude were restricting economic resurgence from the time of the general economic decline. Reducing oil production can only be attained by raising the price twofold within the next 10 years.

This will probably bring about the stage wherein cost of cumulative supply surpasses the price that economies afford to pay without disrupting economic activity considerably at a certain instance. Ahead of this obstacle, the levels of oil prices will cast a powerful effect countries leading to dormancy and hardships.

Helplessness of Oil-importing Countries

Countries which have become ever more dependent on oil imports are confronted with two dangers that are very difficult to control.

One is the growing utilization of oil in the producers’ own nations. For example, Saudi Arabia (biggest oil exporter globally) sold less oil overseas in 2011 compared to 2005 despite substantial production increases in the latest years. Two is importing countries have greater capacity in agreeing to higher prices for crude. In established high-consuming nations such as the United States, oil prices higher than $90 for every barrel will have a sizeable monetary impact. On the contrary, up and coming economies, like China can easily tolerate prices in the $100 and $110 per barrel limit.

It is possible to soften the influence of high oil prices. These can originate from a number of sources. These include more supplies of low-cost crude, greater efficiency in oil usage and shift to a low-carbon option. Shale is one. This is called unconventional oil that comes from rock fragments through thermal dissolution or hydrogenation. The process transforms organic substances into man-made oil and gas. It may be used right away as fuel or improved to meet refinery requirements. At the same time, there can be a major initiative by governments by means of regulations and incentives. However, this calls for demand management to keep away from increases in efficiency that paves the way for demand growth. There can also be a changeover to low-carbon economies that can decrease impacts of high oil prices. Yet, it entails political leadership and policy firmness to build long-term, adequate and dependable motivation for renewable energy.

Conclusion

It may be safe to assume that high prices of oil dislocate economic systems all over the world.  If prices climb up, the wages of millions and even billions of ordinary workers do not necessarily increase. This phenomenon generates higher prices for principal commodities such as food, transportation, clothing and even basic services like education or health. Everything is affected adversely. Unfortunately, these trends and developments only show that the world has become too dependent on crude oil. This is something that people have to bear with at present and the near future.