Crude oil is the most important type of energy for all the countries, mainly for developed and developing countries. The value of crude oil is such that it is used in everyday activity of individual as well as the economic development of the nation. Of late, the GDP of China and India show that the economies of these two countries are growing at faster pace and are the large customers of crude oil on earth market. Therefore the increase in oil prices inadvertently affects the GDP and economy of the countries. During 2008 world witnessed the growth in the prices of crude oil reaching a new high threatening the world economy in particular, thanks the economic crisis, the current recession has taken it down again. It might be exaggerated that increase and decrease within the opec the world economy that makes it necessary to study its impact on the world economy and just how it effects the alternative energy resources.
OPEC reports the recent surge within the oil prices occurred during the time when there is virtually no shortage of oil whatsoever. The price upsurge accompanied with volatility has been recognized in all commodity groups including energy, metal or agricultural products with prices doubled since 2005. OPEC reports that it has risen the supply of crude oil by 4 mb/d since 2003 and further increased it by more 1 mb/d with simply no shortage of crude oil in the market. (World Oil Outlook, 2008)
Some factors behind upsurge in crude oil prices – Many elements have led to this volatility in crude oil prices. Keeping aside the demand and supply elements, fluctuations inside the dollar value has been the key reason for increase in the prices of crude oil. Ray and Olga (2004) reported that oil charges are the source of major developments in the world economy that can trigger inflation and recession like 1974 and 1979 which led to slowdown of world economy. Based on Chandrasekhar (2005), the primary cause of rise in the crude oil prices will be the rapid growth and development of United states, China and India, forcing the industry to extract and refine more oil from your reserves. It is additionally reported that global demands have risen by 2.7 million barrels per day during 2004, highest since 1976. Some factors who have helped the price upsurge include US occupying Iraq, Saudi Arabia being attacked by terrorist temporarily affecting oil supplies, speculative investments by financial investors.
Decline in OPEC’s Surplus Oil Production Capacity – Increases in global need for the crude oil have forced the oil producing nations to produce more crude oil to be able to meet the demands. The above figure implies that we have seen drastic decline within the oil production of OPEC countries; this demand/supply factor is the primary reason for boost in crude oil price touching $140 per barrel.(Hiromi Kato, 2005)
According to the BPs Statistical Review of World energy for the year 2007, it really is said that interest in the entire world touched 83.7 million barrels/per day or 3.9 billion tons/year which is the same as 5 times the annual household water consumption. The above mentioned figure demonstrates that the increasing demand has led to upsurge in crude oil price which rocket from mid 2005 till 2008. As per the figure, oil price didn’t had any upsurge till late 2000 but as a result of increased demand in Asian countries, the crude oil price escalated.
Trends in Oil Prices – Roncaglia using Hotelling theory explains that the equilibrium price of the scarce resource net of extraction costs rises as time passes in the rate that is certainly equal, year in year out, for the interest rate. It is understood from this statement that value of the scarce commodity increases on the rate every year using the added monthly interest. The crude oil is a crucial ingredient within the expansion of world economy. It really is learned that commodity traders are accountable for oil prices who bid on oil ukmaqt contracts by looking into current availability of oil in terms of output, oil reserves as to understand what can be obtained and need for oil, mainly from United States.(Kimberly Amadeo) Based on OPEC Monthly Oil Market Report released for August 2008, it really is highlighted that OPEC Reference Basket (ORP) rose to $2.89/b or 2% during July 2008 to $131.22/b with US dollar weakening and geopolitical tensions dominating the upward trend.
However because of weakening economic conditions, recovery in US dollar and increased OPEC oil exports, the price came right down to three month low of $109/ b. Based on OPEC, the world economy will grow at 3.8% in 2009 as against 3.9% in 2008. Additionally, it reports that developing countries growth rate remains unaffected at 5.6%. India’s growth is up at 7.7% as against to unchanged China at 9.2%.(www.opec.org) The graph represents the trends in crude oil prices from 2006 to 2008. The figure shows that an oil price in 2006 was $50 to $70 per barrel when compared with $50 to $90 per barrel around 2007.
The increase in oil price is visible from fourth week of August 2007 which touched $90 per barrel after 2007. This trend continued during 2008 with all the price touching to $140 per barrel mark in second week of July. However, some controlling factors and increased export from OPEC suppliers, gave some relief with steep fall in crude oil price as much as $118 per barrel during fourth week of August 2008.