The Cause and Effect of Rising Oil Prices

Introduction

This research paper will concentrate on the topic about the current happenings and alterations in the price of oil. As such, this would focus in determining the various reasons behind the rise and fall in oil price. Hence, the paper would work in rendering definite information and rationale with regard to the topic presented on this research. Likewise, pointing out the cause and effect of the increasing oil prices will serve as the purpose for this order.

The following will be discussed:

1. A Brief Background: Oil Price
2. Causes of Oil Price Increase
3. Effects of Oil Price Increase in Business Industries

At the end of the paper, its goal includes determining the reasons of the oil price increases and its implication in various business industries including the economy. Nonetheless, this research would work to tackle the significance of such issue of changes in oil price with regard to the development and performance of business industries as well as in the economic stability.

A Brief Background: Oil and Price

            It is perceived that the prices of crude oil acts just like any other service and products across the globe wherein the alterations with its cost react accordingly depending if there is a shortage and oversupply (A History of Oil Prices, n.d.). Hence, the phase of oil price would probably extend for a long period of time, depending on the ever escalating demand for the utilization of oil and in the capacity of oil supply directly provided by the Organization of Petroleum Exporting Countries or better known as OPEC together with the non-OPEC oil companies (A History of Oil Prices, n.d.).

Moreover, in a thorough review of the history of oil prices, it is clearly evident that the petroleum industry has been heavily regulated in terms of production and price control, most especially in the United States throughout the period of the 20th up to the 21^st century (A History of Oil Prices, n.d.).

Most of the people and professionals believe that it is in the 70s and before, which served as the glory years of the oil industry wherein the costs of crude oil were fair, as well as reasonable, and the there were readily bountiful supply of petroleum (A History of Oil Prices, n.d.). Back then, the cost of oil per gallon ranges from four dollars up to five dollars as compared to the present price of oil wherein petroleum cost is at $100 per barrel (A History of Oil Prices, n.d.). Certainly, such continuous increases in oil price became a burden from the people and among different industries (A History of Oil Prices, n.d.).

Causes of Oil Price Increase

It is considered that the disparity between the supply and demand is one of the major causes of increase in the oil price. As such, the noticeable swing in the oil demand for utilization in China together with the oil requirement of other countries with emerging economic and the limited investment in the oil industry for the past decades are all perceived to be the probable causes of oil price hike.

Oil demand among the emerging economies, on the other hand, plays a profound role wherein such requirement for oil must be filled accordingly as they are in the process of development and to be able to maintain a firm pace in its local production of its industries (Berkmen et al. n.d.). In addition to this, countries with emerging economies entail bigger oil demand compared with the fully developed states (Berkmen et al. n.d.).

Likewise, oil supply also plays a profound role in the rising price of petroleum. According to the book freedom from oil, the oil supply has been responding slowly to price increases (Sandalow, 2008). As such, oil supply in the world has dropped down due to the increase in oil demand, most especially with emerging countries (Sandalow, 2008). Hence, with the enough oil supply in the global petroleum industry, oil supply can portray a profound role to lower down the cost of oil and put an end to the growing price of gasoline (Sandalow, 2008).

Certainly, with the fact in the stiffness of oil market and worries about the supply and demand, there are still other factors that contribute in the oil price increase such as geopolitical developments, uncertainties of potential supply interruptions, market manipulation and negative speculations are as well considered to play a profound role in the rising global cost of oil (Berkmen et al. n.d.). In addition to this, the bottlenecks in oil plants or factory blockage has added more pressure and influenced the increase (Berkmen et al. n.d.).

Furthermore, the demand for oil is considered to inflexible wherein it is slow in reacting or responding to changing conditions. Hence, this means that a fairly small change in demand or supply would most likely result in a comparatively large alterations with regard to price (What is the reason causes the oil price increase n.d.). As such, goods that are indispensable like oil or petroleum does not have its readily available substitutes, so it takes a very large change in price to bring supply and demand into symmetry (What is the reason causes the oil price increase n.d.). For instance, a small five percent growth in the demand for oil would most probably result in a ten percent increase in the price (What is the reason causes the oil price increase n.d.).

Effects of Oil Price Increase in Business Industries

When there is an increase in the price of oils, this as well entails particular impacts in the business world and industries that depend on the consumption of oil (Reynolds, n.d.). As such, when there is an oil price hike, the production costs of companies that utilize oil increases while their profits react adversely and lowered down (Reynolds, n.d.). Likewise, such increase in oil price threatens to affect various industries such as the new and old industrial economies (Reynolds, n.d.).

In general, the impact of such oil price increase is indeed adverse and negative for most of the major business industries across the globe. As such, the effect of oil price increase in transportation industry is more likely to create a raise in the rate of fare per passenger while such inflation would as well implicate higher prices in food and other goods that utilize oil in its production and transportation (Irvin, 2005). However, despite the obvious negative effects of oil price increase, this as well entails a positive outcome in some countries and economies (Irvin, 2005). In Australia, the start of rising oil prices entails bright implications wherein such increase in price could possibly place the Australian dollar in a healthier ground. However, longer periods of high prices could also restrict the Australian country towards global growth in the long run (Irvin, 2005).

In the end, with the continuous crude oil prices increase, importing countries like the United States, most especially those with emerging economies, must start to look for alternative sources of energy, such as coal and natural gas to be able to slowly break free from dependence on non-renewable sources of energy.

Nonetheless, with the above written facts and information, it is evident that the issue of oil price hike is inclined to create adverse effects in the society and major industries across the globe.

References

A History of Oil Prices. [online] Available from <http://library.4offsets.com/2008/07/28/a-history-of-oil-prices/> [September 10, 2008]

(Berkmen et al. (n.d.) The Structure of the Oil Market and Causes of High Prices. [online] Available from <http://www.imf.org/external/np/pp/eng/2005/092105o.htm> [September 10, 2008-10-10]

Irvin J. (2005) Australia boosted by high oil price – initially. [online] Available from <http://www.smh.com.au/news/business/australia-boosted-by-high-oil-price–initially/2005/08/15/1123958005168.html> [September 10, 2008]

Reynolds A. (n.d.) Oil Prices: Cause and Effect [online] Available from <http://www.cato.org/pub_display.php?pub_id=3947> [September 10, 2008]

Sandalow D. (2008) Freedom from Oil: How the Next President Can End the United States’ Oil Addiction.New York City.  McGraw-Hill Professional

What is the reason causes the oil price increase. (n.d.) [online] Available from <http://answers.yahoo.com/question/index?qid=20071205085736AAphAHV> [September 10, 2008]