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The global financial crisis has exposed very serious weaknesses in the economy of the world as well as in the global economic governance. Countries have enacted stimulus packages that are aimed at helping the countries in meeting their needs. The global economic crisis has exposed systems failures as seen in the financial markets working and the major deficiencies that occur at the core of economic policy making. This paper delves into the main economic trends and features of the world oil market during the period 2006-10, the factors which led to change in the demand for oil during 2006-10, the factors influencing the production and supply of oil during the period 2005-10 and ways in which governments might influence the oil market.
The main economic trends and features of the world oil market during the period 2006-10.
The financial fallout in the United States of America has affected jobs and livelihoods. The economic crisis came on top of other crisis where the prices of the world food as well as energy prices are high.
There are important shifts taking place in the global economy with rapid growth development experienced in Asia. The shift is mainly the balance of global economic power which makes it be an economy with multiple engines of growth. The recent economic crisis is due to the decline inn the economy of the United States of America. Brazil, the Russian Federation, India and China have become the economic giants and they are making their presence to be felt in global forums and through their own interactions.
Per capita income of the developing countries has quadrupled over the past half century. This per capita income is measured in terms of purchasing power parity where Brazil, India and China has shown an increase from 10% in 1957 to 27% in the year 2008. The Russian Federation has added another 2.5 %. The weight of the major economic power in today’s economy such as United States and Western Europe has dropped to less than one fifth. Several developing countries such as Asia have experienced major convergence to the living standards while those in Africa have fallen behind. The number of poor living in the world has decreased from $1.5 to 1.8 billion in 1990 to 1.4 billion in 2005. Almost this reduction was concentrated in China. In Sub-Sahara Africa, and South Asia, the number of poor increased and the number of income inequalities did the same thing.
Demographic changes influence the increasing global interdependence. The world’s population is expected to grow by 2-3 billion over the next for decades meaning that the global economy will be required to provide for the decent living for more than nine billion people where 85% lives in developing countries by 2050. Seventy per cent of the population is projected to be living in the urban areas and hence the land use as well as food patterns will be changed.
The factors which led to change in the demand for oil during 2006-10
The peak oil production is determined by the amount of resources that exist underground and the portion of that resource that could be extracted. The future oil demand governs the speed at the extractable resources are depleted. The future ability to extract oil and the path of future demand are determined by the circumstances above the ground. Low prices discourage investment and it forms one above ground condition that has much effect on the supply of oil physically. The evolving technology, economic growth, fiscal regimes, geopolitics and environmental preferences as well as regulations are other above ground factors that determine the timing of peak oil production.
The global energy demands peaks before supply does so because of economic slack, efficiency advancement and consumption cutbacks in response to the change of climatic change is the reason for peak in oil production which is driven by demand rather that supply constraints.US gasoline consumption peaked in the year 2007 because of firm pump price, high fuel efficiency, evolving transportation habits the increased role of renewable fuels for transportation. Extracting and refining nonconventional energy resources are more capital intensive and energy intensive than for conventional oil and this makes them to be more expensive to produce than conventional resources. The relatively high environmental impact of processing nonconventional together with legislation that restricts their use increases production costs.
New technologies have resulted in major advancements in the ability of the companies to extract oil that are located beneath the floor of the ocean. Offshore extraction technologies have evolved in the past half century from the platforms that makes it possible for extraction of oil that is located beneath the ocean floor. There are new expanses in the US Gulf of Mexico and North Sea and that the coast of Brazil and West Africa. The recover techniques advancements as well as improved geologists instruments have made the previously unreachable deposits viable for oil production.
The role of prices
During the period of 2003 through 2007, the global economic growth accelerated was led by the increase in the energy-intensive developing countries and they placed significant pressure on the global oil balance and this contributed to unprecedented spike in price. The price of crude oil tripled from January 2007 through 2008 and made the businesses and consumers to jolt around the globe. The high price was a result of tightening oil market fundamentals (energy demand outpacing supply). The oil price spike had undeniable economic and social consequences across the globe. The oil price spike was a critical factor that made United States to go into recession and brought the negative effect of rising oil price on global economy with great impact on developing economies and oil importing countries and was considered to be great in developed countries.
The factors influencing the production and supply of oil during the period 2005-10
The factors that influenced the production and supply of oil in the period of 2005 to 2010 are increase in the improved economy, increased global consumption, increased shipbuilding and oil and gas exploration and finally, increased construction and manufacturing activity.
Improvement or declining of economy
The world economy having recovered from recession through the second and third quarters of the year 2009, the economic sentiments in western Asia improved from being pessimism to cautious optimism. This region being major crude oil exporters lead to strong recovery of oil price to about $ 80 for a barrel. Western Asia is said to have experienced economic contraction of one percent in the same year.
The prospects for oil supply depend on the production constraint in major producing economies that stems from the fact that their oil field has reached maturity where they can either stagnate or decline. Most economies that happened show decline trend are not members of OPEC like Russia and Saudi Arabia. The North Sea Fields were affected by the maturing of their field. This led to unexpected growth in demand thereby declining the spare capacity of OPEC. To offset the effect of maturing field, there is need to continue large scale investment but this has shown formidable challenge.
Supply shocks can alter the output directly affecting the productive capacity of an economy. The supply shocks are adverse whether conditions, natural disaster or rise in price of the resources which are imported. Favorable weather condition leads to fall in the prices of major imported goods.
Increased global consumption
The external demand conditions determines the extent as well as speed of production where oil exporters benefits from the recovery in the prices of oil from their trough that was experienced at the end of the year 2008. All these were driven by global growth and its effect on oil demand. Non-oil exporters have suffered from sharp drop in the global demand across all groups of products.
Increased shipbuilding and oil and gas exploration
The large scale rise in the exploration as well as production of offshore oil and natural gas has made the offshore segment a very crucial market for the industry that builds ships. The demand for international equipment is associated with oil industry at the offshore and the supply of vessels. UK companies supply equipment to gas and oil shipping industry.
One hundred and forty million barrels were lost in the Libya market due to the turmoil in that country which resulted in the increase in oil price. The fall of oil price by five percent was experienced when there was news of the opening spigots.
Interruptions in the supply
Exploding demand and sluggish supply
The surge in the price of commodities is linked to exploding demand which in turn experiences a sluggish supply. The demand is boosted by industrial development unprecedented in its size, speed as well as breadth and this is experienced in countries such as China where the appetite for raw material has become voracious because of the size of the country and the investment rate. Most of China’s energy comes from coal while its oil consumption tally with the economies size but it is expected to increase than gross domestic product. The raw materials and reserves are in places which are hard to reach such far off the coast and deep beneath the water.
Shortage of experts
There is now the shortage of experts such as geologists who could help in determining the location and the search for oil. This has forced the companies such as OGX (firm founded by EIke Batista) to recruit back the retired skilled worker.
High production cost
In countries such as Brazil, it is expensive and difficult to recover oil which is located at the offshore of this country. The resource is also limited to growth and this was noted by Thomas Malthus in the late 18th century. There high costs of raw materials have jumped up and this result in the prices of non-oil commodities prices to treble in the past decade. The price of crude oil is $ 100 for a single barrel which is very high as compared to the oil shocks of 1970s.
Ways in which governments might influence the oil market.
The production of oil in a day in the whole world is eighty million. America alone consumes approximately nineteen million barrels. President Barrack Obama ordered thirty million barrels to be released from the strategic petroleum Reserve in attempt make it trickle. The other countries also supply thirty million barrels in order to boost the supply. This will result in a shift of two point five percent on the price.
There OPEC leaders protests to what president Obama proposes in regard to the release of oil and suggests that he is undermining their investment in the new capacity. There have been talks about the withholding of oil by OPEC to make up for the largesse of America.
In the year 2007, 88% of the proved reserves are owned by the oil companies that are owned by government and they are located at the OPEC and are not subject to external auditing. Saudi Arabia controls the world’s largest conventional oil reserves. The world’s exporter of oil under-report their reserves to take advantage of expected high future returns of oil and they save for future generations.
The factors that influenced the production and supply of oil in the period of 2005 to 2010 are increase in the improved economy, increased global consumption, increased shipbuilding and oil and gas exploration and finally, increased construction and manufacturing activity. The global energy demands peaks before supply does so because of economic slack, efficiency advancement and consumption cutbacks in response to the change of climatic change is the reason for peak in oil production which is driven by demand rather that supply.
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