Crude oil is the most important form of energy for all the countries, mainly for developed and developing countries. The importance of crude oil is such that it is used in day to day activity of individual as well as the economic development of the nation. Of late, the GDP of China and India reveal that the economies of both these countries are growing at faster pace and are the big consumers of crude oil in the world 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 at large, thanks the financial crisis, the recession has brought it down again. It may be exaggerated that increase and decrease in the oil price effects the world economy which is makes it necessary to study its impact on the world economy and how it effects the alternative energy resources.
OPEC reports that the recent surge in the oil prices occurred at the time when there was absolutely no shortage of oil at all. 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 increased the supply of crude oil by 4 mb/d since 2003 and further buy cbd oil increased it by more 1 mb/d with absolutely no shortage of crude oil in the market. (World Oil Outlook, 2008)
Some reasons for upsurge in crude oil prices
Many elements have led to this volatility in crude oil prices. Keeping aside the demand and supply elements, fluctuations in the dollar value has been the main cause for increase in the prices of crude oil. Ray and Olga (2004) reported that oil prices are the source of major developments in the world economy that can trigger inflation and recession as in 1974 and 1979 which resulted in slowdown of world economy. According to Chandrasekhar (2005), the primary cause of increase in the crude oil prices is the rapid development of United States of America, China and India, forcing the industry to extract and refine more oil from the reserves. It is also reported that global demands have risen by 2.7 million barrels per day during 2004, highest since 1976. Some factors that 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 demand for the crude oil have forced the oil producing nations to produce more crude oil in order to meet the demands. The above figure shows that there has been drastic decline in the oil production of OPEC countries; this demand/supply factor is the main reason for increase in crude oil price touching $140 per barrel.(Hiromi Kato, 2005)
As per the BPs Statistical Review of World energy for the year 2007, it is revealed that demand for the world touched 83.7 million barrels/per day or 3.9 billion tons/year which is equal to five times the annual household water consumption. The above figure shows 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 due to 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 over time at the rate that is equal, year after year, to the interest rate. It is understood from this statement that price of the scarce commodity increases at the rate year after year with the added interest rate. The crude oil is an important ingredient in the growth of world economy. It is learned that commodity traders are responsible for oil prices who bid on oil futures contracts by looking into current supply of oil in terms of output, oil reserves as to know what is available and demand of oil, mainly from United States.(Kimberly Amadeo) According to OPEC Monthly Oil Market Report released for August 2008, it 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.