Introduction to Oil Crisis

Introduction to Oil Crisis

Oil is the major source of energy worldwide and it is expected to remain so over the next few decades. As the technology is changing our environment nowadays, oil has done it in the 20's and 30's. Ever since, then crude oil has become the main "raw" material in every economy no matter it is a developed one or it is in the developing process. The changes in the prices of the crude oil are making positive and negative implications on every economy. When these changes of prices are severe ones, one might easily conclude that an economy is going to face problems such as unfavorable supply shocks, or according to the theory adverse supply shocks. When these kinds of problem arise in the world oil market, it is usually described as a world oil crisis. The world has witnessed 2 major oil crises and it is facing another one at the moment. In order to discuss the recent oil crisis and its economic implications I am going to refer to the appropriated economic theory and I will also examine the two previous oil shocks in the world. As I mentioned previously the major problem that an economy is facing during every oil crisis is the adverse supply shock. Adverse supply shocks are unexpected events that reduce aggregate supply and therefore the output decreases and prices increase. In the language of economy we call this stagflation . Furthermore, I will refer to the organization that has caused the three supply shocks so far. OPEC, the Organization of Petroleum Exporting Countries, has the power to control the world oil prices by its reduction in the world oil supply. That's what has done in the oil crisis that had happened in the early 70's(Mankiw 252). OPEC's reduction in the supply of oil had doubled the world oil price instantly. As I said previously this had caused stagflation in every oil importing country. In addition I will refer to the US statistic about the oil crisis that took place in the early 70's. In the year of 1974 the change of the oil price was 68% and therefore there has been inflation in the area of 11% and negative change in the unemployment rate from 4.9% to 5.6%. (Mankiw 253) For instance we had the same impact on the economy in the crisis that took place in the 80's, such as double-digit inflation rates and high unemployment rate. These 100% changes in the oil price have caused an adverse supply shocks for the US economy. The main negative effects of the adverse supply shock are described as: an upward shift in the short run aggregate supply curve (SRAS) and a decrease in the level of output and an increase in the prices. In order to get a clearer picture of what's going on in every economy I will closely consider the graph where this changes can be seen.

Having drawn the appropriate graph it is much easier to analyze the economic implications from an adverse supply shock that is caused mainly by the oil crisis . It is obvious to see the changes that have been made with the raise of the oil prices to an economy. We have an upward shift of the SRAS from point P1 to point P2, which was caused, by the increase of the price. Furthermore, this change has moved the output from point Y1 to Y2 and initiated stagnation, which is the main impact on the economy from the oil crisis.

Moreover, it is interesting to analyze the economic implications from the extra petrodollars gained from the increased prices. I will refer to an article, which has statistical data about the oil crisis that took place in the 70's. For instance the extra gained petrodollars from the crisis in 70's were lent to the developing countries in Asia and Latin America. (Whiter 2) According to mine reasoning that's the only positive aspect from facing an oil crisis. To wrap up, the macroeconomic theory and the implications from the previous crisis have assisted us to understand the implications from an oil crisis, and will also help us easily understand and explain the current oil crisis.

As the last sentence of the previous paragraph put forward, I will refer to the economic implications from the current oil crisis. According to the theory that I have presented the economic implications are going to be identical. Every single oil importing country is anticipating that they are going to have higher inflation and unemployment rates than the expected ones. According to Stewart Wallace " Higher oil prices may exacerbate an economic slowdown in the US, which consumes a quarter of the world's oil. Furthermore, Outgoing Energy Secretary Bill Richardson is on a tour of the Gulf and Europe ahead of OPEC's meeting, trying to convince the group's producers to limit their cuts". (1) Despite the fact that crude oil had driven the economic success in the last 50 years, the new soaring oil prices will have a drastic impact on business decisions and investment strategies, which will obviously slow down the economies. Furthermore, I will pass on the positive economic implication from the recent oil crises, which are the petrodollar effect and the TAXES. To begin with, as the price of the oil increases also the demand for the dollar increases which implies that that the price for the dollar will increase respectively. The most crucial issue that the oil exporting economies should consider is the appropriate investment of the extra petrodollar earned because of the soaring prices. If it is going to be invested in the further development of the economies we might also have positive effects on the global economy. (Whither,2). But, according to Janet Henry who works for HSBC, says that oil prices would have to rise to some $70 a barrel before symptoms similar to those of the 70's began to appear . The next issue that I am going to present is the world petrol taxations. According to OPEC official "whenever the prices of oil products such as gasoline, diesel or heating oil rise, OPEC is usually made to scapegoat by some media, politicians and the generalpublic. "OPEC must raise output" the cry goes on"". (1) OPEC is claiming that the main reason why the oil prices are so high is due to the heavy government taxation. Namely, these taxes imposed by the government of the consuming nations vary from country to country and region to region. According to OPEC from every barrel of refined oil 68 percent of the final price is tax, 16 percent is for the refinery and the remaining 16 percent are for the oil exporters. (1) Furthermore, as we said the barrel of refined oil is split in to three - the crude oil price, the industry margin and taxes. In addition to in all countries it is clear that the biggest chunk of the cost of refined barrel does not go to the oil-exporting countries but, straight to the governments of the consuming countries in the form of taxes. These taxes have