Economics

    Oil have been known to human being for very many centuries, the Eastern world historic literature have shown oil abundance, the Bible and the Apocrypha allude to oil exploration Noah  the legend tightened his ark seams using pitch indicating use of fluid bitumen at his time, the Deuteronomy have mentioned oil out of the flinty rock. Oil is believed to have been a major factor in the ancient Judea and Persia trade. The burning wells in Eastern nations like the wells of Baku seemed miraculous to primitive people at that time, these wells have continued to flow into this century without running out of oil or being exhausted, led to emergence of the Zoroastrians or the fire worshippers, this worship was also amongst the ancient Indians. There were also some medicinal values attached to the petroleum at the source. The Greek legends used petroleum to burn the criminals and slaves (The World Traveler 1).

    Romania is the first country where modern scientific and commercial oil lines first began across the sea, though united states is the country producing highest quantity of oil in the world, it entire the field in Pennsylvania discovery virtues in 1895. Italy was the third country to start organized oil production followed by the following countries in this order Canada, Russia, Galicia, Japan, Germany, India, Dutch East Indies, Peru and Mexico.

    Col. E. L. Drake is the fonder of the petroleum industry because he innovated better ways of mining and solve a lot of mining problems at that time that would latter make the States a rich nation. This saw the evolution of well drilling of oil, he drilled the first well near the Titusville, Pa., in august 1859. Other countries emulated the states on their late achievements especially on drakes innovations.

    The figure 1 below shows the world oil repartition, North America have evidently consumed most of its oil reserves with Middle  East having the largest of oil that is not yet explored. This brings forward the swing share idea, for some time to come they can comfortably meet the world oil demand rather comfortably (The World Traveler 2).

Yellow line reveals the world share of oil production, green highlights prices, in the year 1973 at first oil shock time share was 38, and by 1985 it has reduced to 18 because other nations had also started production. The share index is now at 30 and we dont expect this to reduce any soon because there is no country going to be a new force in mass production apart from those already existing (The World Traveler 5).

    When the U.S oil production peaked, other countries specifically got the pressure to compensate for the deficit gap created by the U.S, specifically Saudi Arabia and followed by Iran took action, they were the only countries globally that could fill up this gap in global oil production. For this to happen, Saudi Arabia had no option but to increase the oil production in doubles and volumes than it did produce earlier, this also applied to Iran (Ben 5).
    In the early 1970s there was a massive increase in global oil demand and market, the global demand of oil was only 20 million barrels per day, but ten years down the line the demand shot to 50 million barrels per day. As the U.S oil production increases to peak, the Saudi Arabia oil production was only 3 million barrels per day. This was later to be taken over by the Saudi Arabia as the largest oil producer in the world.
 Figure  SEQ Figure  ARABIC 2 Growth in Global Oil Demand. Barrels per day in millions (dollars)
 EMBED MSGraph.Chart.8 s

    The global oil demand has been on the rise with a deep in around the year 1985 according to figure 5, there after the prices have continued to increase gradually to 2000. This increase in global demand of oil is attributed to increase in growth of demand of oil products and also due to demand for power to fuel faster growing economies like china. This demand is likely to increase and will definitely see the depletion of the oil reserves. US is one of the largest consumers in the world, though it is resorting to alternative sources of energy, a number of researches are underway to find the possibility extracting liquid energy like petroleum from coal, if this comes through then it would be a new world order on the energy world.

 EMBED MSGraph.Chart.8 s     In the early 1999 the world ran out of oil leading to increase in crude oil prices from 12 to 60. Since that time the supply of oil globally has increased by 10 according to a study by IEA (International Energy Agency), in 1999 it was 65.8 million barrels and rose to 72.5 million barrels in 2004. Global oil production capacity is estimated to double by 2010 to about 16 million barrels of oil per day (www.nab.com.au).

    These increases of oil prices are due to the decline in the value of dollar and speculation, when the dollar value deteriorates then al the commodities related to it are affected directly as the suppliers look to keep their purchasing power constant. Speculation is also another phenomenon which is rather complex, the higher the uncertainty levels in the market the higher the levels of speculation in the oil market. Speculation obviously leads to various activities in the oil market for example hoarding of the oil which automatically leads to price escalation.

    Another factor leading to oil price boom is the increase in its demand by the fast growing countries like China, Brazil and India. Speculation in even higher growth in these nations including U.S has led to price increase and fueled by the problems of supply by suppliers like Nigeria, Russia, and Venezuela. Price increases are directly caused by the shortage of oil from the major oil producing nations.

    Shocks in oil prices have global stagflation effects on basically on the oil importers because it slow the growth rates and cause recession through reduced production levels leading to increase or a shoot in the prices of almost all the commodities and hence inflation in the said country. These effects size varies according to a number of factors the oil shock size, persistence of the shock, the level of oil dependency and energy in the country and the policies in place on monetary and fiscal bodies.

    OPEC foundation lead to oil decline in member countries in 1979 to 1980 purchasing power per barrel reduced. Arab exporting states introduced the Arab Oil Embargo in 1973 on U.S and other states supporting Israel leading to 400 price increase of oil in just six months. Price increases between 1979 and 1980 are also attributed to the Iraq-Iran war which doubled oil prices during the period. These high prices led to the non-OPEC producers which led to lower demand of oil in the OPEC organization member states hence plummeting of oil to record below 10 a barrel. These prices shot up again due to the Gulf War when Iraq invaded Kuwait. Between 1990 and 1997 the global oil consumption increased turning the price cycle up. The US economy was stable and strong and a boom in the Asian Pacific areas.

    WTI (West Texas Intermediate) prices and Bret have fluctuated around  70 per barrel in July 2009. In august the prices rose by 11 in monthly average figures. Non-OECD Asia consumption increased led to EIA (International Energy Agency) to review their forces for global demand 2009 and 2010. Despite this volatility the Chinese import of crude oil has increased over this year which is attributed to increase in operation in domestic operation and continued oil strategic stockpiling. With such expected continued increase in china growth, we expect similar trend in the coming the years 2010 through to 2011 as long as this growth continue.
    IEA have revised to higher scale 2009 non-OPEC supply by 160kbd because of high levels of unexpected activities on US and Russia which improved the production. There was a remarkable increase in oil supply because of increase in the production capacities in these non-OPEC countries
Figure  SEQ Figure  ARABIC 5 Long-term and short-term aggregate supply of oil

    Inflation and oil prices have clear relationship, oil price increases causes short term aggregate supply to shift inwards putting pressure on price levels upwards in short, sharp increase in crude oil price leads to exogenous inflation , the impact felt is great when the nation is big oil importer, has several industries depended on oil energy in their production processes. There are factors that come in which may eliminate inflationary shock, lets take into consideration the high crude oil prices impact on aggregate demand. First inflation acts increase to decrease real incomes growth reduces pressure on demand by the consumers (AD Main component). Low demand growth, high levels of input costs (which pressures profit margin of a company) results to reduction in planned spending on investment (Ben 11)

    The monetary policy should respond to escalating oil prices by reducing spending through raising the short term interest rates. But tightening the monetary policy will result to increase in unemployment, reduced economic growth levels. Deflationary policies will consequently decrease the GDP, and if the slow down in production leads to recession the oil demand will decline as a result putting pressure on global oil prices. (Victor  James 7).