The Potential Causes of Rising Oil Prices, Essay Example

There is likely no issue that causes more controversy than the cost of oil prices (Sachs, 2007). On any given day discussions can be heard around the water cooler at work, on commuter trains, and at lunch counters lamenting how expensive gasoline is. Everyone has an opinion as the cause but no one seems to have a solution and, with the American economy continuing to struggle, oil prices are offered as the prime cause. Yet, what are the real reasons for the rising cost of oil?

Over the last three years there has been an increased effort on behalf of American consumers to decrease their usage of gas. This is reflected in the statistics issued by both the U.S. Government and the oil companies (U.S. Department of Energy, 2009). This decreased usage is the result of increased consumer awareness of environmental concerns and the fact that, with ever increasing prices, consumers are more selective in making decisions about where and how often they drive.

The rise in oil prices continues despite aggressive efforts by the U.S. Government to control the spiral. The American economy is heavily dependent on oil prices as the U.S. remains the world’s largest user of oil products but factors outside the control of the Government have, and will continue to contribute, to the rise in prices. Demand for oil throughout the world remains strong (Cala, 2011). As the United States and Western Europe, which have been historically the largest users of oil, have made attempts to cut back on their oil usage the rest of the world has stepped up its demand. Nations such as India and China are quickly and aggressively beginning to establish themselves as world economic powers. Both nations are emerging from a long period of economic stagnation during which they had little or no need for oil and are now entering a new era during which they need oil not only  for industrial production but also to provide their populations with Western style comforts. Both of these heavily populated nations are now competitors on the world stage for the oil products that were once marketed primarily to the western world. Now the oil producing nations have new customers and these new customers are causing the demand to remain high. Simple economics reflects that high demand equals higher prices.

The other side of the equation, supply, is also contributing significantly to the continued increase in oil prices. The two largest oil fields in the world, Saudi Arabia and Cantarell in Mexico, are both in serious decline as sources of oil (Hamilton, 2008). These two fields have been the primary sources of the world’s oil supply for the latter part of the twentieth century and their production decline represents a serious problem. Some experts claim that the situation in Mexico’s Cantarell field is so severe that it could result in Mexico becoming an oil importer in the next decade. This would have a disastrous effect on the national economy of Mexico and acerbate an already existing supply shortage in the world market.

When most individuals consider how oil is used they consider only the obvious uses such as gas for motor vehicles and heating for homes and industry. Unfortunately, the uses for oil are far more extensive and, in fact, it is the collateral use of oil products that is contributing significantly to its increased cost. Oil based products are used more and more extensively in the everyday world economy. Consider alone the increased use of plastic (Clifford, 2011). Oil is the primary component of plastic related products and plastic related products have taken over the market place not only in the western world but also in the rest of the world where plastic is just now being discovered as an alternative. Just imagine how much plastic has impacted the lives of the typical American in the past fifty years and multiply that impact by the numbers beginning to use plastic products in India and China in the past decade. In doing so, it is not hard to understand why oil prices continue to increase. High demand equals high prices and the demand for plastic related products has never been higher and, as previously undeveloped nations emerge onto the world stage, this demand will only increase.

The other major area where oil is used extensively but where its use is often overlooked is in the area of food production. The world’s population continues to increase and this places greater pressure on the food industry to feed the masses. As the number of acres dedicated to food production decreases in the face of increased urbanization, a corresponding demand is created for food production to become more efficient. This requires that increased amounts of fertilizer are used and the primary component of fertilizer is oil which adds further to the overall demand. Add in the fact that the food must be transported to where the need for food is the greatest and that the vehicles used in the production of the food are oil dependent and you have a additional cause for the ever increasing cost of oil.

The ever increasing demand for oil is not the only cause for increased oil prices. There is also the fact that political conditions in most of the world’s oil producing nations have been extremely tenuous over the past several years. The war in Iraq, the civil war in Libya, and the posturing in Iran all have contributed significantly to the rise in oil prices. Investors in the future markets witnessing these political situations are continuing to bet that oil prices will continue to move higher and they bid up the cost of futures which, not coincidently, also serves to keep the price of oil high. If the world’s economy would improve, investors would move their interest to other commodities and oil futures would become less attractive as an investment vehicle. Unfortunately, this has not been the case over the past several years. Oil futures remain an attractive investment and, as a result, they are contributing to a sustained increase in oil prices.

The continued decline in the value of the American dollar is also contributing to the rise in oil prices. The American dollar has been the currency of choice in the oil industry since the end of the Second World War and most oil contracts are traded in dollars. As a result, the oil  producing countries value their own currency against the value of the dollar and so as the dollar declines so do their own currencies. This causes a corresponding decrease in the revenues and in order to offset this decline in revenues the oil producing nations must increase the cost of oil in order to offset their increased costs. It is a symbiotic relationship that cannot be avoided as long as the dollar remains the currency of choice. If the value of the dollar would increase, the oil producing nations could enjoy higher revenues and maintain their profit margins without increasing prices but as long as the dollar remains in decline the oil producing nations must increase prices so as to not suffer their own economic decline.

In actuality, the politics and economic factors in the production of oil make the issue of oil prices very complicated. The factor listed, herein, are, when considered separately, easy to understand but when the issue is considered in its entirety it becomes far more complex. The American public would like oil prices to remain at the levels that they have enjoyed for several decades but the reality is that the world is changing and the maintenance of oil prices at past levels is not reasonable. There are just too many factors contributing to the equation. Oil is a commodity and, unlike other commodities such as wheat or corn, it is a limited commodity. As demand increases, political unrest continues, and the world’s economy struggles, the price of oil will continue to reflect the influence of these factors and unless an alternative source of energy is suddenly discovered that is capable of replacing oil there is little likelihood that the price of oil will be decreasing any time in the near future.

References

Cala, A. (2011, August 12). Rising demand for oil could lead to global double-dip recession. Christian Science Monitor .

Clifford, S. (2011, June 1). Devilish Packaging, Tamed. New York Times , p. B1.

Hamilton, J. D. (2008). Understanding Crude Oil Prices. San Diego: University of California.

Sachs, I. (2007). The Biofuels Controversy. New York: United Nations.

U.S. Department of Energy. (2009). Reduce Oil Dependence Costs. Retrieved September 14, 2011, from fueleconomy.gov: http://www.fueleconomy.gov/feg/oildep.shtml