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| Effect of Oil Essay

Some observers, such as petroleum industry experts Kenneth S. Deffeyes and Matthew Simmons, believe the high dependence of most modern industrial transport, agricultural, and industrial systems on the relative low cost and high availability of oil will cause the post-peak production decline and possible severe increases in the price of oil to have negative implications for the global economy (Gertler, 1997). Forecasts differ deeply as to what precisely these unhelpful consequences would be. If political and economic changes only occur in reaction to high prices and shortages rather than in reaction to the threat of a peak, then the degree of economic damage to importing countries will largely depend on how rapidly oil imports decline post-peak (Charles, 2008).

According to the Export Land Model, oil exports drop much more quickly than production drops due to domestic consumption increases in exporting countries (Charles, 2008). Supply shortfalls would cause the price of oil to increase sharply, unless demand is mitigated with planned conservation measures and use of alternatives (Zipapa, 1988)

In the past, recession way predicted, and known to be as a result of scarcity of oil for instance; 1970s.The effect the price of oil has on an economy is known as a price shock (Barrell, 2004). In many European countries, which have high taxes on fuels, such price shocks could potentially be mitigated somewhat by temporarily or permanently suspending the taxes as fuel costs rise (Zipapa, 1988). This method of softening price shocks is less useful in countries with much lower gas taxes, such as the United States (Ogata, 2002).

Some economists predict that a substitution effect will spur demand for alternate energy sources, such as coal or liquefied natural gas (Charles, 2008). This substitution can only be temporary, as coal and natural gas are finite resources as well (Gertler, 1997).

Prior to the run-up in fuel prices, many motorists opted for larger, less fuel-efficient sport utility vehicles and full-sized pickups in the United States, Canada, and other countries (Hooker, 1996). This trend has been reversing due to sustained high prices of fuel (Barrell, 2004). The September 2005 sales data for all vehicle vendors indicated SUV sales dropped while small cars sales increased (Hooker, 1996). Hybrid and diesel vehicles are also gaining in popularity (Hooker, 1996)

In 2008, a report by Cambridge Energy Research Associates stated that 2007 had been the year of peak gasoline usage in the United States, and that record energy levels would cause an “enduring shift” in energy consumption practices (Zipapa, 1988). According to the report, in April gas consumption had been lower than a year before for the sixth straight month, suggesting 2008 would be the first year U.S. gasoline usage declined in 17 years (Ogata, 2002). The total miles driven in the U.S. peaked in 2006 (Charles, 2008).

In the year 2005, the prices of oil rise thus driving force behind Nigeria’s financial growth. The country’s real gross domestic product (GDP) grew approximately 4.5 percent in 2005, and is expected to grow by 6.2 percent in 2006 (Ogata, 2002). The Nigerian economy is heavily dependent on the oil sector, which accounts for 95 percent of government revenues (Barrell, 2004). Even with the substantial oil wealth, Nigeria ranks as one of the poorest countries in the world, with a $1,000 per capita income and more than 70 percent of the population living in poverty (Gertler, 1997).

Petroleum politics have been an increasingly important aspect of diplomacy since the rise of the petroleum industry in the Middle East in the early 20th century (Zipapa, 1988). As competition grows, for an increasingly scarce but vital resource, the strategic calculations of major and minor countries alike place more prominent emphasis on the pumping, refining, transport and use of petroleum products (Ogata, 2002).

Discovery of oil in 1908 at Masjed Soleiman in Iran initiated the quest for oil in the Middle East (Ogata, 2002). AIOC (The Anglo-Iranian Oil Company) was established in the year 1908. In the year 1952, Iran made it public to all oil fields instigating the Abadan disaster. The United States of America and Great Britain thus punished Iran by arranging coup against its democratically elected prime minister, Mosaddeq, and brought the former Shah’s son, a dictator, to power(). In 1953 the US and GB arranged the arrest of the Prime Minister Mosaddeq(Gertler, 1997).

Oil is needed to grow food, build infrastructure, advance technology, manufacture goods and transport them to market (Ogata, 2002). It lubricates the mechanisms of both national and international politics (Charles, 2008).

Oil usually controls the whole world, a good example is Kuwait, The moment Saddam moved into Kuwait every man and his dog moved against him yet when the Palestinians ask for help in their own country, we just stand back and let them be murdered (Charles, 2008). If there was oil there we would all be interested in peace coming to this beautiful country (Charles, 2008).

On the other side of the coin, higher oil prices have also served to bring greater political stability and prosperity to several regions around the planet (Ogata, 2002). Some of these locations, including Mexico, Columbia, Venezuela, China, India, several of the Persian Gulf States, Russia, as well as many former Soviet Central Asian Republics and portions of the continent of Africa, particularly Nigeria are just getting their first tastes of “the good life” and are quickly developing a strong liking to the flavor (Charles, 2008).

For some countries, higher oil prices mean finally having the money needed to invest in desperately outdated infrastructure, technology and means to successfully building a sustainable defense and military that protects the borders and sovereignty of the nation, eliminating many incursions, invasions and all out turf wars before they can ever get started (Adroben , 1996). People who feel safe tend to prefer the sweet fruit of peace (Isard, 2002)

Economic growth in oil consuming nations increases the demand for oil and pushes up oil prices (Hunt, 2001). The world economy continued its recovery in 2003 and 2004 with gross domestic product (GDP) growth rates increasing in many regions (Hooker, 1996). The strongest growth performances were in oil importing United States and China, but better performance was also observed in Japan and Russia, as well as the emerging growth nations of Asia. U.S. growth was 3.1% in 2003, and forecast to reach 4.6% during 2004. Chinese economic growth was 7.4% in 2003 and projected to be 6.8% in 2004, moderating only slightly for 2005 (Adroben, 1996)

In the United States, economic growth has been linked to high levels of oil consumption, of which increasing gasoline demand is an important component (Hamilton, 1996). In China, expanding exports have increased the industrial demand for oil, and rising consumer income has increased consumers’ demand for gasoline (Gertler, 1997). U.S. oil demand increased by 1.9% in 2003 to over 20 million b/d. Chinese oil demand increased by 11.5% in 2003 to almost 6 million b/d (Charles, 2008).

In both the United States and China the increase in GDP growth and economic activity in general, has led to increases in energy demand (Hurst, 2003). However, a feedback relationship exists which can mitigate this effect (Barrell, 2004). To the extent that oil prices rise, reflecting increased oil demand, GDP growth rates might decline for two reasons (Barrell, 2004). If the monetary authorities interpret increasing oil costs as generalized price inflation, they may adopt restrictive monetary policies which could slow the economy’s growth. Also, if oil product prices rise, and consumers are unable or unwilling to reduce oil product consumption, consumers may reduce expenditures on other goods and services, again potentially slowing the rate of GDP growth (Charles, 2008).

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