Rising Global Oil Prices

Rising Global Oil Prices

Introduction:

This paper focuses on rising global oil prices, it focuses on the effect of rising oil prices on developed and developing countries and how international trade among countries is affected. This paper focuses on a new article by the New York Times on 21st May 2008, this article reports on the expected oil prices in the near future and also offers solutions to the rise in prices.

Summary of the article:

The article states that oil prices are expected to reach $200 by the end of the year, the rise in price has been as a result of high speculated demand resulting into high prices, the high prices are also as a result of a decline in the production of crude oil by non OPEC countries such as Britain and Mexico.

Despite the high rise in oil prices there are various alternative to consumers such as hybrid vehicles, increased nuclear power generation and also increased oil production, in the United States there has been tax incentives aimed at encouraging consumers to buy hybrid vehicles and there has been an increase in taxes on crude oil.

Rising Global Oil Prices

Economic implication of rising oil prices:

The increasing demand for crude oil has resulted to an increase in the prices for oil products, according to the law of demand as demand increases then the equilibrium prices are expected to rise, therefore there is a need to increase the supply of oil in order to bring down the prices and this is because as supply increase then equilibrium prices will decline.

International trade is also affected by the rise in oil prices, most countries will import oil which will be used as an input in almost all the industries, an increase in oil prices will lead to trade balances where countries may face the problem of high cost of imports than the exports and therefore there will be the problem of trade balances, countries will also be faced with the problem of debts where countries will borrow from financial institutions to finance their oil imports.

Solutions to this problem include an increase in supply of crude oil, however there is also a possibility of using alternative source of energy such as nuclear energy, nuclear energy is a substitute and as the price of oil rises then consumers will demand more of nuclear energy which may bring down the price of oil due to a decline in demand for oil.

The other solution is to adopt hybrid vehicles which are more environmental friendly and require less running costs, the government has introduced tax incentives to encourage more consumers to purchase these vehicles and also discouraged use of gasoline vehicles by imposing tax on oil.

Conclusion:

Rising Global Oil Prices

From history it is evident that the demand and supply has automatically adjusted itself to reach equilibriums, increased demand will cause rise in prices and this will lender suppliers to earn more income, this will encourage more firms to produce energy resulting to an increase in supply, and the increase in supply will bring down equilibrium prices. Therefore there is no need to interfere with the market because the market will ensure proper resource allocation.

REFERENCE:

New York Times (2008) Oracle Predicts a rise in oil prices to $200 a barrel crude, May 21st 2008, retrieved on 8

th

July, available at

http://www.nytimes.com/2008/05/21/business/21oil.html?_r=1&adxnnl=1&oref=slogin &adxnnlx=1215518456-dGSAG3aVaQMcjzufkOL0YQ