Crude oil is an essential type of energy for all the countries, mainly for developed and developing countries. The importance of crude oil is such that it is found in day to day activity of individual as well as the economic development of the nation. Recently, the GDP of China and India show that the economies of these two countries are growing at faster pace and are the major consumers of crude oil in the world market. Therefore the increase in oil prices inadvertently affects the GDP and economy of the countries. During 2008 world witnessed the growth in the prices of crude oil reaching a new high threatening the world economy in particular, thanks the economic crisis, the current recession has brought it down again. It might be exaggerated that increase and decrease in the more info the world economy which makes it necessary to study its impact on the world economy and how it effects the renewable energy resources.
OPEC reports that the recent surge within the oil prices occurred at that time when there was virtually no shortage of oil at all. The price upsurge associated with volatility has been recognized in most commodity groups including energy, metal or agricultural products with prices doubled since 2005. OPEC reports which it has increased the supply of crude oil by 4 mb/d since 2003 and further increased it by more 1 mb/d with virtually no shortage of crude oil in the market. (World Oil Outlook, 2008)
Some reasons for upsurge in crude oil prices – Many elements have triggered this volatility in crude oil prices. Keeping aside the demand and supply elements, fluctuations in the dollar value has been the key cause of increase in the prices of crude oil. Ray and Olga (2004) reported that oil costs are the origin of major developments on the planet economy that may trigger inflation and recession like 1974 and 1979 which resulted in slowdown of world economy. According to Chandrasekhar (2005), the primary reason behind increase in the crude oil prices is the rapid development of United States of America, China and India, forcing the market to extract and refine more oil from the reserves. It is also reported that global demands have risen by 2.7 million barrels daily during 2004, highest since 1976. Some factors which have helped the cost upsurge include US occupying Iraq, Saudi Arabia being attacked by terrorist temporarily affecting oil supplies, speculative investments by financial investors.
Decline in OPEC’s Surplus Oil Production Capacity – Increases in global need for the crude oil have forced the oil producing nations to produce more crude oil to be able to satisfy the demands. The above figure implies that we have seen drastic decline in the oil creation of OPEC countries; this demand/supply factor is the primary reason for rise in crude oil price touching $140 per barrel.(Hiromi Kato, 2005)
Depending on the BPs Statistical Report on World energy for that year 2007, it really is stated that need for the entire world touched 83.7 million barrels/each day or 3.9 billion tons/year which is the same as 5 times the annual household water consumption. The above figure demonstrates that the improving demand for services has resulted in upsurge in crude oil price which rocket from mid 2005 till 2008. According to the figure, oil price didn’t had any upsurge till late 2000 but as a result of increased demand in Asian countries, the crude oil price escalated.
Trends in Oil Prices – Roncaglia using Hotelling theory explains the equilibrium value of the scarce resource net of extraction costs rises over time at the rate which is equal, every year, towards the interest rate. It really is understood from this statement that value of the scarce commodity increases on the rate year in year out with the added interest rate. The crude oil is a vital ingredient in the expansion of world economy. It is found out that commodity traders are accountable for oil prices who buy oil ukmaqt contracts by looking at current supply of oil when it comes to output, oil reserves as to understand what is available and demand of oil, mainly from United States.(Kimberly Amadeo) Based on OPEC Monthly Oil Market Report released for August 2008, it is highlighted that OPEC Reference Basket (ORP) rose to $2.89/b or 2% during July 2008 to $131.22/b around dollar weakening and geopolitical tensions dominating the upward trend.
However because of weakening economic conditions, recovery in US dollar and increased OPEC oil exports, the cost came as a result of three month low of $109/ b. In accordance with OPEC, the entire world economy will grow at 3.8% in 2009 as against 3.9% in 2008. In addition, it reports that developing countries growth rate remains unaffected at 5.6%. India’s growth is up at 7.7% as against to unchanged China at 9.2%.(www.opec.org) The graph represents the trends in crude oil prices from 2006 to 2008. The figure shows that an oil price in 2006 was $50 to $70 per barrel when compared with $50 to $90 per barrel around 2007.
The increase in oil price can be seen from fourth week of August 2007 which touched $90 per barrel after 2007. This trend continued in the year 2008 with all the price touching to $140 per barrel mark in second week of July. However, some controlling factors and increased export from OPEC suppliers, gave some relief with steep fall in crude oil price approximately $118 per barrel during fourth week of August 2008.