Factors Impacting the Rise of Oil Prices
The paper demonstrates the impact of rising price of oil on the economy of United States along side the factors that is causing the oil price to rise. In general price of oil is determined by the interaction between the global supply and global quantity demanded, however, there are various other direct and indirect factors impacting the oil price. Oil plays a very important role with its requirement ranges from powering business and homes to keeping the transportation of infrastructure running. There is more to oil price than just the demand and supply, which includes geopolitics and OPEC. Oil production in US has increased sharply since the end of 2000s, and the trade balance of the country has significantly improved due to increase in production (Van et al. 614). On the oil trade balance, US has reached equilibrium due to conjoint fall in oil import and rise in oil export.
Oil price is significantly impacted by OPEC because of setting the production targets for tits members. 71% of the total proved crude oil reserves of the world was controlled by members of OPEC at the beginning of 2020. Effectiveness of OPEC in influencing the oil price is determined by willingness of the consumers to reduce the consumption of petroleum, non-OPEC producers’ competitiveness and their efficiency to supply oil against OPEC producers. However, the influence of OPEC on the oil price have witnessed to be declining because of the warning that the oil market could be headed towards surplus resulting from American fracking industry expansion (Degiannakis et al. 45).
Also, price of oil is affected by the disruption in its supply due to the geopolitical events. It is because of the uncertainty created by such events in the future about the demand and supply which might create in the volatility of the oil prices. Moreover, regions where the crude oil production is located are prone to political upheaval in the region and such region have witnessed disruptions in the production of oil resulting from political events.
Global economic performance is one of the major drivers of the oil price and when the overall global demand is higher, prices also move in the upward direction. Europe, USA and China are the market representing the main driver for the demand market. Oil price can be significantly impacted by the global economic performance and the strength of their economies. It is speculated that in the coming years, demand for oil would remain higher and due in part due to renewable energy sources development (Basher et al. 268).
Due to the rise in crude oil prices, economy of US suffered until 2010, because the impact of rise in oil price pushed up the price of intermediate firm’s consumption and weighed on household purchasing power. However, the impact of rising price of oil on the US economy has been so clear cur in the sense that the increase has positive impact on the investment level in the hydrocarbon sector that counters the consumption side negative effects. Despite the shale oil revolution witnessed by US, the rise in oil price may have a total negative net effects on the activities in the country (Herrera et al. 143). It is because strong investment in the oil and gas sector of the country might not be able to more than partially offset the decrease in purchasing power of household due to rise in the fuel prices (How an Oil Price Surge Could Hurt the U.S. Economy, nytimes.com).
The Role of OPEC in Oil Price Control
Source:
The risk of recession facing the country might increase due to prolonged surge in gasoline prices after the attack on the oil production facilities in the Kingdom of Saudi Arabia and it adds to the negative economic outlook. Broader economic swing can be caused due to changes in the oil prices along when there is a sharp drop in oil prices. For instance, a blow to the manufacturing sector was observed when the oil price plunged from $ 106 per barrel in June 2014 to $ 30 per barrel in February, 2016. It was due to decline in the oil related product demand and slowdown of the overall economic growth. On other hand, the impact of rising oil prices on business is a bit complicated in terms of change in the role of oil in the economy since the 1970s energy shocks. Higher oil price positively impacts not only the oil companies but also the producer of steels which are the metal pipe and other goods supplier to the energy sector (Su et al. 117219). However, transportation sector would suffer as increase in oil prices creates a big loss for the delivery firms and airlines relying on the cheaper fuel. Furthermore, significant military conflicts between Iran and United States poses a biggest risk to the economy and consumer itself.
In US, there are three types of positive affect due to increase in the oil price and such positive effects can offset the negative impact of the same. The changes in the price of barrel both in the non-conventional and conventional sector influences the decision of corporate investment and implying a direct effect on the sectoral behaviour. Other sectors are indirectly affected due to associated knock down effects on the value chain of the sectors. In addition to this, a Keynesian multiplier effect associating to the circular flow of income can be identified in terms of positive consequences on the income of household through employee income stemming from higher revenue (Young, Forbes.com). Therefore, it is observed that the various components of GDP of US have contrasted effects due to increase in oil price.
An increase in price of oil drags the consumption expenditure of household holding all the other factors constant. Purchasing power of households gets reduced due to higher energy bill, particularly for heating oil and fuel. The impact of increase in oil price on the inflation can be quantified using consumption and energy inflation equation. A 10% increase in the oil price causes household consumption to reduce by -0.3 percentage points and this in turn impacts GDP by -0.2 percentage points.
Employment in the country is positively impacted due to oil and gas sector activity and this in turn impacts the household’s disposable income. Share drilling development in the country has been a source of creation of dynamic jobs. Any variation to the oil price causes strong reaction in the sectoral employment and the oil price surge on the total employment would nonetheless remain modest (Choi et al. 76).
(Source: Young, Forbes.com)
There are two opposing effects of the increase in oil price on the economy of US when summarizing the transmission channel affects which includes investment effects and consumption effects. The effect results from both the present and past variation in the oil price. In accordance with this approach, since 2010, the US growth sensitivity to increase in oil price have subsided. Also, the consumption effects were partially offset by the investment effect on the sector due to unconventional growth production since 2010. In 2017, the barrel price rebounded that resulted in the fresh investment in oil exploitation where the lower purchasing power of household was countered (Budget.ny.gov). However, the continuous increase in the oil price caused the economy of US to slowdown in 2018 was negative.
In the current scenario, it is expected that oil price could reach level that was not seen since early 2010. Concerns have grown that price of oil would reach as high as $100 per barrel in the coming winter, with the West Texas Intermediate (WTI) oil price in October 2021 rising above $ 80 per barrel. It is because of shifting of the power plants in Asia and Europe to petroleum products in respond to changes in natural and oil gas shortage. Oil price could be pushed to an extraordinarily higher level due to inadequate oil production in countries and OPEC, surge in oil demand combined with the lower level of oil inventories. Inflation in US could be higher for extended period that would drive up the inflation expectation of consumers due to substantial increase in the oil price (“Short-Term Energy Outlook – U.S. Energy Information Administration, eia.ga). Also, increase in oil price is reflected in gasoline retail prices and this might result in the expectation of inflation become embedded in the price and wage setting process. In early 2021, systematic inflationary pressures were created due to the oil price shock. Increase in oil price implies a definite decrease in the real spending by the households, however, impacting the domestic oil production positively (Oil Prices and Outlook – U.S. Energy Information Administration, eiv.ga).
Even during the pandemic, rise in the oil prices was reflected in the inflation expectation of households which the implication that the fluctuation in the price of gasoline in the country lowered inflation expectations temporarily. In the early 2020, the price of oil crashed during the peak Covid, where inflation fell to almost zero due to plummeting of the consumer demand and this has resulted the inflation to move into a different phase. Therefore, from the overall analysis, that the surge in the price of oil has immediate influence on the economy of US.
Order an Essay Now & Get These Features For Free:
Turnitin Report
Formatting
Title Page
Citation
Outline
