Oil price Essay Example | Topics and Well Written Essays - 1250 words

Oil price - Essay Example Since this rising prices is inevitable, the major countries will need to find alternative sources of energy to protect themselves from the impending doom of disaster. Oil is the ingredient that drives the planet; it is as essential as air and a key source for almost every product from construction material to transportation to clothing. But the hard fact is that the supply of oil is finite and eventually it will be depleted and demand will outstrip production capacity. Increasing demand along with diminishing supply has already begun to drive price upwards. As prices are rising, new supplies are emerging in an effort to reduce consumption. "The rate at which consumption levels are rising, it is predicted that the world's oil supply will be exhausted within the next 40 years". (Guinness Atkinson Funds, "Future of Energy"). As can be seen by the above graph, demand and supply both have been rising over the years, but the growth in supply has not been able to keep pace with the demand growth and hence an increase in prices. On the supply side, there are three factors that are responsible for the current situation. "Firstly, non-OPEC production capacity has been growing over the years. In recent years, the former Soviet Union supply has been growing annually at a rate of about 0.5 million barrels per day. However, this growth had mainly come from repairing tired infrastructure rather than new exploration and this sort of growth rate is and will be hard to sustain. In addition to that, West Africa, Canada and Brazil have seen another 0.5 million barrels per day annual growth in production capacity. But like the former Soviet Union, the future looks bleak regarding the maintenance of this growth. The output from the U.S. and North Sea is also shrinking. Secondly, the growth potential in OPEC production cap acity is becoming smaller. Currently, most of OPEC, with the exception of Saudi Arabia, is operating at near capacity. Thirdly, since 1998, OPEC has been quite effective in keeping supply and demand matched, in addition to keeping the world oil supply a little tight. It is this combination of strong demand, slow non-OPEC production growth and effective OPEC supply management that has been the major driver of recent increases in world oil prices. On the demand side, the surge in global economic activity has led to an explosion in demand for oil and hence the world is facing an oil demand growth shock"(Guinness Atkinson Funds, "Future of Energy"). The major demand is coming from the developed world particularly the US, China and other economies in Asia. "China is in a phase of rapid energy-intensive industrialization and will continue to be one of the key consumers of oil in the coming years"(Oil Market Report, International Energy Agency). Behavior of Oil prices: The Asian Financial Crisis hit the world in mid-1997 and had a devastating effect on the major economies of the world. Even in the face of this crisis,