Black Gold: Oil's Influence on the World Economy

Last Thursday, consumers worldwide felt their pocketbooks pinch as the price of crude oil surged to ninety-six dollars per barrel. This number falls just shy of the inflation-adjusted 1979 record of $100.28 per barrel, but economists predict that oil prices will rise well above this level by the end of the year. While industry leaders blame the latest price spike on tensions between Turkey and Iraq, long term price escalation can be attributed to the increase in global demand for a diminishing supply of oil. In light of the recent media attention devoted to oil-related events in the economy, I decided to search the blogosphere for scholarly and expert analysis of the current crisis. The first blog I found, Energy Filter, is written by a Financial Times editor, Ed Crooks. In his post “Total Chief Skeptical about Future Oil Supplies,” Crooks writes about the 2007 Oil and Money Conference and describes the debate over the accuracy of market predictions. The second blog I discovered, The Streetwise Professor, explores current events in the world economy and is written by a finance professor at the University of Houston. His post, “Talk about Timing”, examines the Chinese government’s reaction to rising oil prices. After reading both posts, I offered my own analysis of the topic and a reproduction of my comments can be found below:

“Total Chief Skeptical about Future Oil Supplies”:

As a finance student and oil consumer, I find your economic analysis of the current oil situation insightful and provocative. After reading this post and learning about the debate regarding oil output and prices, I am not surprised that the experts participating in the Oil and Money conference are hesitant to predict the future cost of crude oil. As you imply when you write “predicting oil prices is a mug’s game,” the forecasts tend to be incorrect due to the volatility of the market. Despite my lack of confidence in price estimations, I still find that certain market predictions are critical in determining the oil industry’s future, which leads me to disagree with your point about production factors. You write that above-ground factors such as “the lack of capacity in the industry to develop resources sufficiently quickly” are more important than the below-ground factors such as the geology of the oil reserves. While a short term analysis of the current oil crisis would merit such a conclusion, the below ground factors you describe as unimportant will ultimately have a greater long term impact on consumers and the economy. Currently, scientists estimate the depletion of the world’s oil supply using the Hubbert Peak for World Oil (which is the basis of the Peak Oil theory you mention in your previous post), and studies based on this theory indicate that complete depletion will occur shortly after 2050. Regardless of whether the supply will completely diminish as fast as predicted, how will “above ground factors” be important when there is little oil left to process?

“Talk About Timing”:

After extensively researching the effect of rising oil prices on the economy, I appreciate your intelligent and clear analysis of the current Chinese oil crisis. Although almost every national economy is suffering from crude oil costs of nearly one hundred dollars per barrel, developing countries seem to have the hardest time adjusting to the price increases. From your post, it is obvious that China is no exception to the rule—only after severe shortages and civil unrest has the government finally agreed to establish price controls. While this is a step in the right direction, the effect of these policies is still unknown and you point out that “depending on how China adjusts these policy instruments, the raising of the price ceilings could ease some pressure on the demand for oil.” However, even if the measures prove to be immediately successful, I am concerned that subsidies and price controls will not effectively reduce the Chinese economy’s long term dependence on crude oil. Today, scientists predict that the world’s oil supply will be depleted by 2050 and this has major implications for developing nations that rely heavily on oil to spur their rapid economic growth. In the future, do you expect emergent economies, such as China, to suffer major setbacks in the absence of oil, or can investment in alternative fuel sources feasibly generate similar financial growth?