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?

History Repeats Itself: Why Slavery Still Exists in Today's World

In 1807 the transatlantic slave trade was abolished, terminating the forcible shipment of millions of Africans to the United States and Caribbean to work on sugar and cotton plantations. Now, two hundred years later, many regard slavery as an institution of the past, a product of a bygone era of unspeakable injustice and racism. True, long gone are the days of legal enslavement and masters of southern mansions; however slavery has managed to escape the confines of history and still shockingly exists today in the form of human trafficking. Essentially, trafficking occurs when men, women or children are illegally transported to other countries often upon the promise of a job or better life, and coerced into labor or sexual exploitation. From Uzbeks sold as compulsory laborers in Russia to Nepalese women and girls forced into a life of prostitution in India, modern-day slavery is present internationally (see map at left) and has been reported in over 100 countries. While human trafficking has undoubtedly developed into a complex, global issue with major political and social implications, it is predominantly instigated by economic problems in developing countries that create a steady supply of potential victims.

In terms of supply, poverty is often referred to as the major contributing or push factor that leads victims to accept the fraudulent offers from traffickers or sell family members into slavery for meager amounts of money. While both are unthinkable options, the underprivileged rarely have much choice in the matter. In rapidly developing nations such as India “seventy-seven percent of Indians—about 836 million people—live on less than fifty cents per day,” which is well under the extreme poverty limit of one dollar per day set by the World Bank. Furthermore, according to the International Labor Organization (ILO), this situation is caused by low wages rather than unemployment. The ILO maintains that the most common misconception about poverty is that the poor do not work and cites regional rates of unemployment as evidence. South Asia, for example, is one of the poorest areas in world, yet its unemployment rate is only 4.8 percent while in comparison,the United States' is 5.1 percent. Clearly, employment in developing countries is not the problem—compensation is. The prospect of a well-paying job in another country is enough to lead the naïve straight into the trafficking trap.

Moreover, in these poor countries, the poverty situation is often aggravated by wars, natural disasters or civil unrest which inflates the supply of economically vulnerable people. The U.S. Department of State’s Trafficking in Persons Report describes dramatic increases in rape, sexual abuse, kidnapping and trafficking in the countries devastated by the 2004 Indian Ocean tsunami. In the aftermath of the disaster, “thousands of orphaned children were vulnerable to exploitation by criminal elements seeking profit from their misery.” A similar effect is presently occurring in war-torn Darfur where thousands of women and children, in hopes of escaping the violent conflict, have found themselves victims of horrendous trafficking by virtually all armed groups involved in the Sudanese civil war. The Lord’s Resistance Army, one of the rebel organizations, is “estimated to have abducted over 16,000 children,” and forced them to work as servants, cooks and even soldiers (see photo at right) in the neighboring countries of Uganda and the Democratic Republic of the Congo. Evidently, these kinds of political and environmental calamities that plague developing nations have increased the number of impoverished people and facilitated human trafficking.

However, the aforementioned supply factors that cause poverty are not the only economic instigators in the trafficking issue. As any elementary course in economics would teach, a market for a good is created from supply and demand for the product, and is perpetuated if the product is profitable. The market for human slaves is no exception to the rule. The criminals who run the trafficking rings would not be involved in the business if there was no demand for the products they offer and no profit potential, but clearly this is not the case. Demand for cheap labor and prostitution remain high in developed nations such as the U.S. and the E.U., where labor costs are a company’s greatest expense and paying for sex is outlawed. To meet these needs, 600,000 to 800,000 people are annually trafficked across national borders creating a lucrative $32 billion dollar black-market industry. Still, trafficking could not exist without the supply push factors from developing nations. If the economic situations in these countries were desirable, fewer people would be baited by the false promise of a better life or job elsewhere and the industry would dwindle without a pool of victims. In order to reach the point where trafficking is no longer a threat, world leaders and organizations must work with struggling nations to create better domestic job markets, ensure higher wages and educate citizens about the dangers of trafficking. These endeavors will not only work to eliminate the supply, but will help to finally create the slave-free world that was envisioned in the early 1800s.