The world is already begging? What else do you want?...An essay on Oil and the economy.

Essay by poshwang October 2005

download word file, 5 pages 5.0

Oil is the major source of energy worldwide and it is expected to remain so over the next few decades. As the technology is changing our environment nowadays, oil has done it in the 20's and 30's. Ever since, then crude oil has become the main "raw" material in every economy no matter it is a developed one or it is in the developing process. The changes in the prices of the crude oil are making positive and negative implications on every economy. When these changes of prices are severe ones, one might easily conclude that an economy is going to face problems such as unfavorable supply shocks, or according to the theory adverse supply shocks. When these kinds of problem arise in the world oil market, it is usually described as a world oil crisis. The world has witnessed 2 major oil crises and it is facing another one at the moment.

In order to discuss the recent oil crisis and its economic implications I am going to refer to the appropriated economic theory and I will also examine the two previous oil shocks in the world. As I mentioned previously the major problem that an economy is facing during every oil crisis is the adverse supply shock. Adverse supply shocks are unexpected events that reduce aggregate supply and therefore the output decreases and prices increase. In the language of economy we call this stagflation . Furthermore, I will refer to the organization that has caused the three supply shocks so far. OPEC, the Organization of Petroleum Exporting Countries, has the power to control the world oil prices by its reduction in the world oil supply. That's what has done in the oil crisis that had happened in the early 70's(Mankiw 252). OPEC's reduction in the supply of...