Topic: "Oil Price Fluctuation: Cause for Economic Panic"

Essay by rickr747University, Bachelor'sB+, July 2009

download word file, 4 pages 5.0

The purpose of this paper is to describe why oil prices fluctuate, as well as, impacts of supply and demand on the commodity of crude oil. Is the price of crude oil truly a "supply and demand" problem or is it backlash from the Middle Eastern countries? Will the fluctuating price of crude oil cause global economic panic?The one key reason why oil prices have fluctuated the way they have in the last 30 years is due to political instability in the countries which we obtain the oil. There is no pattern in the change of oil price during this time; the only difference is to what the current climate is in the particular countries. Furthermore, natural disasters help in the fluctuation of oil prices. An example of oil production disruption due to natural disaster is hurricane Ivan in 2004 which severely affected the production in the Gulf of Mexico, therefore causing an increase in oil prices.

Another reason for a fluctuation in price has to do with the shift in demandcoming from China and other developing countries; with real gross domestic product growing at a rate of 8-10% a year. China's need for energy is projected to increase by 150 percent by 2020. To sustain its growth, China requires increasing amounts of oil. Its oil consumption grows by 7.5% per year, seven times faster than the U.S' (Gal, L.).

This increased demand from China would typically result in an increase of supply; however OPEC has restrictions on the supply of oil and does not want to overproduce. Over production could cause prices to fall rapidly. Over-supply is not the only reason there is no shift in supply. The main reason for no increase in supply, is that most all the worlds' refineries are working at maximum capacity. These factors...