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Oil Prices Changes Reasons Analysis Report

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Updated: Sep 7th, 2021

Summary

There has been remarkable increase in oil prices in all parts of the world. Many have argued that the world is running out of crude oil deposits while others believe that there is still enough to last for a long time arguing that there are more wells to be explored and more efficient refineries to be built. World oil prices are driven by many factors. The leading factor is the increase in demand of oil due to growing economies in china and United States.

The rising demand has out spaced the world production capacity and the trend offsets the prices. Political instabilities in oil producing countries have continuously led to reduced production. The problem has been compounded by the fact that new technologies to refine crude oils and new oil fields have not provided a solution to the problem. There are worries that rising oil prices could slow down the growth of the world economy.

The effects of rising oil prices have also been felt in the dining table as it has not only resulted in high food prices but also corn has been used as a substitute to produce bio-fuel. The organization of petroleum-exporting countries OPEC promised to increase the production by half a million a day. But this is disputed by experts who argue that increase in production may not help in solving the oil crisis since the problem is not production of crude oil but rather the refinery process.

The current oil crisis problem can be only solved by drilling new wells and refineries to increase amount of oil to consumers which takes time and money. It is estimated that the world will not run out of oil reserves but it is feared that producers will run out of capacity to produce to meet world demand. In order to increase the current supply of oil, there is need to improve oil extraction technology as the current technology operates at 40% efficiency.

Discussion

Oil crisis have rocked the word for a long time and the problem seems not going away soon. From November 2001, oil price per barrel has continued to rise to date and is currently selling at $100. This has been due to rising demand in China and America with the demand in China growing at 12 to 15 percent per year and America consuming quarter of world oil demand every day. Demand has suddenly out spaced production due to low production technology which enable the world to exploit only 40% of the total oil reserve.

Low production has also been compounded by political instability in majority of the OPEC region like Nigeria and Venezuela. Low refining capability has compounded the problem of oil crisis. It is being argued that the oil crisis is pegged on low reefing capacity since increased production of crude oil has not enabled to solve the problem of oil shortage. Like in the United States no new refinery plant has been built for the last thirty years.

It has had devastating effects on the world economy like during the great depression and oil crisis of 1970s when oil embargo was imposed on the Arabian countries. The current world economy in the world is dependant on crude oil as the main source of energy which has caused fluctuation in the economy every time there is disruption in the production of oil in the world. The problem takes another dimension with the intended use of corn as a source of bio-fuel. This has led to problem of food shortage.

It is to be understood corn is still used in many developing countries as a staple food and it is being feared that utilizing corn-base ethanol as a source of energy may lead to food competition between human beings and machines which may disrupt food chains. This has also led to increasing food prices. Hence the effect is felt right at the dining table.

OPEC has promised to increase their production capacity by half million barrels a day which is intended to ease oil crisis. But this is disputed on the basis that in 2005, an increase in production did not ease the crisis since the refinery capacity was still far below the need. Hence the issue goes back to the capability of the world to refine oil into useful product. Although it is being feared that the world may soon run out of oil reserves, this has been disapproved by many studies.

No one can estimate the exact time when oil reserves will run out. But it is being feared that the world consumption could overcome production since some old wells and new one that are being discovered contain the heavy crude which is difficult to refine. This calls for the need to modernize the refinery facilities to increase production.

To solve the problem of oil crisis, the world needs to take various approaches to the problem. First there is need to increase the production and refinery capacity. There is need to explore new oil extraction technologies and install refinery plants which are more efficient. This will ensure that the world keeps in line the demand and supply of oil products. The other approach is to save on the use of crude oil products as the main sources of energy and in turn use renewable sources of energy.

Reducing dependency on crude oil products is perhaps the safest way to avert the crisis keeping in mind the compounded environmental effects crude has. Alternative source can be nuclear energy, solar power, hydroelectric, bio-diesel, and others. These sources have to be made more efficient and reliable. There is also need to enforce laws that governs the use of crude oils to enhance efficiency.

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IvyPanda. (2021) 'Oil Prices Changes Reasons Analysis'. 7 September.

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