Impact of Higher Oil Prices

Topics: Inflation, Aggregate demand, Economics Pages: 16 (6163 words) Published: January 23, 2011

Posted by jamesesz on September 27, 2008 · 2 Comments 
The year 2008 has brought to Asia not only the Beijing Olympics games but also a hosts of economic calamities ranging from the spillover effects from the subprime crisis, the food crisis, and more importantly the unprecedented surge in international oil prices. History has shown us from the oil crisis in the 1970s that high oil prices severely affect economies in both the developed and developing countries. This research paper attempts to briefly study reasons for the spike in oil prices and the impact that high energy prices would bring to Malaysia and other Asian economies. Furthermore, knowing the challenges ahead is only part of the whole picture. More importantly, it is the response of the authorities in charge that will determine how well we weather this current crisis. II.

The end of the cold war, globalization, the rise of China and the rampant spread of information technology set the stage for a long spell of economic growth, high productivity, low inflation, and booming economy for not just the United States but for most of the rest of the world (Daniel Gross, 2007).[1] The acceleration of the flow of workers across borders to the most competitive markets during the past decade has been a potent disinflationary force that not only held down wage growth but inflation in virtually every country. Yet this period of unprecedented worldwide economic growth coupled with low inflation may be at its end as the subprime and financial crisis has all but crippled the economy of the United States while commodity prices of both food and fuel has reached previously unforeseeable heights. Among all the commodity prices that are breaching record high prices, the price of oil emits the most concern from governments and citizens across the globe. Oil prices has been an unstoppable juggernaut since the early days of 2002 (back then, oil prices was merely at the US$20 level). Since the emerging economies of China and India took off, the price of oil has spiraled up to almost an alarming 600% and reaching a record high of US$147.27 on July 11 (Tee Lin Say, 2008).[2] According to Bob Lutz from General Motors, when the price of oil goes and stays up, it has a negative effect on the entire economy because oil is used in the production of virtually everything, including steel, aluminum, plastics, rubber, fabrics, transportation, and food (Daniel Gross, 2008).[3] Yet why are oil prices so high? While many governments and analyst around the world blame speculators for artificially propping up oil prices (this is true to a certain extent), one must be reminded that speculators speculate according to market conditions that are set by fundamental factors of supply and demand. According to Tony Hayward from British Petroleum (BP), there is enough oil to maintain world consumption at current levels for another 42 years and to add to that, the world could probably unearth another one trillion barrels of oil should it really wanted to (The Economist, June 11th 2008). According to the data obtained from BP, the proven reserves of the world in 2007 remains at healthy levels. Mr Hayward continues by saying that one of the reasons petrol prices are so high is because some 80% of the world’s oil reserves are in the hands of state-owned oil firms that tend to allow international oil companies limited access. This can evidently be seen in countries such as Russia and Venezuela that welcome the high-tech and well-capitalized oil firms when prices are high and chase them out when prices are low. BP’s data also shows that global output of oil fell last year and combining that...
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