Rise and Fall of Oil Prices

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The Rise and Fall of Oil Prices

POSC 101: Introduction to Politics & Government
Professor Taehyun Nam
December 6, 2012

Professor Taehyun Nam
POSC 101
6 December 2012
The Rise and Fall of Oil Prices
In the previous writing assignment, I wrote about how the high price of oil has affected my life as a commuting college student. Therefore, now I would like to explain the causes that contribute to the rise and fall of oil prices in the world economy. Oil is arguably one of the most important resources in the world economy and keeps all countries infrastructures running. It is a finite resource which is only rich in certain parts of the world, so there are countless small issues that could potentially cause a change in the price of oil, but I would like to focus on major topics such as economic activity, supply and demand, war in oil-producing countries, and oil speculation.

In 2007, the price of oil rose substantially compared to previous years, which in turn caused the prices at the gas pumps to rise also. One main explanation to this sudden rise in oil prices was the increased economic activity throughout the world, especially in China. Many countries throughout the world were further industrializing themselves during this time and the use of automobiles was greatly increasing throughout China. Knowing that China is home to the largest population in the world, it is quite obvious that economic development in China would largely affect everyone else importing oil from Middle Eastern countries. It is believed that this significant increase in economic activity began around 2002, when prices for many commodities, not just oil, increased (Kilian 270). This rise in price caused the supply of oil to increase throughout the time period of 2002 to 2005, but then supply stagnated, or stopped increasing at the end of 2005 (Kilian 271). With an increasing demand and stagnated supply, price of oil rose way faster than the price of other commodities and...
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