The Effects Of Oil Prices On Our Nation'S Economy

The Effects of Oil Prices on Our Nation's Economy

Introduction

As one may have noticed in the past few years the price of oil has risen drastically. Either at the gas pump or at home in the winter with the heating bill the price of oil effects everyone.

The beginning of this paper discusses what OPEC is, what it does, and why it is good or bad. Also it will begin to discuss the price of oil in the global oil market but mostly in our nation's economy: who, what, when, where, why, how.

The purpose of this research paper is to educate the reader on the effects of oil prices and how another oil crisis can be prevented like the one in 1973. That oil crisis quadrupled the price of oil, eliminated economic growth, double inflation rates, and launched many nations into urgent pursuit energy self-sufficiency (Shojal 27).

What should the price be on a barrel of oil? This question is asked a lot and does not always have a easy answer. Oil is a strategic and valuable resource. The question of running out of oil is a major concern.

Another major concern is the rising price of a barrel of oil. Barrels of oil are currently approaching more than $70 dollars. Effects of these high prices are spreading throughout the world economy; increases in the cost of gas, travel, and home-heating oil are really starting to take a big bite into everyone's pockets.

Oil is found in large quantities below the surface of Earth and is used as a fuel and as a raw material in the chemical industry. Modern societies use it mainly to achieve a degree of mobility on land, at sea, and in the air. In addition, oil and its by-products are used in the manufacture of medicines and fertilizers, foodstuffs, plastics, building materials, paints, cloth, to generate electricity, and most importantly gasoline.

OPEC

History

OPEC stands for the Organization of Petroleum Exporting Countries. OPEC was originally established in 1960 in response to a unilateral decision of oil companies to reduce prices of oil. The founding members of OPEC are: Iran, Iraq, Kuwait, Saudi Arabia, and Venezula. Today OPEC is made of Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela (Organization of Petroleum 1).

OPEC was started on September 17, 1960 to protest pressure by major oil companies which were mostly owned by U.S., British, and Dutch companies to reduce oil prices and payments to producers (Organization of Petroleum 1). At first OPEC operated as a bargaining unit for the sale of oil. Later its activities were to gain a larger share of the oil revenues produced by western oil companies and expressed control over the levels of production. The main objectives of OPEC were to get a fair return on exporting oil, oil price stabilization, and regulation of oil output (Shojal 85).

Today

Saudi Arabia is a leading member of OPEC. Saudi Arabia is a leading member of OPEC. (Al Faisal 1). When OPEC wants to raise the price of oil, all it has to do is just reduce its production. This causes oil prices to rise because of the short supply, but also because of the chance of future declines in production.

OPEC's part of world wide oil production has varied considerably between 1970 and the present.

OPEC's world wide production of oil was the highest in 1973 at 53.9 percent and the lowest at 31.1 percent in 1985 (Shojal 19). In the 1990's OPEC's oil production increased by two times the world increase in production OPEC is often referred to as the swing producer, absorbing the greatest impact of changes in production (Shojal 19).

Price

Consumption

The world consumes 87 million barrels of oil every day, which totals to 30 billion barrels of oil every year (Bailey 2). This brings up the question. Will our oil supply run out? That is a tough question to answer.

Proven oil reserves, oil that is recoverable under current economic and operating conditions, are estimated to be 1.1 trillion barrels by the industry journal World Oil, 1.2 trillion by the oil company BP, and 1.3 trillion by the Oil and Gas Journal. In March 2005 the private U.K.-based energy consultancy IHS Energy estimated that the world's remaining recoverable reserves, excluding unconventional sources such as heavy oil or tar sands, are between 1.3 trillion and 2.4 trillion barrels. (Bailey 2)

The United States consumes 20 million barrels of oil a day on average, according to the U.S. Department of Energy (Bonsor 2). Of the 20 million barrels, about 45 percent is refined for gas. The rest is used for higher octane jet fuel other fuels. Each barrel of oil contains 42 gallons, which yields 19 to 20 gallons of gas (Bonsor 2). With that in mind, the United States uses about 178 million gallons of gas everyday (Bonsor 2).

Oil prices normally increase when the world oil market decreases and lowers its inventories. Also, with the increasing demand in oil it can sometimes out run oil refinery capacity. The price on a barrel of oil is mostly determined by OPEC because it controls the amount of oil that the countries, who are members, produce.

The price of oil across the globe is settled in U.S. dollars. This affects the value of the dollar in world currency markets, also the amount of oil in reserves held by oil importing and exporting countries around the world (Oil Supply 1).

Price Breakdown

(Bonsor 3)

When standing at the gas pump pumping gas have you often wondered where your money that you are paying for the gas goes? Well your money is broken up into different costs. The first is refining costs.

The crude oil section of the price breakdown is the biggest section of the cost of gas. As of February 2006, it was about 59 percent. This 59 percent goes to the oil suppliers or OPEC (Bonsor 3).

The refining of oil makes up about 10 percent of the price of gasoline. This is the price it costs to refine gas from oil (Bonsor 3).

Distribution and marketing is the section breakdown. Oil is transported to refineries, and than gas is shipped from the refineries to distribution stations and then out to gas stations. The cost of