Crude oil is the most important form of energy for all the countries, mainly for developed and developing countries. The importance of crude oil is such that it is used in everyday activity of individual as well as the economic development of the country. Lately, the GDP of China and India show that the economies of both these countries are growing at faster pace and are the big consumers of crude oil in the world market. Therefore the increase in oil prices inadvertently affects the GDP and economy of the countries. During 2008 world witnessed the growth within the prices of crude oil reaching a new high threatening the world economy in particular, thanks the financial disaster, the current recession has brought it down again. It could be exaggerated that increase and decrease in the energy the world economy which makes it essential to study its impact on the world economy and how it effects the renewable energy resources.
OPEC reports that the recent surge inside the oil prices occurred during the time when there was clearly virtually no shortage of oil at all. The cost upsurge accompanied with volatility has been recognized in all commodity groups including energy, metal or agricultural products with prices doubled since 2005. OPEC reports that it has risen the availability of crude oil by 4 mb/d since 2003 and additional increased it by more 1 mb/d with simply no shortage of crude oil in the market. (World Oil Outlook, 2008)
Some reasons for upsurge in crude oil prices – Many elements have led to this volatility in crude oil prices. Keeping aside the demand and supply elements, fluctuations in the dollar value has become the key cause of boost in the prices of crude oil. Ray and Olga (2004) reported that oil costs are the cause of major developments on the planet economy that can trigger inflation and recession as in 1974 and 1979 which resulted in slowdown of world economy. According to Chandrasekhar (2005), the key reason behind boost in the crude oil prices will be the rapid progression of United states, China and India, forcing the business to extract and refine more oil through the reserves. Additionally it is reported that global demands have risen by 2.7 million barrels each day during 2004, highest since 1976. Some factors which have helped the price upsurge include US occupying Iraq, Saudi Arabia being attacked by terrorist temporarily affecting oil supplies, speculative investments by financial investors.
Decline in OPEC’s Surplus Oil Production Capacity – Increases in global interest in the crude oil have forced the oil producing nations to produce more crude oil to be able to fulfill the demands. The above figure demonstrates that we have seen drastic decline in the oil manufacture of OPEC countries; this demand/supply factor is the key reason for boost in crude oil price touching $140 per barrel.(Hiromi Kato, 2005)
Depending on the BPs Statistical Review of World energy for that year 2007, it is said that interest in the planet touched 83.7 million barrels/each day or 3.9 billion tons/year which is the same as five times the annual household water consumption. The above mentioned figure implies that the improving demand for services has led to upsurge in crude oil price which rocket from mid 2005 till 2008. As per the figure, oil price didn’t had any upsurge till late 2000 but as a result of increased demand in Asian countries, the crude oil price escalated.
Trends in Oil Prices – Roncaglia using Hotelling theory explains the equilibrium value of the scarce resource net of extraction costs rises with time on the rate which is equal, year in year out, to the interest rate. It is actually understood from this statement that price of the scarce commodity increases at the rate year in year out with the added interest rate. The crude oil is a vital ingredient in the expansion of world economy. It is actually found out that commodity traders are accountable for oil prices who bid on oil ukmaqt contracts by looking at current availability of oil in terms of output, oil reserves as to be aware what is accessible and demand of oil, mainly from U . S ..(Kimberly Amadeo) According to OPEC Monthly Oil Market Report released for August 2008, it is actually highlighted that OPEC Reference Basket (ORP) rose to $2.89/b or 2% during July 2008 to $131.22/b around dollar weakening and geopolitical tensions dominating the upward trend.
However due to weakening economic conditions, recovery in US dollar and increased OPEC oil exports, the cost came as a result of three month low of $109/ b. Based on OPEC, the world economy will grow at 3.8% during 2009 as against 3.9% in 2008. In addition, it reports that developing countries growth rate remains unaffected at 5.6%. India’s growth is up at 7.7% as against to unchanged China at 9.2%.(www.opec.org) The graph represents the trends in crude oil prices from 2006 to 2008. The figure indicates that an oil price in 2006 was $50 to $70 per barrel as compared to $50 to $90 per barrel in the year 2007.
The increase in oil price is visible from fourth week of August 2007 which touched $90 per barrel at the end of 2007. This trend continued in the year 2008 with the price touching to $140 per barrel mark in second week of July. However, some controlling factors and increased export from OPEC suppliers, gave some relief with steep fall in crude oil price as much as $118 per barrel during fourth week of August 2008.