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Oil crisis

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The term oil crisis is commonly used to describe periods of history when the price of crude oil and other petroleum products has reached a level that has made it very "expensive" or in situations were petroleum products are in a shortage.

This has a knock-on effect on the whole economy - from a commercial side, the production costs of electricity rise, which raises manufacturing costs. From a consumer side, the price of petrol for cars and other vehicles rises, leading to reduced consumer confidence and spending.

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Causes The price of oil (and broadly, gas, though the analogy is not absolute) on the open market is driven by the fundamental principles of supply and demand. However in some cases an oil crisis is brought on by a failure of the market to adjust prices in response to shortages. Some economists have argued that the oil embargo crisis in 1973 was exacerbated by price controls.

Oil supply

Oil supply is largely controlled by the national oil companies of nations with significant reserves of cheap oil, including the UAE, Saudi Arabia, Venezuela, Norway and Kuwait. Many of these countries have formed a cartel known as OPEC (Organization of Petroleum Exporting Countries). As OPEC controls a very large proportion of the total global oil output, they have a strong leverage on the global oil prices. If OPEC decides to reduce the output quotas of its member countries, this will tend to drive up the price of oil as the supply diminishes. Likewise, OPEC can step-up oil production to increase supplies and drive down the price. The politics that lead OPEC to perform such actions deserve an article in their own right.

There are however limits on the actions of OPEC. If OPEC raises the price of oil too high, demand decreases and production of oil from less productive fields or unconventional sources such as tar sands[?] become profitable. In addition, the economies of oil exporting nations are dependent on oil and efforts to restrict the supply of oil would have an adverse effect of the economies of oil producers.

Oil demand

As a proportion of the total, by far the greatest demand for oil and other petroleum products comes from the commercial sector which uses oil for heating and transportation. Oil demand is also seasonably variable as the countries of the Northern hemisphere, who dominate global oil consumption, consume more oil in the winter for home heating. In fact, the United States alone represents nearly 60% of global oil demands and a particularly cold winter in North America can strongly affect global prices.

1970s

The oil crisis of the 1970s was precipitated by an embargo, in 1973, of many of the major Arab oil-producing states, in response to US support of Israel. A second crisis occurred in 1979 when revolutionaries in Iran overthrew the Shah and blocked oil supplies.

2000s

We are currently (2003) seeing a period of extended high oil prices, with the standard Brent crude[?] around $33/barrel. The causes of this include:

  • The oil strikes in Venezuela as a result of protests directed towards the President Hugo Chavez. Venezuela is one of the principal suppliers of petroleum to the United States.
  • The possibility of a war with Iraq, itself a (potential) producer of vast quantities of oil and gas. Though Iraq is currently under sanctions which limit its oil output to the open market, it has vast reserves which could strongly affect future supply rates. Uncertainty about the safety and potential of these supplies in the event of a war has lead to an increase in stockpiling[?] of extant oil which has had a knock-on effect on world supplies.

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