Oil_Supply_Demand_Balance

This response is a belated reply to a comment from one of the special visitor to this website and who has kindly commented old article on “Oil Price as a Barometer of Economy”.
I observed three very interesting propositions from this comment:
a) Oil Price can’t be set on one side of the economic analysis as cause or victim – for it is both.
b) Oil reserves are not just subterranean deposits, but are also the infrastructure and the market.
c) Possessiveness and covetousness of oil reserves is a factor that can spark conflicts and prolong wars. Thus oil price is not a passive element before the strife but undoubtedly is part of the war strategy in most conflicts.
I would like to share my view on each of the above propositions separately.
a) Oil Price can’t be set on one side of the economic analysis as cause or victim – for it is both! – The latest report from EIA in September 2012 is very timely and supports the article published by Tiberias MC in the Year 2011!

If I may phrase the question in another way, what moves the economic growth, is it the cheaper oil or the need of the people i.e. economies of the nations? High oil price if it implies shortage of supply, will undoubtedly dampen the economic growth and conversely, cheaper oil price i.e. abundance of supply, will accelerate the economic growth rate. If taken this view, then it sounds like chicken and egg, more chicken more eggs and more eggs, more chickens! But in the modern era of unprecedented levels of technological advancements, oil is just one component or a consumable element in the aid of the economic growth, though a significant element. It was the need of the time when mankind wanted to grow that the search for new resources led to the discovery of oil the “black gold”, even though it was accidental. No doubt once the oil reserves were discovered, rate of the economic growth was at a much faster pace than before the discovery of oil, but only in the developed and industrialized economies.
Now taking another look back in the recent living memory lane, of the periods from 1975s to 1987, after the Suez Canal conflict, when the oil price was at the lowest, what happened to the economies of the world? Be it for the cold war era or lack of international trade, the economic growth was stagnant. The low price of oil didn’t stimulate economic growth. The end of Iran-Iraq war and warming up of ties between the cold war veterans, was the most significant factor in boosting international trade, which encouraged the need for infrastructure ,thus economic growth and so the demand for oil and its price shot up.

On the surface, Oil price may appear to be the cause and victim both at the same time, but in-depth analysis will indicate that it is just a consumable commodity which can help sustain the economic activity. In the absence of which, alternative sources of energy as a commodity such as renewable energy resources, nuclear fuel etcetera will be exploited. If there is no economic growth, there will be no pressure on oil reserves or sources of energy. Necessity is the mother of invention!
For similar details and a comprehensive analysis, readers are encouraged to refer to http://www.eia.gov/finance/markets/EFMI_reports_presentations.cfm for an article ” What Drives Crude Oil Prices? An analysis of 7 factors that influence oil markets, with chart data updated monthly and quarterly
For comments or critic’s review, please contact the author through: webmaster.tmc@tiberiasmc.com