Since 1980s, the price of fuel and oil has assumed an upward trend. The price of crude oil per barrel was being sold at 40 dollars. In 2007 it was 92 dollars and in February 2008 the price per barrel hit 103 dollars. The rise in oil and fuel prices has led to the rise in the living standards as most commodities are either directly or indirectly affected by it. Many items that are used in our homes are the products of petroleum and those that are not are affected in that the transport cost go high when the price of oil and fuel go up.
Though the price of oil has always been on the increase, the recent soaring of these prices had risen to the levels of concern in America as well as to the rest of the world. In June 2008, the price per barrel in USA cost 142$ a figure that has never been witnessed before in the history of oil prices. Why is it that the price for oil and fuel is always increasing, what are the factors that have led to the rise of these prices? This is what this paper will mainly focus on. There are various factors that are attributed to the rise of oil and fuel prices and one of them is the ever growing economies for Asian countries like China and India.
As the economies of these nations grow, they demand more energy than before thus causing the demand for oil to go up. Oil demand in China is growing by eight percent annually since 2002 and this is a double to the rate prior to this period. As nations become developed, more industries are built that demand a lot of energy to run them also many people are able to buy vehicles that consume a lot of oil thereby leading to the rise in the price of oil and fuel. (Williams. J. L. 2007) The other cause of the rise of oil and fuel prices is rate at which oil is supplied by those nations that are responsible.
If the demand for oil is higher than the rate at which the oil is being supplied, what results is the rise of oil prices. This is what is known as the market forces that control the price of the product or simply the law of the market. Of late, the amount of the oil that is being produced by OPEC has been on the decline and the causes for this problem are many and complex. Some countries have deliberately decided to cut the amount of oil they produce so as to save their oil wells from being depleted.
Those countries that are threatened by oil depletion, the cost of production goes up because when the level at which the oil is found deepens it becomes hard to extract it. This has a domino effect as the burden of meeting this cost is placed on the consumers so; if the production cost is high then the price of oil and fuel goes up. (World Bank, 2000) In as far as that some oil producing countries might be experiencing oil shortage, the theory might not be hundred percent true as it is not the sole cause for the rise in oil prices.
There are other factors that have contributed to the rise in these prices. Political turbulence in the Middle East has also contributed to the oil shortage in the world. When US attacked Iraq in a bid to terminate the regime of Sadam Hussein, the rate of oil production was affected because the state was subjected to a state of anarchy. This affected the world’s oil prices immediately. The same was witnessed in West Africa and to be particular in Nigeria where the rebels targeted the oil companies and the pipelines.
Also in Venezuela strikes, civil unrest and political turbulence hampered the normal production of oil in 2007. All these factors leads to the low supply of oil globally something that causes the rise of oil and fuel prices. This adds weight to the fact that it is the forces of the market that determines the price of the commodity. The price of oil in the United States of America varies from place to place for example in the West Coast, the price of oil is higher than that of the Gulf Coast regions which enjoys much lower prices.
It is believe that the difference depends on whether the infrastructure of that region or country are good and more particularly the pipeline network that makes it possible for oil to be transported easily and fast. The other reason that is put forward is the manipulation of prices by the suppliers for example, California has a big population and this means that the rate of energy consumption is very high. The problem that faces California is that there is no competition among the oil companies as far as oil supply is concerned so, what these companies do is that they manipulate the oil prices to suit them.
They cause an induced oil shortage leading to increased prices. (World Bank, 2000) Though reasons such as increase in oil demand, environmental issues, weather changes, depletion of oil reserves and poor price control mechanism especially by OPEC has been blamed for the rise in prices. Political turmoil in the Middle East, in West Africa and in Venezuela and the reduction in oil supply could lead to the hiking of prices, there are still other reasons that could lead to the same for example, in 1972, the price per barrel was three dollars but by 1974, the price had already doubled.
The reason for this was not necessarily the political disturbance in the Middle East because the United States decided to support Israel but the reason was that the Arab countries whose majority are the main oil producers, got angry by the US move and decided to cut the amount of oil they produce in the normal circumstances. In response, the Arab nations placed an embargo against the United States and its allies infact they decided to cut the amount of oil they produce by five barrels per day. This move has adverse effects on the oil economy as it led to the oil shortage in the world and in turn the rise of oil prices. Associated press, 27th 2008) Whenever oil and fuel prices go up, the Organization of the Petroleum Exporting Countries (OPEC) is held responsible by politicians and the media. According to Clough, (2006), OPEC is not in anyway responsible for this as its role is to stabilize the price of oil by making sure there is availability of oil in the market by regulating the demand and supply. The other problem if it not lack of competition among the oil supplying companies, is the merging of companies.
In USA companies joining together for better service provision are allowed but the problem is that these companies become a formidable force that exploits the consumers for in US, there are five mergers which are among the biggest in the world and they control 62 percent of oil in the market. These are companies such as Conoco Phillips, Exxon Mobil, Royal Dutch-Shell, BP Arco and Chevron Texaco. Because of the part of oil they control in the market, they alter prices the way they want or in other words, they form a cartel that no other person can challenge. This dramatic increase in the control of the top five companies…makes it easier for the oil companies to manipulate gasoline supplies and to intentionally withhold supplies in order to drive up prices. ”(Clough, RG. 2006, 32) To conclude, the tensions that were experienced in Turkey in 2007 and the destruction of pipelines by the leftists could also be contributory factors to the rise in fuel and oil prices but the current rise in oil and fuel prices is not necessarily as a result of political instability but it is also believed that the growth in Gross Domestic Products (GDP) of many nations leads to high oil demands.
This is because, as the economy of a country improves, people are able to buy cars and therefore the demand for oil due to increased transport. The prices of fuel and oil are projected to rise to greater heights if the demand for oil by the developing nations continues in the same trend. Political instability in the Middle East is also leading to this problem and if peace would prevail, then the prices would tremendously come down.