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Oil and Natural Gas: Its Effects to America and the Global Economy Essay

Oil and natural gas have a very important role in the lives of almost all people in the world. These have been the primary source of energy that fuels the technological civilization that exists at the present. Its importance could be seen in the everyday lives of most individuals. The moment someone wakes up in the morning and read the newspaper up to the time that same person would sleep in the comforts of his/her home, the utilization of petroleum products are present. The newspaper is produced out of ink coming from oil as well as the printing machine that is operated by the same means of energy.

Similarly, oil-operated machineries also create the various infrastructures like the houses people live in. Furthermore, even computers, which are widely used today in terms of government services and even in mere personal purposes, are run by electricity coming from natural gas. According to Pfeiffer, the present civilization is built on oil and that economic progress will continue as long as there is a continuous supply of this energy. This is also the reason why the volatile and fluctuating prices of oil and natural gas affect numerous countries as well as its citizens.

Its status in the international market has implications in the economies of countries like the United States of America and basically, the whole world. Oil and natural gas that are the backbone of this society’s economy has a long history behind it. These sources of energy come from the earth’s ground as either solids, liquids, or gases. Crude oil or petroleum is liquid source of energy that is considered as a commercial fossil fuel. Natural gas as well as propane comes in gaseous form. Coal, on the other hand is a solid form of energy (Nonrenewable Energy).

These energy sources are formed in the earth millions of years ago when it was still covered by water. Combine remains of animals and tiny plants that are layered together with sand and mud are also present. During the time that the earth underwent drastic changes, intense amount of heat and pressure were present, which have been the caused for these fossils to turn into hydrocarbons. Basically, what are simple remnants of plants and animals have turned into valuable deposits of crude oil and natural gas inside the crust of the earth (Discover the wonders of natural gas).

Natural gas is often defined as a combustible, gaseous mixture made up of simple hydrocarbons. It is a very light portion of petroleum that includes both natural gas as well as crude oil. Natural gas often rise through the surface by means of natural openings in the earth’s crust or it can be brought to the surface by man-made wells. Thousand of years ago, it was discovered that this gas could be burned and be utilized for heat and light. At present, natural gas is still one of the safest, efficient, and abundant source of energy in the world (Discover the wonders of natural gas

The importance of oil and natural gas to the world’s economy is very vital, which is why a decline in its resources would mean a devastating crisis which would affect countries not only with the likes of the United States of America but also the whole world. According to the Energy Information Administration and the Department of Commerce and Bureau of Economic Analysis (Pfeiffer), United States’ was able to acquire its status as a superpower in the global economy due to the availability of oil, natural gas, and coal.

The increase in the energy consumption is directly proportional with the income of the U. S. because the higher the amount of energy consumed, the annual gross domestic product (GDP) also increases. However, a large amount of the country’s GDP becomes reliant in the consumption of energy. If a decline in energy consumption takes place then this will eventually have an adverse effect in the annual gross domestic product of the country. What is even worst is the idea that the decline of consumption is suspected to change abruptly rather than gradually. This could lead to the collapsed of the market especially when the investors realized that the decrease in energy resources could not be reversed.

The outcome of this situation would entail a crisis that is worse than the Great Depression of 1930s (Pfeiffer). The adverse effect in the lack or limited supply of oil resources is greatly felt during the 1973 Oil Crisis. The Organization of Petroleum Exporting Countries that is mostly composed of Arab nations decided to imposed an oil embargo in western countries especially in the United States of America. This action is brought about by the participation of western countries in the Yom Kippur War wherein they supported Israel in this armed conflict.

Another reason of the embargo is the realization of member countries of the OPEC of the important position they have in the global economy. They started to increase the prices of oil and at the same time decrease its supply. Basically, OPEC utilized the oil embargo as both a political tactic as well as a means of empowering themselves. In doing so, they were able to punished the western countries for supplying arms to the Israelis and at the same time realized their potential due to the effects of their action towards other countries (Horton).

United States of America experienced an abrupt increase in the prices of petroleum products. The prices quadrupled from a mere 25 cents to almost a dollar within the span of a few months. The country was in complete disarray. A nation that was so accustomed to driving vehicles in their everyday lives was now powerless with the high prices of oil. People have to wait for about two to three hours in line just to get their car’s fueled. The consumption of oil dropped about twenty percent due to the high prices of oil as well as the efforts of the citizens to conserve money (Horton).

The U. S. government did extreme measures in order to conserve oil. The congress issued a speed limit of 55mph that reduced fuel consumption and reports of fatalities. Even the practiced of the daylight savings time happened during that period in order to conserve energy. Tax credits were also given to those people who could devised new sources of energy like solar and wind power. Moreover, President Nixon, who was the president during that time, created the Energy Department and made it a part of the cabinet office. Its main purpose is to developed energy policy that could make the U. S. energy independent.

The oil companies also cooperated in Nixon’s call for energy conservation as they voluntarily closed on Sundays and they only cater to their regular customers. They only sell ten gallons of gasoline or less at a time. Being the case, they believed that these would contribute in making the American citizens thriftier in using petroleum products (Horton). Arab countries especially the members of the OPEC once again exported oil to western countries. However, the shipment of petroleum products has inflated prices.

One of the crucial effects of the oil crisis is the economic decline the world experienced due the an inflation rate that remained above ten percent as well as the record high unemployment rate. After World War II, economic growth, which was happening worldwide, has been observable but this was no longer the case due to the oil embargo that took place. According to Horton, at present, the effects of the 1973 oil crisis are still being felt. This can be seen in the practices of most people. Nowadays, fuel-efficient vehicles are more patronized as compared to big cars that are very gas consuming.

Most appliances that are used today require less energy consumption as compared before. Furthermore, the exploration of resources and other means of energy also increased in the U. S. The series of armed conflict in the Middle East change the pattern of consumption of oil products. Oil is responsible for approximately one-third of the energy used in the world. The series of wars starting from the Iranian revolution in 1979-1980 up to the Iran-Iraq war in 1980 had caused a drop in the over all consumption of oil in the world.

In 1980, 63 million barrels are consumed per day but it decreases into 59 million barrels per day in 1983. However, the consumption of petroleum products in the world has increased ever since with 84 million barrels per day in 2005 (United States Government Accountability Office, p. 9). The United States of America also experience an increase in the consumption of petroleum products since 1983 to 2004, from 1. 65 percent annually to an averaged of 20. 6 million barrels per day in 2005.

The country consumes one-quarter of the world’s oil consumption. According to the projections of the Energy Information Agency, U. S. consumption will continue to increase up to 27. 6 million barrels per day by the year 2030 (United States Government Accountability Office, p. 9). The duration of the oil crisis has also paved the way for a new idea in the international economy in terms of monetary and the oil industry. Dr. Ibrahim Oweiss, a professor of economics at the Georgetown University coined the term “petrodollar”. This word connotes the money being paid by western countries in exchange for petroleum products that mostly comes from west Asian countries or the Middle East.

This took place during the time where there is a significant increase in dollar surpluses. Most countries especially the developing ones are exchanging their commodities for dollars (Washington Affairs). According to the Washington Report on Middle East Affairs, the petrodollar poses a new threat in the American economy as well as the world’s. If during the oil crisis of 1973, petroleum products were utilized in order to punish western countries from its participation in the Yom Kippur War.

At present, petrodollar could be a viable weapon for Middle Eastern countries to once again affect the economic situation of the world. This would become possible if an Arab nation would pull out its investment from New York Banks, which will trigger a tremendous shift in the U. S. economy. However, Dr. Oweiss himself warned that if ever such incident would take place the U. S. government would implement the International Emergency Economic Powers Act, which would freeze the asset instead of allowing it to be removed. The investment of the Middle East in the U. S. is then considered as a form of “capital hostage”.

The politics behind the supply and demand for oil could be attributed to the important role that it has in the economy of the world especially in countries like the United States of America. However, petroleum products are considered to be finite resources or non-renewable source of energy. Non-renewable resource like petroleum products are sources of energy that cannot be replenished, regenerated, or re-made in a short span of time. It exist in a particular fixed amount which could be totally consumed before it could be re-made again by nature (Nonrenewable Energy).

The finite or limited source of oil and natural gas has a huge effect on the pattern of supply and demand, which will eventually affect the price for these commodities. The price of oil in the world market determined based upon the balance between the world’s demand and supply. Recently, the production of oil has reach its near capacity because of the continuous increase in demand, which is also the reason why there is an upward pressure in oil prices (United States Government Accountability Office, p. 0). Oil consumption is inversely proportional with oil prices. Higher oil prices caused consumers to reduce their oil consumption. Increases in crude oil are also reflected in other petroleum products like gasoline, diesel, home heating oil, as well as petrochemicals. Consumers’ adaptability to the increase in oil prices is greatly dependent on the cost of changing their activities and shifting their lifestyle in order for them to utilized less oil.

In connection with that, consumers are believed to have more options in adapting to the high prices of oil in the long term rather than in the short-term situation. Reducing the amount of oil consumed in the short terms would be possible by merely driving less or more slowly as compared to the long term solution wherein people could actually purchase a more fuel-efficient vehicle or moved closer to work so that their consumption of oil would be reduced (United States Government Accountability Office, p. 11).


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