Oil, as it has been popularly referred to, is the black gold society. Nations and economies have risen and fallen because of oil. Individuals have lost their lives to defend it and own it, and giant corporations as well as countries wage war on each other and spilled blood just to have its control. This paper would not be a conspiracy theory, nor would it be an over dramatization of how oil has become so much important in the world today and how it has become the major and prime base of claiming power.
However, even in a scientific and economic discussion of the implications of the prices of oil, we could not help to think of it as a hallowed commodity — even sometimes more powerful than the vision of gold itself — and this is an important thing to keep in mind especially when discussing the various implications of such price changes in the good (Kieh). In this paper, we would be using various economics and social science books, articles, and peer-reviewed journal research about the various implications of raising prices in oil.
Because of the length of this paper, it would be important for us first to identify the underlying classification of how it is written and researched so that the reader would have a guide as to what this paper discusses.
The general objective being that we would be discussing the implications of rising oil prices, its first gives a very brief history and economics of control of oil in the world. After that, the paper would be gathering the various research and evidence regarding the activities of oil prices — including how prices of oil are determined in the first place.
After such objectives have been achieved, we would then critically analyze from the point of view of economics and social studies — as well as the political arena — of how increases in oil prices affect the other variables we shall indicate. After that, the paper would be understanding why such price research go on including an essential aspect of understanding oil cartels and oil distribution in the world today.
However, before the paper begins, it is first important to highlight the specific limitations that would be integrated into this research and study. Remember that because of the varied history of oil prices and the many complicated variables that are integrated into the discussion, being able to capture all aspects of the implications of rising oil prices would be next to impossible unless we would fill volumes and volumes of pages regarding the topic. Nevertheless, we would try, to the best of our abilities as academic researchers, to be able to highlight the most essential issues regarding such pricing of the most valuable commodity of the world.
What is oil in the first place? An interesting discussion, in fact, is the realization that oil is not the proper and real word for describing oil. There are thousands of kinds of oil. However, what we are discussing is petroleum. What then is petroleum and how has it changed so much the playing field of the world economy given that it is just a commodity?
The reason why the label petroleum has oil is that because the root word of petroleum comes from the Greek meaning rock oil (Speight). However, some linguists and historians have pointed out that this is not the actual Greek translation and the modern crude oil is the better label for petroleum. It is a commodity that is naturally occurring in the world and is a kind of flammable material found in various kinds of rock formations in the planet. We would not anymore go on about the chemical compositions of the good.
However, what is important for us to realize is that many of today’s modern industrial machines including generators, transportation, and large-scale production facilities require on such petroleum in order to operate. Although recent innovations in science and technology have allowed for alternative means of generation with respect to energy, oil and petrolleum still remains to be the largest, most cost efficient, and the most popular way and means of operating these machines (Ferrier & Bamberg).
According to various academic history documents and reviews by historians that specialize in oil and natural human, as early as the pre-Roman times, oil had already been discovered and was Arabi processed for use (Parra).
Its popularity had not been comparable to many of the more expensive products of that sign because oil remained to be either a use for warfare in generating instantaneous fire, or beauty products such as oil, so, in the light. It was only after the industrial revolution where the importance of oil had been discovered especially since the invention of engines that make use of petroleum products to operate.
In fact, the shift in the use of oil in civilization and economics had been asked if it was an overnight shift in a commodities importance. It has even been pointed out that petroleum and oil is the backbone in order to maintain industrialized civilization itself (Yergin). Today, oil is measured in barrels and, as we would be discussing in the next pages, has been the topic of dispute especially when prices change.
Why does the price of a commodity change in the first place? In order to answer this, we would be looking at standard economic theory which would serve as the backbone not only for the analysis of integrating price into discussion but also its changes (Hirshleifer & Glazer).
According to standard economics price theory, the price of a good is determined by the intersection of the demand and supply curves of that specific good. In the case of oil, holding all other things constant and that the oil market is in a perfectly competitive market — a concept which is essential in our discussion later but is nevertheless still simplified early on for us to understand it — the price of oil and petroleum in either the domestic or world market is that specific partial equilibrium intersection (Hirshleifer & Glazer).
It is where the willingness to pay of consumers intersects with the willingness to accept the producers. However, it is important for students of economics and international studies to realize that price is not simply a value of scarcity for good. Just imagine if you were to sign on a piece of paper your signature and promise never to sign that signature again ever. Would your signature be more expensive than the thousands of documents that were signed by George Washington? Of course not.
The reason for that is price is not the only determinant but value is also essential in the discussion as well. Value is the willingness to pay functions of consumers versus the willingness to accept of producers (McConnell, Brue, & R). Price is determined in the economic model as the locus of points while value is the integrated areas under those points. We will not anymore discuss complicated integral calculus into disfavor. However, that is our framework which we shall build upon.
Therefore, there are many factors using this framework that may influence the price of a certain good. In fact, a movement of either the supply curve for the demand curve in the market changes the price. This may be due to costs of production — from the supply side — were available substitutes — from the demand side of the market.
Therefore, in a perfectly competitive environment, and a perfectly competitive market situation, even if all other things are still held constant, we would still see that the price of oil would increase because of specific frameworks (McConnell, Brue, & R). First, from the supply side, it is very difficult to extract oil from the earth because it requires a lot of infrastructure and capital — not to mention that not all geographical locations support the production and stock of oil.
From the demand side, the demand as consumers for oil is basically inelastic because there are no readily available substitutes for its use. Just imagine filling your tank with water and hoping for it to ignite when you turn the key. Price of oil, therefore, in traditional economic models are in there are no market imperfections, would still be driven high.
What, then, are the implications of price theory of increasing price of oil? In a study made recently in 2008, economists held many variables constant and try to find the implications of the rising prices of oil in standard economic models (Borenstein). They discovered that the root reason, and eventually also the effect, of rising prices is because of the scarcity of the good.
Considering even that capital for oil remains current and inflow — meaning that modern machines are still being brought into countries and locations where oil is present — and even if consumers still continue to buy traditional cars which consume petroleum products — the price of oil would still rise because of its scarcity.
Remember that oil is not a renewable resource, and as more and more of it is extracted from the earth, less and less of it is reserved for future consumption. Therefore, one definite implication of the rising price of oil is a greater demand for oil even in perfect markets and an eventual rise in the future considering even the variable that technology is improved for oil extraction (Levy & Kolk).
This concept already holds true and we have been reiterating that the analysis takes into consideration a perfect market condition. However, the reality is that the oil market — and almost any kind of industry one can imagine in the modern economy — is not in a perfectly competitive environment. In fact, the production, distribution, and consumption of oil is in an imperfect market situation which we call an oligopoly cartel model (Alhajji & Huettner).
The paper would bring large focus in the analysis of the implications of increasing oil prices in the cartel model of oligopoly because it is the most relevant since it reflects the current market for oil today in the modern economy.