Essay Sample on Crude Oil: A Limited Resource Essential for Industrial Needs

Introduction

Crude oil is one of the essential commodities in the global market. It is a source of energy for most industrial activities, including electrical power generation. Nearly all industrial operations depend on crude oil both directly and indirectly. Nevertheless, crude oil is used as a raw material in the manufacture of plastic products, cosmetics, and the production of various medicines. Despite its extensive use, crude oil is a highly limited resource. Crude oil deposits are increasingly become deeper, increasing the costs of excavation and extraction. As a result, its prices are becoming increasingly volatile. The prices of crude oil oscillate every second, making it the most fluid commodity in the international market.

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Crude oil is an essential component playing a central role in emerging manufacturing, engineering, and industrial markets in western countries like the United States, China, India, Japan, and Latin America. Crude oil has significant command and influence on the global market, forming an oligopoly market structure. The oligopolistic type of the crude oil market dates back to the late nineteenth century when the market was run by a cartel popularly known as the "seven sisters." The current oligopolistic market structure of crude oil is formed by the Organization of the Petroleum Exporting Countries (OPEC). OPEC is a multinational organization comprising of 14 Arabic countries with significant oil deposits (Moran, 2015, p.28). OPEC is like a type of cartel that decides on the mining, manufacturing, and sale of oil. As a result, it plays a critical role in influencing the demand and prices of oil in the world.

The oligopolistic market structure of crude oil allows OPEC to influence the costs of fuel if the member countries are not in line with the current oil prices. OPEC has affected the costs and demand for oil in the recent past by cutting the supply of crude oil. When OPEC cuts the amount of fossil fuel, the call for the scarce fuel shoots to balance the forces between the supply and demand of fuel and achieve price equilibrium. Thus, by announcing shortages, OPEC creates an artificial scarcity, which alters the cost of fossil fuel temporarily. The effect of such moves on supply and demand of crude oil is farther amplified by large scale crude oil dealers who use the opportunity to hoard crude oil. It affects the price equilibrium more considerably.

The cost of oil has been fluctuating over the past five years. In December 2018, the cost of Brent crude oil stood at $71.19. As of December 2019, the price of the same per barrel is $63.20 (Azimi, Neisy, and Mohammadi, 2019, p.75). A comparison of the two prices indicates a significant drop in the cost of oil over the two years. However, a critical examination of the prices within the year shows an alternating increase and decrease in the prices of crude oil. The trends observed in the price equilibrium of crude oil are the result of a limited supply of crude oil. Crude oil occurs from deposits of fossil fuels, which cannot be increased after extraction. It takes several decades for the fossils to build up and form new deposits of crude oil. Nevertheless, the removal of oil calls for advancement in technology due to increasing depths of the oil deposits. The location of the oil deposits deepens with increasing extraction causing a significant increase in the costs or mining.

The price of crude oil has a substantial impression on global economic development. Crude oil has a huge demand in both developing and industrialized nations despite the limited supply. Although crude oil is the most significant energy source in the world, its price elasticity has shifted from the initial inelastic state to a more elastic state. The shift in price elasticity is the result of increasing difficulty in the extraction and development of new oil deposits. Countries are also improving their energy consumption base on the introduction of more energy-efficient locomotives. For example, the opening of the electric train has dramatically reduced the overreliance on crude oil in industrialized nations. The move to the prevention of environmental pollution and global warming resulting from plastic wastes has had a significant impact on the plastic industries, which relies heavily on crude oil. Most countries in the world have banned the use of nonrenewable plastic bags and advocate for reuse of plastic bottles. As a result, there has been a variation in the state of price inelasticity of fossil fuel. Currently, crude oil is more elastic in terms of price compared to any other period in history. According to the US Investment Bank, there has been a drop in the amounts of crude oil used in the manufacture and production of primary materials from 60 percent in 2002 to 45 percent in 2019 (Azimi, Neisy, and Mohammadi, 2019, p.38).

The crude oil industry is mostly dependent on the availability of crude oil deposits. The ease, effectiveness, and costs of extraction of oil influence its ultimate prices in the market. However, it is becoming challenging to exploit both existing and new oil deposits due to their uneconomical value. The industry lacks essential capital investment to discover, extract, and process crude oil to increase its supply in the market. The current global production of crude oil fails to satisfy the massive demands of oil in countries like the United States, Japan, and China. However, alternative sources of energy have helped ease overdependence on crude oil. A report released by International Energy Agency (IEA) in June 2019 indicates a significant increase in international demand of crude oil from 86.5 million barrels on a daily average in December 2010 to 99.4 million barrels daily in May 2019 (Mohn, 2019, p.17). It estimates that the trend will continue upwards in the future, leading to a possible inelasticity of the price of crude oil.

The figure below shows the supply and demand curve between 2014 and 2017 presented by the report on growth in the supply of crude oil of the International Energy Agency. The report affirms the fluctuation in the supply and demand for gasoline within four years. The quantity of supply oil has a significant impact on the market for crude oil. Intensification in the amount of crude oil causes a corresponding decrease in the demand for fuel. The reverse is also true.

Conclusion

In conclusion, crude oil is one of the universal products that affect the economic development of countries around the world. Its high demand creates a form of price inelasticity for crude oil. However, recent changes in the legal and technological spectrum generate a shift from inelasticity to a more elastic price of crude oil. The introduction of electric powered locomotives and regulations banning the use of plastic products are some of the factors that have had a significant impact on the price elasticity of crude oil.

References

Azimi, S., Noisy, A., and Mohammadi, T., 2019. Role of Structural Shocks on Fluctuations of Crude Oil Prices. Quarterly Journal of Applied Theories of Economics, 6(1), pp.241-264.

Mohn, K., 2019. The gravity of the status quo: A review of IEA's World Energy Outlook. Economics of Energy & Environmental Policy, 9(1).

Moran, T.H., 2015. Oil Prices and the Future of OPEC: The Political Economy of Tension and Stability in the Organization of Petroleum Exporting Countries. Routledge.