World Economy

The present and future of oil in our lives - By Ally Baker

Oil – a resource excavated in abundance in the Middle East and sold to nations who rely on these imports to sustain the lives of their people. Its overwhelming presence is everywhere in our lives – when we drive around to pick up some groceries on our way home, when we fly to Hawaii during summer break, and when we use plastic in almost every aspect of our daily existence. As a population, our global consumption approximates to about 89 million barrels of oil and liquid fuels a day, with one barrel containing about 160 liters – a tremendous amount of oil.[i]  These gargantuan expenses we concentrate on our utilization of oil and how willing we are to pay for these resources demonstrates our vulnerability when we rely on foreign companies to provide us with these assets. Both the production and consumption of oil has devastating effects worldwide; irreversible damage on the environment as well as firms taking advantage of the demand of their product, crippling the economic status of nations.

Oil is a product with a relatively inelastic demand; meaning that if firms make decisions that change the price of the oil, consumers of the product will still continue to purchase the product due to the lack of direct substitutes of the good. With this knowledge, firms in the oil industry are free to raise the price of oil and still expect consumers to buy their oil – overall, these companies never fall short of exploitation as they change their prices due to rising world demand and when “cost shock” events occur such as the War in Iraq or extreme changes in weather.[ii] In addition, the oil industry is an example of an oligopolistic market, where only a few, large and dominant firms hold the majority of the power of the oil industry. This, again, strengthen their power and gives us a reason to be even more weary of our consumption of oil. With total consumptions levels estimated to rise about 60% by the year 2020 due to the rise in population and industrialization of nations such as China and India, we wonder what will become of future generations, especially when crude oil is guaranteed only for the next twenty-five years.[iii]

Despite the predicted growth in the consumption of oil, we have a reason to be optimistic. While in nations such as China and India more oil will be crucial for the further development of their economies, studies have shown that in the past year alone, oil prices have dropped nearly 50%, after the peak of prices in the year 2008.[iv] The use of “fracking” or hydraulic fracturing is a new, healthier, and booming industry in the United States and East Europe to extract natural gas. But more importantly, many developed countries have “restrained demand” by “driving less and using more efficient vehicles while also producing more biofuels”, among other adjustments.[v]  Governments and people have begun seeing the drawbacks and long-term expenses of using oil, and have attempted to act in the genuine wellbeing of the society. Namely, beginning the development of technology that will help to sustain the world’s future without compromising resources for later times. Recyclable bags, eco-cars, “we’ve been substituting away from oil” and foreign companies are gradually growing more and more desperate as the demand for oil in countries such as Japan and the United States decreases. What does this mean? It means that as a people, we’re moving towards the idea of feasible, sustainable development and we’ve begun to identify the importance in reducing our dependency on foreign imports in our nations. Instead of worrying who to buy our oil from, we’re substituting away from oil altogether; which is exactly the mentality needed by the whole world to reduce not only our dependence on foreign crude oil, but the resource as a whole.

[i] International Energy Agency, FAQs:  Oil. [Online]  Available at:  http://www.iea.org/aboutus/faqs/oil/ Accessed 5th February, 2015

[ii] Economics Online, The Oil Market. [Online] Available at:  http://www.economicsonline.co.uk/Competitive_markets/The_market_for_oil.html Accessed 7 February, 2015

[iii] Set American Free, Cut Dependence on Foreign Oil. [Online] Available at:  http://www.setamericafree.org/oildependence.htm Accessed 5th February, 2015

[iv] Inflation Data, Historical Crude Oil Prices (Table). [Online] Available at:  http://inflationdata.com/Inflation/Inflation_Rate/Historical_Oil_Prices_Table.asp Accessed 5th February, 2015

[v] The Atlantic, It Really Doesn’t Matter if We Stop Buying Middle Eastern Oil. [Online]  Available at: http://www.theatlantic.com/business/archive/2012/06/it-really-doesnt-matter-if-we-stop-buying-middle-eastern-oil/259058/ Accessed 6th February, 2015