Crude Oil

World Economy and Crude Oil Prices

The high price of crude has many causes, including unrest in Nigeria and tension in Iran or more recently sanctions on Russian exports. Regardless of the cause, if the world supply of crude oil were to drop, it will push prices higher globally. Lack of supply increases the psychological pressure on crude oil prices and the fear of future supply disruptions. In the past, the lack of surplus capacity has led to high prices, but the often the situation changes as countries release further stocks.

In addition to crude oil's dependence on national economies, the price of crude oil is closely linked to the currency of nations that purchase it. The correlation between crude oil prices and currencies intensifies during strong trending periods. While the energy sector contributes significantly to U.S. GDP, the United States' diversity in its economic production helps reduce the country's dependence on oil.

While a drop in the price of crude oil is good news for the oil importing economies, the drops in prices will be disastrous for the oil producing countries. A study by Oxford Economics examined the GDP growth of various countries when the price of crude oil fell from $84 to $40. It found that a fall in oil prices resulted in 0.5% to 1.0% GDP growth in countries like India and Saudi Arabia.

Higher prices of crude oil are expected to moderate demand while increasing supply. However, the effects of increased prices are likely to take time to play out, as consumer behavior, investment responses, and new oil production and refining will take time. In addition to these factors, dramatic economic growth in emerging countries has resulted in an increase in demand. China, for example, was self-sufficient in oil until 1993, but now imports three million barrels per day, or about half of its total demand.

OPEC is making Oil prices a bit of a balancing act with the United States. Saudi Arabia, Kuwait, and Russia are all low-cost countries to produce oil. Moreover, US producers are more expensive to extract oil from shale formations; lower prices could put them out of business. But as the world moves more towards renewable energy, prices should become more stable around the globe.