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Oil price fluctuations and its effect on GDP growth

A case study of USA and Sweden

Written by Anonymous

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Bachelor Thesis






Thesis: Oil demand and supply history demand. At the beginning of the 20th century, the introduction of internal combustion engines (car engines) provided demand for petroleum products, which has largely supported the industry to this day. Since then, in the 20th century, scientists have discovered many different products and industry inputs from petroleum. These products and industry inputs are important to almost all industries and manufacturers now. They range from generators and cars to simple tablets and pens. There are very few industries and services that directly or indirectly do not use petroleum and petroleum products. Not surprisingly, the crude oil market is the largest commodity market in the world. In the past and present era of industrialization, the demand for oil has never stopped growing in different parts of the world. In fact, it appears that it is impossible to stop increasing demand. The first indicator of economic growth is considered to be rapidly increasing oil demand or consumption. Oil demand mainly comes from developed and fast-growing developing countries, such as the United States, European Union countries, Japan, China and India. With the development of the country, industry, rapid urbanization and higher living standards have promoted the use of energy, the most common being oil. From 1950 to 1973, the world petroleum industry increased by 9 times, at a rate of 10% per year, and lasted for 20 years. During this period, more than 2.5 billion new motor vehicles were produced globally, half of which were in the United States. (Wright, 2006) In the 1950s, the world's demand for oil was 11 million barrels per day. This number increased to 57 million barrels per day (mb/d) in the 1970s, and increased to slightly more than 80 mb/d in our time. The United States consumes 20.7 mb/d (Figure 3), which is more than any other country, and is equivalent to the consumption of consumers in the next five largest countries (China, Japan, Germany, Russia, and India). (Wright, 2006) With the economic development of China (6.5 mb/d) and India (2.3 mb/d) and annual growth of 10%, world demand is growing faster than ever before, but the United States is still the largest consumer. Since 2002, China's oil consumption has grown at an annual rate of 8%, doubling from 1996 to 2006 (Figure 3). By 2020, India’s oil imports are expected to more than triple their 2005 levels, reaching 5 million barrels per day. (IEA, 2006) With the speed and quantity of demand growth, the country's oil consumption structure is also important. Because the sensitivity to fluctuations in oil prices depends on the speed and cost of the economy's transition to alternative energy sources. U.S. consumption is composed of four main sectors: transportation, industry, power generation, and residential/commercial. Transportation accounts for nearly 70% of total oil consumption in the United States, two-thirds of which is motor gasoline. The population of the country is accustomed to cheap and abundant gasoline, and has built cities and lifestyles around this fact. 2.2 What are the reasons for oil price fluctuations? Most experts said that the increase in the crude oil market and price fluctuations may be due to unexpected economic developments. The unforeseen rise in energy demand in China and India and the decline in the weighted value of the dollar are recent examples. As can be clearly seen from the chart below, the first oil shock was the beginning of an era of price instability that led to a slowdown in world economic growth. Throughout history, many factors have led to price instability, but the recent frequent fluctuations have never been experienced in the world (Figure 5). It can be said that there are economic and non-economic reasons for the increase in oil price fluctuations. Some economic reasons are that the high growth in oil demand in developing countries after economic growth has not been offset by sufficient supply, resource nationalism has led to underinvestment in new potential projects, the recent soaring price of exploration technology, obsolete oil wells, and the depreciation of the US dollar against world currencies. The short-term price volatility is mainly affected by news of US economic performance and oil and gasoline inventory data. Long-term volatility is affected by more basic demand and supply forecasts and long-term world economic performance. Non-economic factors are mainly politically motivated. For example, countries with large oil reserves do not disclose real oil data to investors, so they can be sure of the profitability of investment projects there. Countries manipulate oil data for political influence and regard it as a national security issue. This uncertainty makes most investors reluctant to invest in large-scale projects, which can ensure a stable supply. The accountability system for national issues is related to the so-called "peak oil" theory. The theory believes that the maximum rate of global mining will be reached at a certain point in time, after which the production rate will decline. The oil-producing countries have been recurring due to resource control wars and the protection of investor rights in resource-rich countries, with different political uncertainties and regional instability due to non-economic reasons. In the past few decades, the political game has been so fierce that investment in new projects that provide a stable supply has been completely ignored, so the so-called "spare capacity"3 of oil producers has disappeared. The European Energy Agency, the International Energy Agency, was established to protect the interests of Western importers, accusing OPEC of not providing enough oil to meet demand, resulting in price fluctuations. However, OPEC has mainly brought about the problem of insufficient global refining capacity, and said that it can increase production at any time, but it will not calm the instability of the market. There are many reasons for price instability, but in the long run, prices will be affected by estimates of world economic performance over a period of more than a year. Read Less