Oil Shock

Oil Shock

The defining question of economics is how to satisfy an unlimited amount of wants with a limited quantity of, for the most part non-renewable, scarce resources. Oil is one such natural and limited finite commodity.

Oil shocks have significant impacts on the economy. For instance, after the oil crisis (1973-74) brought on by the Organization of the Petroleum Exporting Countries (OPEC) embargo in 1973, the stock market shrunk to half of its worth (Alpanda & Peralta-Alva, 2007).

The authors analyse the interaction of oil prices and energy saving technologies using an econometric model. The paper explains that in response to increases in energy prices, businesses adapt, and to remain profitable, invest in energy-saving technology, which brings about innovation. However, there are inconsistencies in the explanations of the oil turned financial crisis story. As the authors summarize “…energy-intensive industries did not suffer the largest drops in market value. The second empirical criticism is the absence of a stock market crash in 1979-81” (Ibid, p.4). Energy prices went down during the 80s-90s. Alternative explanations are the adoption of information technologies and misguided investments. Simply by standing still, the human body burns calories, stationery edifices too: “U.S, residential and commercial buildings consume 40% of all U.S. energy” (Ibid, p. 7). Improvements in technology lead to more ecologically efficient (green) techniques. For example, during the innovative decade between 1973 and 1983, oil use per day fell by 1,200,000 barrels due to advances in home atmosphere systems.

Cruise liners in Nassau, Bahamas. Photo by Elena

Momani (2009) writes that many of the oil producing Gulf states have few domestic avenues in which to park their oil earnings. Oil revenues have been increasing, especially since oil prices were meagre during two decades at US $20 per barrel in 2001 and lofty at US$ 140 per barrel in 2008. Instead, the funds are redirected internationally, sometimes to institutions such as the International Monetary Fund (IMF) and the Supplementary Financing Facility (SFF).

Further, “these past Gulf efforts to recycle petrodollar wealth through the IMF were in response to the global imbalances created by a decade of increased inflation, steep rises in commodity prices, including that of oil, and the overall global recession” (Ibid, p. 2). But according to the author, the situation changed and the Gulf oil producers no longer want to be involved in the IMF. Apparently, it is economic liberalization and integration as well as entry into the World Trade organization (WTO) that prompted the inward shift of petrodollars.

References:

    Alpanda, S. & Peralta-Alva, A. (2007). Oil crisis, energy-saving technological change and the Stock Market Crash of 1973-74. MPRA Paper 5896, University Library of Munich, Germany.

    Momani, B. (2009). The oil-producing Gulf states, the IMF and the international financial crisis. Policy Brief. The Centre for International Governance Innovation, 13: 1-8.