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The Reasons and the Impacts of Crude Oil Prices on World Economy



This paper focuses on how crude oil prices affect the world economy. It discusses crude oil and its everyday usage and necessity in today‘s world. This paper also discusses the historical supply and demand of oil and gives the numbers for the world proven reserves. Furthermore, it explains the history of crude oil prices, maps factors that influenced price and highlights impacts on the world economy. It characterizes the main factors influencing the impact of crude oil price changes to a country’s economy in OECD countries. It contains detailed information about each country of OECD and calculates the results of the main macroeconomic figures and influencing factors. It analyzes and compares country’s differences and point out the danger of dependency on imported sources of oil. Crude oil price is influencing of our everyday life and understanding the problem can improve our awareness of energy sources and perhaps prevent another oil crisis. ThepaperwasprocessedwithintheframeworkoftheResearch Project of MSM 6046070906 "Theeconomicsof Czech agriculturalresources and theireffective use withintheframeworkofmultifunctionalagri-food systems".
The Reasons and the Impacts of Crude Oil Prices on World Economy
Jitka Heydová, Mansoor Maitah, Farhat Hammad
This paper focuses on how crude oil prices affect the world economy. It discusses crude oil and its everyday
usage and necessity in today‘s world. This paper also discusses the historical supply and demand of oil and
gives the numbers for the world proven reserves. Furthermore, it explains the history of crude oil prices,
maps factors that influenced price and highlights impacts on the world economy. It characterizes the main
factors influencing the impact of crude oil price changes to a country’s economy in OECD countries. It
contains detailed information about each country of OECD and calculates the results of the main
macroeconomic figures and influencing factors. It analyzes and compares country’s differences and point
out the danger of dependency on imported sources of oil. Crude oil price is influencing of our everyday life
and understanding the problem can improve our awareness of energy sources and perhaps prevent another
oil crisis. The paper was processed within the framework of the Research Project of MSM 6046070906 "The
economics of Czech agricultural resources and their effective use within the framework of multifunctional
agri-food systems".
Key words: Crude oil, oil market, oil reserves, oil price impact, oil crisis, OPEC, OECD
JEL Classification: Q34
Tento článek se zabývá cenou ropy a jejím vlivem na světovou ekonomiku. Poukazuje na význam ropy
v dnešní společnosti a její využití v běžném životě. Článek dále objasňuje historii nabídky a poptávky,
poskytuje údaje o světových zásobách ropy, ropné produkci a spotřebě.Vysvětluje historii cen ropy, mapuje
faktory, které ovlivňují ceny a popisuje jejich vliv na světovou ekonomiku. Článek charakterizuje hlavní
příčiny, ovlivňující ceny ropy a jejich vliv na ekonomiku jednotlivých zemí. Obsahuje podrobné informace o
každé ze zemí OECD, uvádí hlavní makroekonomické údaje a upozorňuje na faktory ovlivňující ekonomiku.
Analyzuje a porovnává rozdíly jednotlivých ze a poukazuje na nebezpečí spojené se závislostí na
energetických zdrojí ze zahraničí. Cena ropy ovlivňuje náš každodenní život a pochopení ropné
problematiky může pomoci zlepšit naše uvědomění o energetických zdrojích a předejít další ropné krizi.
Klíčová slova: ropa, ropný trh, zásoby ropy, vliv cen ropy, ropná krize, OPEC, OECD
Crude oil and products from oil surround us every single day– the plastic in your toothbrush, your
transportation to work or school via vehicles powered by gas, your food grown with the support of
petroleum based fertilizers, pesticides, fuel, or even the frozen packaging with petroleum derivate wax. For
all of these and much more, we are dependent on oil – a non-renewable source of energy, whose reserves are
slowly but surely declining. The limited sources of oil are unevenly distributed around the world and give a
stronger position to countries with oil reserves, than those dependent on imported oil. This inequality brings
an ability to dictate supply on one side and on the other side economic fragility and vulnerability, because
crude oil prices are important to the health of the economy. Higher oil prices can contribute to an economic
downturn, while lower prices can speed up an economy and bring real expansion. Crude oil price is not just
simply influenced by supply and demand; it is a complex figure with factors like level of petroleum
inventories and investments into new refineries, weather problems (such as hurricane) and political tensions
(such as strikes in Venezuela).
Objectives of Theses and Methodology
One of the objectives of this paper is to clarify the complexities of the crude oil market, draw attention to
decreasing oil reserves and point out tightness of oil supply and demand. Second objective is to analyze the
history of crude oil prices and the potential impacts on the world economy. The last objective is to determine
which countries would be most and least affected by changes in oil prices or availability of oil. To fulfill this
commitment we have used four country specific metrics of: 1) Percent oil energy; 2) Percent imported oil, 3)
energy usage/capita and 4) GDP/capita. The methodology is gathering data from International Energy
Agency (IEA), World Bank and United Nations, calculation of measures recommended by IEA‘s Analysis of
the impact of High Oil Prices on Global Economy and their comparison and analysis.
World Proven Reserves of Oil
Oil reserve is the fraction of oil underground, which can be brought to the surface under reservoir
characteristics and limitations of petroleum extraction technologies. The percentage of oil reserve can
change in each field over time in response to changes in technology, economics and investment. Oil reserves
must satisfy following four criteria: they must be discovered through one or more exploratory wells,
recoverable using existing technology, commercially viable and remaining in the ground. Estimates are done
on the basis of indirect geology techniques– 2D and 3D reflection seismic surveys are most widely used
geophysical techniques in oil exploration. Indirect measurements are only extrapolating an answer based on
a collection of related but indirect data and therefore there is always some degree of uncertainty.1 2
Generally speaking, oil producers should revise their reserves estimates in only two situations: when
discoveries are made or when some new assessment methodology reveals that they have more oil in existing
reserves than previously stated. New technologies usually increase the estimated size of field and therefore
oil fields tend to grow with time. Many oil producing nations do not reveal their reservoir engineering field
data and instead provide unaudited claims for their reserves– for example during the 1980s or 1990s none of
the 6 main OPEC producers had announced any significant new discoveries, nor had assessment
technologies suddenly improved, but claimed to be correcting for past mistakes.
Following data shows world proven reserves of oil, counted by BP p.l.c. (Statistical Review of World
Energy, June 2008) and by Penn Well Corporation (Oil & Gas Journal, Vol. 105.48). Even though there are
significant differences in partial sums and both approaches comprise of different –forms of oil the world
totals are in range from 1 237 to 1 331 billion barrels.3 BP’s approach includes crude oil, gas condensate and
natural gas liquids, but does not count with 152.2 billion barrels of Canadian oil sands defined as ‘remaining
established reserves‘. PennWell Corporation includes crude oil and also all oil condensates. Both BP and
PennWell took United States data from Energy Information Administration’s 2006 annual report (DOE/EIA-
0216, 2007).
BP Statistical Review Oil and Gas Journal
(Year-End 2007)
In billion barrels
(Jan 1, 2008)
In billion barrels
North America 69.3 211.2
Central and South America 111.2 109.9
Europe 15.6 14.3
Euroasia 128.1 98.9
Middle East 755.3 748.3
Africa 117.5 114.8
Asia and Oceania 40.8 34.4
World Total 1237.8 1331.8
Source:, table: own work*
Problem is that these numbers are questionable. Estimates of proven reserves are routinely exaggerated for
economic and political gain. Saudi Arabia alone, owner of the largest oil reserves in the world, raised its
estimates overnight from 167 billion barrels to 257 billion barrels.4
1 All Experts:, 19.12.2008
2 Society of Petroleum Engineers:, 5.12.2008
3 EIA:, 25.12.2008
4 ROBERTS, P.: The end of oil: on the edge of a perilous new world, Houghton Mifflin Company, New York 2004, ISBN: 0-618-
There are more than 40 000 oil and gas fields of all sizes in the world. However, 94% of known oil is
concentrated in fewer than 1500 giant and major fields. The largest conventional oil field is Ghawar Field in
Saudi Arabia, owned and operated by Saudi Aramaco. It was discovered in 1948 and production started in
1951. Saudi Armaco and Saudi government closely guard field performance information, therefore little is
known about Ghawar, but it is a fact that after more than 50 years of oil production, more water is pumped
into the field than oil is extracted, and it seems quite possible that the production rate will decline in the near
future. Orinoco Oil Sands in Venezuela and Athabasca Tar Sands in Canada are the largest non-conventional
oil sand deposits in the world. Orinoco’s producible reserves are estimated to 236 billion barrels. The
Athabasca contain an estimated 175 to 200 billion barrels based on using existing technologies, with the
newer one, as much as 2.5 trillion barrels of oil might be recovered, but at very high cost.56
The table below together with the graph and map shows that the biggest reserves are in the Middle East,
supply of Europe and Euroasia on the second place is mainly met by Russian reserves and African biggest
suppliers are Libya and Nigeria.
Greatest Oil Reserves by Country, 2006
Rank Country Proved reserves
(billion barrels)
1 Saudi Arabia 264.3
2 Canada 178.8
3 Iran 132.5
4 Iraq 115.0
5 Kuwait 101.5
6 United Arab Emirates 97.8
7 Venezuela 79.7
8 Russia 60.0
9 Libya 39.1
10 Nigeria 35.9
Oil Supply
Year by year, the volume of newly discovered oil is getting lower. Larger fields are easier to find than
smaller ones and are therefore discovered first. They are also preferred by oil companies that can more
easily make profit from huge yield fields than from small, hardly accessible field. As the time goes by and
exploration progresses, the average size of the fields discovered decreases, as well as the amount of oil
found per exploratory drilling. Even though vast quantities of oil still remain in the ground, it is in the highly
uncertain or even problematic environments: deep below the Arctic ice, in small African regimens wracked
by civil war or inside the fortress OPEC, whose political machinations may affect long term supply more
powerfully than any geology. The ability to get and use this oil depends on many variables- technological,
economical, financial and political– these are hard to predict and even harder to control.
Since 1995, the world has used 24 billion barrels of oil a year, but has found, on average just 9.6 million
barrels of new oil annually7, this would mean that every year the amount of reserves found is less than the
demand and demand continuing to climb each year is not a good situation.
Global Balance Summary (million barrels per day)
2007 2008 2009 2010 2011 2012
Global demand 86.13 88.27 90.02 91.91 93.84 95.82
Global supply 84.47 86.45 87.75 89.05 90.12 90.92
5 Oil Shale and Tar Sands Programmatic Information center:, 19.12.2008
6 EIA:, 19.12.2008
* Data from August 27, 2008 (in Billion Barrels); US data are from EIA U.S. Crude Oil, Natural Gas, and Natural Gas Liquids
Reserves, 2006 Annual Report, DOE/EIA-0216 (2007).
7 ROBERTS, P.: The end of oil: on the edge of a perilous new world, Houghton Mifflin Company, New York 2004, ISBN: 0-618-
Non-OPEC supply 49.98 50.99 51.65 51.94 52.2 52.56
Global Crude Capacity 34.49 35.46 36.1 37.11 37.92 38.36
Source: International Energy Agency, Oil Market Report, November 2008, 19.12.2008
About 40% of the World oil supply is provided by OPEC countries, where the biggest producer is Saudi
Arabia with the world’s largest oil field– Ghawar. Main non-OPEC producers are North America (14.06
million barrels per day), former USSR (12.81 million barrels per day), Europe (4.70 million barrels per day),
Latin America (4.02 mb/d) and China (3,83mb/d). US main oil fields are in Alaska (Prudhoe Bay) with
production of 7.5 mb/d, 5mb/d comprise of crude oil and rest is covered by natural gas supply. Canada’s
Alberta with oil production 3.27mb/d covered by synthetic crude oil, bitumen and natural gas. Russian
production is at 10.0mb/d, where short-time decreases in Lukoil, Gazpromneft and Sakhalin 2 are
compensated by increases in Rosneft and Gazprom. Discoveries in Azerbaijan and Kazakhstan led to the
expectation that the development of large fields (Tnegiz, Kashagan, Azeri, Chirag, Guneshli) can maintain
the present production. Norwegian oil production averages 2.4mb/d. Even though historically, mature fields
suffer due to mechanical outages and equipment failures, these are compensated thanks to development of
non-conventional sources and new areas (including tar sands, shale oil and deepwater fields). United
Kingdom production around 1,5mb/d is an average between decline in mature fields and start-up of new
fields (Ettrick, Jura, Tweedsmuir, Saxon). Latin American production is supported by stronger performance
of Argentina, Columbia and Peru. China’s largest oil field– Daqing is already in decline, but there are efforts
to develop offshore oil production.8 9
Non-OPEC Oil Supply (million barrels per day)
2008 2009
North America 14.06 14.28
Europe 4.7 4.27
Pacific 0.7 0.81
Total OECD 19.46 19.36
Former USSR 12.81 13.04
Europe 0.12 0.11
China 3.83 3.91
Other Asia 2.66 2.74
Latin America 4.02 4.28
Middle East 1.61 1.55
Africa 2.56 2.56
Total Non-OECD 27.6 28.2
Processing Gains 2.24 2.29
Other Biofuels 0.46 0.58
Total Non-OPEC 49.76 50.42
Source: International Energy Agency, Oil Market Report, November 2008
Oil Demand
The increase in economic activity pushes up the demand for oil. The International Energy Agency (IEA) set
average consumption of oil in 2008 to 88.3 mb/d in comparison with the year 2002 when the consumption
was 78.3 mb/d. Demand growth is highest in the developing world, particularly in China and India and to a
lesser extent in Africa and South America, where demand grows more than three times faster than that of
OECD countries. High demand growth exists primarily due to rapidly rising consumer demand for
transportation via cars and trucks, rapid urbanization, higher living standards and less efficiently used energy
8 IEA, Oil Market Report, November 2008,,
9 Energy Watch Group,,
(in average, they use twice as much oil to produce a unit of economic output). They also tend to be large
players in the energy intensive processing of primary commodities and heavy industry.
Global Oil Demand (million barrels per day)
2007 2008 2009
Africa 3.1 3.1 3.1
America 31.1 30.3 30
Asia/Pacific 25.1 25.7 26
Europe 16.1 16 15.8
Former Soviet Union 4.1 4.2 4.3
Middle East 6.5 6.9 7.2
World 86.1 86.2 86.5
Source: Energy International Agency, Oil Market Report, July 2007
Although demand growth is highest in the developing world, the United States is the world’s largest
consumer of petroleum. Between 1995 and 2005, US consumption grew from 17.7 million barrels a day to
20.7 million barrels a day. China, by comparison increased consumption from 3.4 million barrels a day to 7
million barrels a days, in the same time frame. China has declared a goal to generate approximately 10% of
its requirements through renewable sources of energy by the year 2010. 10 Majority of American
consumption comes from personal automobile use (American drivers consume 45% of total world
consumption of gasoline), which is necessary for American way of life in suburban low–density settlements.
There is a recent shift from gas driven SUVs to more fuel efficient vehicles and hybrid versions. Fuel
consumption demand growth in North America grows twice as fast as in Europe or Pacific. In recent years,
production of biofuel increased. Some commodities like maize, sugar cane or vegetable oil can be used as
food, feed or to make biofuels. In 2007, 25% of maize grown in the United States was used for biofuels or
ethanol production. There is a risk connected with diverting farmlands or crops for biofuels production in
detriment of the food supply on a global scale. A World Bank policy research working paper released in July
2008 concluded that ‘large increases in biofuels production in the United States and Europe are the main
reason behind the steep rise in global food prices‘.11
Supplies of oil and gas are essential to modern agriculture techniques. Oil prices can increase the cost of
fertilizers, food transport and industrial agriculture, while a fall in global oil supplies could cause spiking
food prices and unprecedented famine in coming decades.12
Pre Embargo Period, 1848-1973
World War II was devastating to Europe. Coal mines that were under control of Nazi Germany were
damaged and mines in Britain were not able to supply the necessary resources to make up for shortages. In
1947 United States produced the Marshall Plan which provided economic and energy aid to Western Europe
by supplying equipment for mine recovery and emphasized a transition to petroleum-based economy using
imports from the Middle East.13 In 1948 crude oil prices ranged between $2.50 and $3.00 ($17 and $18 when
viewed in 2006 dollars). By 1956, oil accounted for approximately 22 percent of total European energy
consumption with 90 percent of this oil being supplied by the Middle East and 70 percent shipped through
Suez Canal. What became known as Suez Crisis started when Gamal Abdel Nassar (Egyptian president)
nationalized the Suez Canal in 1956, the fear from disrupted oil supply induced Great Britain, France and
Israel to merge and organized coordinated attack against Egypt. Although the fighting ceased in December
1956, the canal remained closed to oil shipments until May 1957 and an extensive energy crisis plagued
10 BP Statistical Review of World Energy:
8/STAGING/local_assets/downloads/pdf/statistical_review_of_world_energy_full_review_2008.pdf, 19.12.2008
11 World Bank: http://www-
682.pdf, 19.12.2008
12AE Biofuels:, 19.12.2008
13 MOAN, J., SMITH, Z.: Energy Use Worldwide, California 2007, ISBN 978-1-85109-890-3
Europe. The Suez Crisis had two consequences: First was foundation of Organization for European
Economic Cooperations (OEEC) to develop energy strategies for future petroleum shortages and second one
was Mandatory Oil Import Program (MOIP) established by US President Dwight Eisenhower in 1959. By
issuance of ‘Quota tickets‘ to individual companies were used to control the amount of oil shipped to the
USA.14 MOIP and economic recession in Europe reduced the demand of foreign oil, and the supply even
increased thanks to the opening of new oil markets in Algeria (northern Africa). These caused successful
price reduction, which was positively viewed in all oil-importing countries, but declining revenues in major
oil-exporting countries led to formation of Organization of Petroleum Exporting Countries (OPEC) in 1960,
with its main objective of restoring original prices. In January 1961 OPEC adopted a charter with three aims:
to raise the incomes of member countries to fund development, to seize an increasing level of control over
oil production from the international companies and to unify production policies.15
This cartel, even though not very powerful yet, served as a remark of crude oil importance in the world and
growing tensions led to aggregation of major industrialized countries into Organization for Economic
Cooperation and Development (OECD) in 1961. This organization actually replaced OEEC but extended
membership to the USA, Canada, Japan, New Zealand and Australia.16 The emergency strategies that were
developed after the Suez Crisis helped moderate the impacts of another oil crisis that emerged in 1967.
Tensions between Israel and Arab nations culminated in Israel‘s preemptive attack on Egypt in June 1967,
starting the Six-Days War. Arab states implemented an oil embargo against the United States and Europe,
because of their support for Israel. The oil shortage that followed was moderated by an increase in exports
from Venezuela, and Iran (which did not participate in the embargo) and from an increase in US production.
The embargo was cancelled by the end of July, but growing the unrest among Arab producing nations over
support of Israel led to foundation of Organization for Arab Petroleum Exporting Countries (OAPEC) in
1968 for the purpose of uniting political interests in the Arab nations. Throughout the post war period oil-
exporting countries found increasing demand for their crude oil but a 40 percent decline in the purchasing
power of a barrel of oil. In March 1971, the balance of power shifted. That month the Texas Railroad
Commission set prorating at 100 percent for the first time. This meant that Texas producers were no longer
limited in the amount of oil that they could produce; there was no more spare capacity and therefore no tool
to put an upper limit on prices. More importantly it meant that the power to control crude oil prices shifted
from United States to OPEC.
Embargo Period, Crises in Iran and Iraq, 1973- 1990
In 1972 the price of oil was stable around $3.00 per barrel ($15.00 viewed in 2006 dollars), but volatile
geopolitical situation did not leave it stable for long time. Till the end of 1974 the price quadrupled to over
$12.00 ($42.00 viewed in 2006 dollars). This increase was caused by oil crisis of 1973, which started as a
Yom Kippur War, when Egypt and Syria launched an attack on Israel. United States, its allies in Western
Europe and Japan supported Israel and in response to this aid, members of Organization for Arab Petroleum
Exporting countries (OAPEC, founded in 1968) initiated oil embargo against US and other allies of Israel.
This 6 months long embargo caused the largest energy crisis in United States history. Although the major
oil-producing companies increased their production, the shipment to USA was reduced from 6 million to 5
million barrels per day. This crisis demonstrated the consequences of dependence on foreign oil and forced
all affected countries to react.
Within the framework of OECD was established in 1974 International Energy Agency (IEA). ‘Its mission
was to develop strategies for energy security during emergencies and to reduce member countries
dependence on oil (IEA 2005) ‘. Many countries implemented national energy policies, France, Germany
and the Netherlands began to expand their nuclear program, Great Britain diversify its oil imports, Europe
began to increase oil imports from the Soviet Union and Japan shift away from oil-intensive industries and
invested in industries such as electronics17. From 1974 to 1978 world crude oil prices were relatively flat
15 OPEC Countries: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United
Arab Emirates, Venezuela.
16 OECD Countries: 1961: Austria, Belgium, Canada, Denmark, France, Germany, Greece, Iceland, Republic of Ireland, Italy,
Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, United Kingdom, United States.
1964: Japan, 1969: Finland, 1971: Australia, 1973: New Zealand, 1994 Mexico, 1995 Czech Republic, 1996: South Korea,
Hungary, Poland, 2000: Slovakia.
17 EIA:, 5.12.2008
ranging from $12.21 to $13.55 per barrel ($39 to $42 viewed in 2006 dollars), but Second Oil Crisis (or
Energy crisis) in 1979 increased prices to $39,50 ($68.00 viewed in 2006 dollars). It resulted from Iranian
revolution, which caused inconsistent oil export with the loss of 2 to 2.5 million barrels per day. This amount
was partly covered by increasing production of other OPEC countries, but later on Iran weakened by the
revolution was invaded by Iraq and the combined production of both countries decreased by 6.5 million
barrels per day, which was 10% of 1979 oil production18. The 1973 and 1979 energy crisis increased public
awareness that oil is a limited resource, and that it would eventually run out as an economic viable energy
source. Consumers’ reactions were better insulation of their houses, more energy efficiency in industrial
processes and automobiles with higher efficiency. These factors along with economic recession and
increased exploration and production outside OPEC caused a reduction in demand which led to falling crude
oil prices to $10 ($20 viewed in 2006 dollars ) and so called Oil Glut of 1980‘s. To sustain prices, an OPEC
meeting in Vienna in 1982 agreed to set quotas, but since under OPEC’s charter these quotas can only be
advisory, only three countries decide to apply them. During the Embargo period, the US imposed price
controls on domestically produced oil in an attempt to lessen the impact of the 1973-1974 price increase.
The result of the price control was that the US consumer of crude oil paid about 50 percent more for imports
than domestic production and US producers received less than world market price. The domestic petroleum
industry was actually subsidizing the US consumer. In the short term, the recession was less because US
consumers faced lower prices than the rest of the world. However, higher petroleum prices faced by
consumers would have resulted in lower rates of consumption and as a consequence, the US would have
been less dependent on imports in 1979-1980 and the price increase in response to Iranian and Iraqi
interruptions would have been significantly less.
Gulf War and OPEC’s quota control, 1990-2007
In 1990 lower production, uncertainty associated with the Iraqi invasion of Kuwait and the Gulf War lead to
short-time price increase to $30 viewed in 2006 dollars, but once the Kuwait was liberated, oil prices entered
a period of steady decline until 1993. The price cycle then turned up. The United States economy was strong
and the Asian Pacific region was booming. From 1990 to 1997 world oil consumption increased by 6.2
million barrels per day and Russian production declined over 5 million barrels per day pushing the prices to
$25 per barrel. The price increase came to a rapid end in 1997 and 1998 when the impact of the economic
crisis in Asia was either ignored or severely underestimated by OPEC. In December 1997 OPEC increased
its quota by 2.5 million barrels per day (10%), but previously booming Asian economies decreased oil
consumption for the first time since 1982. The combination of lower consumption and higher production
decreased prices by 40% ($15 per barrel). OPEC reacted by cutting quotas in April (1.25 million barrel per
day) and July (1.335 million barrels per day), but prices continued down through December 1998.
In April 1999 OPEC reduced production by another 1.719 million barrels which was sufficient to move
prices above $25. Growing US and world economies were not supported enough by OPEC quota increases
totaling 3.2 million barrels per day and prices were pushed even further. Increased oil consumption was
mainly covered by Russia which dominated the non-OPEC production growth and was responsible for most
of the non-OPEC increase since the turn of the century.19 OPEC overshot the market again in 2001, when
increase in non- OPEC production and weakened US economy put downward pressure on prices. OPEC
reduced production by 3, 5 million barrels per day and this would be probably sufficient if the year 2001
would not be scarred by the September 11th terrorist attack. Prices went down by another 35%, but given the
political situation all oil producing countries delayed additional cuts until January 2002.In mid 2002, there
was over 6 million barrels per day of excess production capacity. By the end of 2002 problems in Venezuela
led to a strike causing decrease in Venezuelan production. In March 2003 Venezuelan production was
beginning to return, but military action commenced in Iraq these did not only reduce Iraq production, but
also significantly increased consumption. Inventories in the US and other OECD countries remained low
and improving US economy and rapidly growing Asian economy led to erosion of excess oil production
capacity to below 2 million barrels per day. In a world, that consumes over 80 million barrels per day of
petroleum products, 2 million barrels is not sufficient excess and prices were pushed to $40– $50 per barrel.
18 MOAN, J., SMITH, Z.: Energy Use Worldwide, California 2007, ISBN 978-1-85109-890-3
19WTRG Economics:, 5.12.2008
Increased price of oil allowed alternative methods of oil production like extraction from oil shale and tar
sands. Security of supply and increased consumption were not the only influences that led to high oil prices.
Weak dollar, low level of petroleum inventories, lack of investment into new refineries, weather problems
(hurricanes), political tensions and OPEC supply cuts as well as a number of accidents were pushing oil
prices even higher. In January 2007 price of barrel was around $62.00 and at the beginning of 2008 reached
$86.00. With that high oil prices governments subsidized farmers to grow crops for energy. Cultivations had
massively shifted toward biofuel feedstock (especially maize), often at the expense of soybean and wheat
cultivation. About 30% of cultivation went into ethanol rather than into food and feed markets. High energy
prices had also made agricultural production more expensive, by raising the cost of mechanical cultivation
and inputs like fertilizers and pesticides. The result of government intervention into oil market was sharp
increase of food prices that led to nutrition problems of poor people in developing countries, inflation
pressure and in some countries to civil unrest20.
In November 2008 prices were falling not as a consequence of increased supply or increased energy
efficiency, but because of reduced economic activity. China, which has been one of the main engines of
global oil demand growth over past several years faced for the first time threat of economic slowdown. Even
though, financial crisis affected mainly developed economies, they constituted important markets for
Chinese exports. Decrease in demand, unstable global financial system and price drop led to worries about
future investments in new oil production. Prices around $60 per barrel forced oil producers to rethink
investment plans or scale back on existing projects. Oil is already more costly to extract, because new fields
are hardly accessible and needed technology is very expensive. On the top of that the new fields are smaller
so they do not yield that much profit. Present under-investment may lead to future oil-supply crunch,
because increased output depends on adequate and timely investment21.
Global Economic Crisis lead to further decreases in crude oil demand and therefore the price of crude oil
drop in February 2009 to $35 per barrel. If we compare the crude oil price of $150 per barrel from mid 2008
and price from February 2009, we get an incredible difference of $115. Low crude oil prices are causing
significant problems to exporting countries. Fields that are small and hardly accessible are stopping
production, because under recent prices is not profitable. National budgets of exporting countries are
dependent on profits from crude oil market- Russia needs to sell a barrel for at least $70 to have balanced
national budget and Venezuela’s budget is from 50% dependent on earnings from crude oil. Shortage of
earnings in oil exporting countries may lead to even deeper problems than only those connected with
economic crisis.22
Crude oil price analyses
The long term view shows that world oil prices since 1869 adjusted for inflation averaged $21.66 per barrel
in 2006 dollars. Fifty percent of the time world prices were below the median of $16.71 per barrel. The
results are significantly different if only post-1970 data are used. In that case US crude oil* prices average
$29.06 per barrel and the more relevant world oil price averages $32.23 per barrel. The median oil price for
that time period is $26.50 per barrel.23
Case study of OECD countries
OECD countries consist nowadays from 30 nations, that can be divided into OECD North America (Canada,
Mexico, United States), OECD Pacific (Australia, New Zealand, Japan and Republic of Korea) and OECD
Europe (Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland,
Ireland, Italy, Luxembourg, Netherlands, Norway, Poland, Portugal, Slovak Republic, Spain, Sweden,
Switzerland, Turkey, United Kingdom). Oil is a critical source for energy for almost every country but is
also required for agriculture, manufacturing and plastics. Because oil impacts almost every aspect of a
country‘s economy, having a reduced oil supply or more costly oil would negatively impact each of the
OECD countries economies as they are all net importers. Together these 30 OECD countries span 3 different
20 International Food Policy Research Institute:, 12.11.2008
21 Guardian: , 12.11.2008
22 Petrol:, 28.2.2009
23 WTRG Economics:, 5.12.2008
* US price average is lower because of imposed price control on domestic production from 1973 to January 1981
continents. Some of these countries have domestic oil supplies while others do not, many countries have
significantly different GDP/person and each country often supports significantly different major industries.
Because of these differences, each country would be impacted differently. Among International
Energy Agency‘s Analysis of the impact of High Oil Prices on Global Economy from 2004, there are several
factors influencing the magnitude of the direct effect of a price change to country‘s economy. Magnitude
depends on the share of the cost of oil in national income, the degree of dependence on imported oil, the gas-
intensity of the economy and the ability of end-users to reduce their consumption and switch away from oil.
In my study I will focus on dependence on imported oil, percentage of oil energy and efficiency in
conversion of oil into GDP. For my research I took information for each OECD state, from International
Energy Agency – statistics of 2006 Energy Balance, World Bank - 2007 GDP per capita and United Nations
Department of Economic and Social Affairs: Population division – 2007 Population.
Taken the figures of Energy Balance, I have counted the percentage of energy that is covered by oil (in table
marked as ‘oil energy‘), percentage of imported oil (in table marked as ‘imported oil‘), than I have used
information from World Bank and United Nation and counted amount of energy consumed per person (in
table marked as ‘energy/capita‘) and I have used this figure to divide GDP per capita and the result gained is
the efficiency of energy conversion into GDP (in table marked as ‘GDP/Energy‘). Detailed information
about each OECD state is in the supplements. Here is the table with calculated results. Percentage of
imported oil is in few countries over 100% which is a result of stock exchange, or small amount of export to
neighboring countries.
Two of the hypotheses that I wanted to test using this data were:
1- The more dependent a country is on imported oil, the less dependent it will be on oil as an energy source.
This would be logical if countries in recognizing their economic dependence on a critical expensive
commodity with erratic pricing and supply problems that they would then put long term programs in place to
reduce this dependency and minimize the money sent out of the country. 2- The more energy that is used in
an economy, the more robust that economy is or that GDP and energy are directly correlated related. This
would be logical in that the higher the standard of living is in a country, and the more money that each
person has then that the more energy that that person might use by having a car, air conditioning, living in a
bigger house, etc. Also because I would expect that a country with a higher GDP would manufacture more
consumer goods for both use and consumption but also for export.
Impact of Crude Oil Prices on OECD Countries
We have attributed the failure of my first two hypotheses to country differences and political and historical
factors that the simple metrics I had could not distinguish between. I now suspect that even if a country had
similar GDP/person and % of imported oil and % oil energy that I would see significant differences between
countries but that there are countries that I could find that would be less impacted by changes in oil cost or
supply and those that would be more impacted. To test this, we created the following graph.
Source of data: International Energy Agency, World Bank, United Nations; graph: own computation
Here the x axis is the energy use/person, the y axis is GDP/Energy, and each data point color and shape
denotes a range of GDP/person for that country. Additionally, I have divided the data up into four quadrants
using the GDP/Energy and GDP/person. Red points represent countries with low GDP (GDP/capita lower
than $20 000), blue points countries with medium GDP (GDP/capita between $20 000–$40 000) and green
point countries with high GDP (GDP/capita over $40 000). Further, the medians are dividing graph into 4
quadrants: Quadrant A represents highly efficient and low energy use countries– the more diagonally further
country is from median’s intersection, the better is its position. There are countries with high GDP/person
(Ireland, Switzerland, Denmark, and United Kingdom) and medium GDP/person (Greece, Italy, Spain, and
Portugal). Countries from A quadrant would be least affected by crude oil price change. Quadrant B consists
of countries, which are efficient in energy conversion into GDP, but have higher energy consumption per
person. There are only countries with high GDP/person like Norway, Austria, France, Germany,
Netherlands, Sweden and Luxembourg and to decrease their impact of crude oil price change they need to
decrease energy consumption per capita. Countries in quadrant C are weak in efficiency, but their energy
consumption per person is quite low. There are only countries with low GDP (Turkey, Hungary, Mexico,
Poland, and Slovak Republic) that can improve their situation by increasing the efficiency of energy
conversion to GDP may be by shifting to less energy demanding industries. Finally, the quadrant D contains
countries with low efficiency and high energy consumption, and the more diagonally further country is from
median’s intersection, the worse is its position. Here are situated countries with low (Czech Republic,
Republic of Korea) median (Japan, New Zealand, Australia) and even high GDP/person (Belgium, Finland,
United States, Canada, Iceland). These countries would be most affected by crude oil price change; their
economies are fragile in relationship to crude oil. Further research might study differences between high and
low efficient countries, type of their industries in detail and solve the question of dependency on imported
energy sources. It is needed to find a solution that improves situation of countries from D quadrant and
explore how are countries from A quadrant keeping up their GDP per capita, while consuming lower amount
of energy than other countries.
Crude oil market is affected by many variables and therefore is hard to make any prediction for longer term.
When I was starting with research for this bachelor thesis, prices of crude oil were very high and main
concerns were about crude oil reserves, tightness of oil market and time of crude oil peak. Few months later,
under the circumstances of economic crisis, the situation is totally opposite- price of crude oil is around $45
and the biggest problems are connected with oil-exporting countries’ national budgets. Complexity of the
market and unexpected changes are influencing the whole economy. The degree of influence on each
country depends on the percent of oil energy, percent of imported oil, energy usage per capita and GDP per
capita. Among my calculations the most affected countries would be Czech Republic, Republic of Korea,
Japan, New Zealand, Australia, Belgium, Finland, United States and Canada. Any changes in the crude oil
price will cause bigger shifts than for example in Ireland, Switzerland and Denmark, which are efficiently
converting energy into GDP. Further research might study the differences between high and low efficient
countries, type of their industries in more detail and examine the problem of dependency on imported energy
sources in greater depth. It is important to explore differences between most and least affected countries and
identify the reasons of these differences and learn what can be done better. From time, when price of
wooden barrel was bigger than price of the oil inside, we have come a long way. Today we can better control
oil wells, have better technology that allow us to drill more crude oil from wells than before, we have built
pipelines all around the world and we became very dependent on oil. On one side we have huge progress of
our society and on the other one vulnerability and fragility that comes with tight dependence. The problem is
that we are missing signs that would show us this dependence is actually threatening us and we need to find
another sources of energy or better way how to use those we have around us in our country, under our
control. Usually price is a good indicator when the supply is getting low, the price of the product
dramatically increases, but oil price is the result of many factors – economic recession lowers the oil price,
but that does not mean that we have bigger supply than before the economic crisis or that our dependency is
smaller than before. Instability around oil fields can drive the oil price up, but this does not mean that we
have lost some of our oil sources– or at least not for a long time. What each human being can do is to be
aware that oil is a resource to be used as sparingly and as wisely as possible and that each person should
work to reduce that consumption of oil. This can be done for example by using public transportation instead
of own vehicle, better insulating one’s home, car pooling or changing the type of heating system in his/her
apartment to renewable sources of energy. These changes are not for free– they cost us money, effort and can
decrease our comfort. And not to put down personal effort, but in the big picture one person can’t change
that much, when the world consumption is around 88 million barrels per day. But we are a world of almost 7
billion and 7 billion times just a bit saved for each person can be a lot. We need to have complex system that
would bring real change for our country and for the world. These changes can be supported by everyone just
doing the “right thing” but re-enforced with economic incentives and penalties. We need to have government
programs that would set the conditions for environmentally or energy friendly behavior for financial
premium or penalties. These conditions have to be complex and closely checked, since only measurable and
monitored programs that cannot be cheated will actually work. It will be a very long time before there would
be zero dependence on oil. We need to improve our dependence on oil on the hope that the oil will keep
coming through the pipelines for many years even though we have no control over the source.
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This paper reexamined the relationship between oil price shocks and the performance of the Nigerian stock market. Unlike extant attempts, daily data on oil price shocks and stock returns for the period spanning February 2004 to December 2013 was deployed. The results for the benchmark (linear) oil price model showed the impact of oil prices on stock market returns to be negative and statistically insignificant. This suggests that linear oil price shocks appear not to have any influence on the stock market returns. Turning to the results for non-linear oil price transformations, the impact of positive oil price shocks on stock returns turned out to be different from that of linear oil price. Moreover, the negative oil price and net oil price increase variables turned out to have negative and statistically significant effects. Broadly speaking, positive oil price shocks seemed to have a greater influence on the stock market returns than negative and net oil price shocks in Nigeria. JEL Codes: C22; F31; G12; Q43
ResearchGate has not been able to resolve any references for this publication.