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The price of oil for the past month has been experiencing an upward trend reaching its highest price of $106/barrel since the 2008 financial crisis where it had then dropped to almost $52/barrel. However, this rise in the price of oil has been preceded by a constant increase over the past two years which is duly attributed to the come back of the world economy from its severest recession in history and therefore revamping the demand for oil; an important input to production. Emerging countries such as China and India were the main drivers behind this healing growth as both of their economies are developing at incredible rates and thus increasing demand for primary and intermediate goods of which oil is part of the former and the latter.
Nevertheless, this past month, the increase in the price of oil can be greatly attributed to the unrest ravaging the Middle East and North Africa (MENA) region, which controls upwards of 65% of the world’s reserves of this natural resource. The ongoing uprisings, sparked by the Tunisian Jasmine Revolution and later emboldened by Egypt’s successful “dethroning” of Hosni Mubarak, have thrown the region up in turmoil creating an air of uncertainty over the supply of this essential resource. The latter is greatly aggravated by the fact that the price of oil is highly elastic due to the lack of supply reserves, in other words, while the current supply of oil is able to satisfy its current demand, there are fears that given a sudden surge in demand, supply shortages may arise due to a lack of proper stocks. In consequence, this would lead to an increase in the prices of many goods causing inflationary pressures that are risky for many recovering economies, namely the fragile few in Europe and the United States; all facing fears of a double dip recession.
The uncertainty and the spiraling effect of the rise in oil prices brings forth one important flaw in the global economy: its dependence on oil as a crucial input to production. True that human capital and labor are also important factors of production but their yields would be greatly diminished without the use of the latter as an input. Therefore, it is this author’s belief that in order to stabilize the world’s economy and promote sustainable growth on the long term, all the while avoiding such risky recurrences, that governments and individuals the world over begin encouraging and investing in new forms of energy, while making sure that no new source of energy gains a “to big to replace” status.
hrmshaker 