Oil price increases of 2004 and 2005: Encyclopedia II - Oil price increases of 2004 and 2005 - Effects

Oil price increases of 2004 and 2005 - Effects

There is controversy regarding the potential effects of oil-price shocks. Some see these increases in the price of oil leading to a recession comparable to those that followed the 1973 and 1979 energy crises or a potentially worse situation such as a global oil crash. Most economists see this as unlikely, partly because all developed countries have high fuel taxes that decrease as oil prices increase and can be eliminated in the event of a dramatic price spike. Nevertheless, that loss of revenue would put a strain on government balance sheets. The American Strategic Petroleum Reserve could on its own supply current U.S. demand for about a month in the event of an emergency, unless it is also destroyed in the emergency. This could well be the case if a major storm were to hit the gulf, where the reserve is located. While total consumption has increased [21], the western economies are less reliant on oil than they were twenty-five years ago, due to substantial growths in productivity. In the United States, for instance, each $1000 dollars in GDP required 2.4 barrels of oil in 1973 when adjusted for inflation this number had fallen to 1.15 by 2001. But oil's historically high ratio of Energy Returned on Energy Invested continues a significant decline. Despite the rapid increase in the price of oil, neither the stock markets nor the growth of the global economy have been noticeably affected. Inflation has increased. In the United States, the Consumer Price Index rose by 0.6% compared to 0.2% for September. This was driven by a 4.2% increase in energy costs. As a result during this period the Federal Reserve has rapidly been increasing interest rates to curb inflation.

Economists say that the substitution effect will spur demand for alternate energy sources, such as coal or liquified natural gas. For example, China and India are currently heavily investing in natural gas facilities. Nigeria is working on burning natural gas to produce electricity instead of simply flaring the gas. Outside the US, more than 50% of oil is consumed for stationary, non-transportation purposes such as electricity production where it is relatively easy to substitute natural gas for oil.

The increased price of oil also makes previously impractical sources of oil attractive to businesses. The most prominent example of this are the massive reserves of the Canadian tar sands. They are a far less cost efficient source of oil than crude, but at 60 dollars a barrel, the tar have recently become very attractive to businesses. Recent months have seen billions of dollars invested in the oil sands.

The increased price of oil might also encourage greater fuel efficiency. Recent years have seen a move towards more fuel-thirsty sport utility vehicles in the United States and Canada, and this may be stopped by the high price of gas. The September 2005 sales data for all the vehicles vendor indicated SUV sales dropped while small cars sales increased compared with 2004 sales. There is also an ever increasing market for hybrid vehicles since they are more fuel efficient; since the 1973 energy crisis, the front-wheel drive passenger car has replaced rear-wheel drive as the preferred layout for energy efficient cars. There is an increasing demand of crossover sport utilities which are more fuel efficient - especially for those based on passenger car platforms.

Oil price increases of 2004 and 2005 - USA Stock markets

The increase in oil prices over two years was mirrored by an increase in stock values in the energy sector. The value of the stock in companies such as Apache[22] and Conoco-Phillips [23] rose sharply during this period. These prices increased more rapidly toward the end of August, particularly after Hurricane Katrina. [24]

Wal-Mart shares continued their decrease in value that began with the increase in the oil prices. Over two years, stock in Wal-Mart dropped in value by 25% from $60 per share to under $45 per share. [25] Earlier in August, Wal-Mart announced that higher than expected oil prices cut into the corporation's profits for the 2nd quarter of 2005. Since oil prices after the end of the 2nd quarter continued to rise, 3rd quarter profits from Wal-Mart are expected to be small. Because Wal-Mart's distribution system relies on the customer to drive to a large discount big-box store, increases in the price of fuel might discourage some customers from making the trip as often. Wal-Mart, like all retailers, will also face higher shipping costs to get goods from the factory to the stores. This will likely cause inflationary pressures.

Oil price increases of 2004 and 2005 - Asia Pacific Region excludes Australasia

The Pacific rim had been experiencing this crisis on an ongoing basis prior to Hurricane Katrina.

• In the Philippines, the oil crisis caused its public to call for immediate government assistance. [26] New sources of energy were sought to deal with the crisis.[27]
• A senior minister of Singapore expressed concern at the oil crisis in Indonesia.[28]
• The Indonesian president had instituted subsidies to control the price of gasoline.[29]

Oil price increases of 2004 and 2005 - South Asia

In India, farmers who are already under considerable duress because of IMF and World Bank imposed deregulations which have left many heavily indebted, will suffer extra burden because of higher fertilizer prices. A ongoing suicide epidemic in the South Asian agricultural heartland is therefore bound to grow.

Oil price increases of 2004 and 2005 - Sub-Saharan Africa

High oil prices are hurting many countries in Africa, including Zimbabwe, Eritrea and Tanzania. High oil prices have created an oil supply instability, per barrel price instability or both. In some cases this has led to fuel rationing being enacted.

• Many countries in Sub-Saharan Africa lack the foreign exchange reserves (ie, Dollars) to purchase enough oil products at the ever increasingly higher prices. These nations must resort to limiting imports or rationing their existing supplies.

Oil price increases of 2004 and 2005 - Latin America & Caribbean

Venezuela's president, Hugo Chávez, came under increasing scrutiny as he began selling oil at lower-than-market prices to island nations in the Caribbean. [30]

• At the same time, Cuba has experienced electricity shortages.

Oil price increases of 2004 and 2005 - Gulf States & Eurasian Arab-Islamic Regions

Iran came under increasing pressure from the European Union in regard to their program to build nuclear power plants.[31]

Adapted from the Wikipedia article "Effects", under the G.N U Free Docmentation License. Please also see http://en.wikipedia.org/wiki