Prices of oil are determined per unit barrel of the crude oil which has been used ever since as the standard measurement of oil prices (Rathmann et al, Page 14-16). The quantity, which is the barrel, is used as a benchmark over which oil prices are determined. Different economies use different criteria for determining the oil prices. Within the North American economies, the Texas Light Sweet is used as a benchmark over which oil prices are determined. It is a type of crude oil that is light compared to other forms of crude oil especially the Brent crude oil. It is also sweeter in terms of taste compared to Brent since it has low sulfur contents. The oil prices have not been stable for some time with the recent prices considered low. Arguments have been put forth in an effort to explain the current situation that causes the oil prices to fall. Speculations have also been advanced by the proponents trying to forecast the future state of affairs in oil prices. All these arguments are claimed to be myths by various critics. This paper, therefore, discusses these myths surrounding the oil prices within the global economy.
Before the year 1985, the oil prices were determined by OPEC, which was the controlling body for oil producers (Cologn et al, Page 857-881). After its collapse, PEMEX was adopted by oil producers as the best method for price determination and is still used currently. As these were happening, speculations started to do around with oil prices becoming a factor of various myths. The first argument was that the world economies had grown substantially and that there was an increase in the demand for oil than before. There was also the argument that the oil production sector had not grown enough to meet this growing demand. The upward demand for oil led to the increase in oil prices. This was in conformity with the rule of demand and supply.
Towards the close of last year, the prices of crude oil used as a benchmark had dropped significantly yet the demand for oil remained almost the same (Cologn et al, Page 860-870). The production of oil is also at the same level it has been. The question that arises, therefore, is what caused the rise and sudden fall in oil prices. Theoretically, the prices should continue going up as the demand for oil products had increased tremendously compared to where they were when prices of crude oil started going up. It is this unexpected sudden change of events that has sparked a series of debates that are otherwise referred to as myths by skeptics of the advanced arguments.
The arguments have revolved around environmental pollution, and the production incentives offered to most oil producers especially in Northern America (Rathmann et al, Page 15-19). Analyst argues that the rate of oil production in North America especially the US increased while the demand for oil in Europe declined tremendously. It is, therefore, more of a myth to assume that the changing trends in demand for oil in Europe is the major reason that the oil prices have gone down. A number of factors have also played out leading to the decline in oil prices. Saudi Arabia is clear example of the factors that determine the oil prices within the global economy. Saudi Arabia has argued that the economy should be left to self-regulate so as to correct the problems related to oil prices. Such actions will have an adverse impact on other oil producing countries such as Iran, Algeria, and Venezuela. These countries will see their oil production cut short thus reducing the supply of oil around the world.
The intention of Saudi Government is to slow down the oil production in the US by championing for low prices (De Gregorio et al, Page 157-200). OPEC is also willing to let the prices go down as advocated for by Saudi Arabia. The argument is that the low prices will make American companies realize low profits thus cut on their production. This argument by the Saudi Government is a myth as the American government has initiated a program that offers oil producing companies’ subsidies so as to encourage them to explore other production means that release less carbon in the environment. The actions by Saudi Arabia, therefore, come a bit late and are of little consequence. Such actions will end up hurting the economies of poor OPEC members rather than make the market self-regulatory.
Another myth that the oil producers overlook in arguing their case is that of the market correcting itself (Cunado et al, Page 68-80). These actions still provide the oil producing companies with the required incentives making them meet their costs of operation as well as make profits. Such a scenario gives these companies an opportunity to continue producing and flood the global market with oil products that are cheap. Therefore, the argument that the market will correct the mistakes and force American companies to cut production is more of a myth than a reality. The companies will continue producing and distributing cheaper oil products across the globe even as the prices continue going down. Either, the barrel price that is used to determine oil prices has also gone down. If the price determinant is low, then it is expected that the prices will be low. Expecting the prices to go up when the determinant’s price is low is more of a myth than a reality. It is also the American standards that are US to determine global oil prices. The determinants are a factor of US policies. Therefore, oil prices will still be low as long as the oil produced in the US is of low price.
Works Cited
Cologni, Alessandro, And Matteo Manera. "Oil Prices, Inflation And Interest Rates In A Structural Cointegrated VAR Model For The G-7 Countries." Energy Economics 30.3 (2008): 856-888.
Rathmann, Régis, Alexandre Szklo, And Roberto Schaeffer. "Land Use Competition For Production Of Food And Liquid Biofuels: An Analysis Of The Arguments In The Current Debate." Renewable Energy 35.1 (2010): 14-22.
De Gregorio, José, Et Al. "Another Pass-Through Bites The Dust? Oil Prices And Inflation [With Comments]." Economia (2007): 155-208.
Cunado, Juncal, And F. Perez De Gracia. "Oil Prices, Economic Activity And Inflation: Evidence For Some Asian Countries." The Quarterly Review Of Economics And Finance 45.1 (2005): 65-83.
