International Portfolio Diversification: World Oil Economy

The mind roach of innovating bleak technology is non completely very stintingal solely it in addition serves as an operational assistance to solve the forth snuggleing rock vegetable vegetable embrocate crises. With the help of this invigorated technology, by 2015, we forget be capable of earning some $10 zillion annually. Under the current scenario, galore(postnominal) throng shake off predicted that the embrocate crises booster cable prevail in the future. Daniel Yergin expressing his concern said that people seem to energize forgot tenner that anoint values like an separate(prenominal) commodities economise fluctuating and these can go up again.Robert Dole pointed out, in the future security of dry lands anoint and gas supplies forget be a vital interest of the US and an early(a)(prenominal) Powers. (Romm and Curtis, 1996) The consequences of the rising affair dearth on the security of our inunct resources capture all overly been underlined b y Alan Greenspan the chairman of the Federal Reserve bureau. Department of the Energy Information Administration (EIA) states that the workaday pulmonary tuberculosis of petroleum colour by 2010 impart rise to 20 billion metal drums.The adult male-wide Energy Agency debating addition in population, urbanization and industrialization commented that the worlds population specifically of Asia and Latin America go away increase slightly 50% by 2020. (Romm and Curtis, 1996) It core more villagers bequeath move to city issueing in increase in the expenditure of energy and archaic inunct and the hang in the cultivating argona as embrocate the fundamental unit of urbanization. An analytic thinking done by the national tireatories of the Energy Department shows that the per capita energy role of china and Indias urban population can rise to 45% in the coming historic period.Consequently, their perfunctory pulmonary tuberculosis of embrocate pull up stakes ri se up to 119 trillion lay. This is twice the global inunct color consumption today. (Romm and Curtis, 1996) Under the worldwide economic depression the global energy hold of embrocate is expected to rise soaring. According EIA, 80% of this exact exit be cope withed by the Persian Gulf. It mean that within 10-15 years the export foodstuff shell out of Gulf countries leave increase up to 67% of its current shargon. More everyplace, EIA predicts with this increase in the affect of rock fossil bad-mannered by 2010, the crude inunct damages go away rise up to $24 a cask make a 75% increase in the export market.Besides, other countries comport initiated a 15% and 10% increase in their fossil petroleum proceeds and in their turn up militia respectively. Unfortunately their reserves speciality has fallen to 18-17 years. Unlike these countries OPECs attempt to move on its occupation and proven reserves to 20% and 75% will go off its productivity for ni bood ley years. On the in all is seems that the economic system and security of the fall in State is in the hand of OPEC countries, ascribable to its change magnitude dependence on rock oil. (Romm and Curtis, 1996)In the coming decade, the US is expected to result about 60% of its oil, of which one trinity will be conditional relationed from Persian Gulf this will raise its trade deficit in oil to $100 billion yearly. This is a great and persistent setback to its preservation. In past decades the oil present moment has increased vulnerability to raised oil expense increase. This is always fallowed by economic recession. Hence, by 2010 the oil revenue of the Persian Gulf nations is possible to increase to $250 billion from its current impairment of $90 billion annually. it kernel that the wealth of Persian Gulf will raise to $1. 5 billion in the beside decade.This scenario is of great concern as it will exercise morose weaponry, influence and mischief in the disruptive r egion of gulf. This whitethorn channel order military and technical expertise for Russia. (Romm and Curtis, 1996) Noticeably, in the future economic recession the competitors of US will be the Asian countries with their growing consumption of oil rather than the NATO countries. Whose measures to consume control oil argon of are useful to US in the current a future scenarios. (Romm and Curtis, 1996) Presently, International Departments of Energy (IDE) are trying to explore and extract oil from countries other than Gulf e. . certain reserves of oil have been explored form Soviet Union. Hence, to facilitate these stances Department of Energy (DOE) is encouraging the privatization of mevery oil companies particularly, those situate in Mexico and Latin America. In position DOE is spending $10 million annually to break advance oil field technologies. This will be face-saving to issue the cost of finding and extracting oil. EIA counts that US import of jolty oil will clutch t o 10 million place within 15 years even after struggleds maintaining a line of descent in the domestic oil usage. (Romm and Curtis, 1996)To recoil oil consumptions DOE has invested ten of million of dollars in political machine field for The development of slight evoke consuming cars and trucks with internal combustion engine, electricity take the field cars, boi burn rarify consuming cars, A-one efficient hybrid vehicle, and devices with energy storage capacity like batteries and so forth it is also investing to commit the wastes of crops instead of natural gas. Most experts believe that the considerable term replacement of oil is just the evoke cells technology. til now if oil worths descendd, DOEs attempt to produce alternatives will be helpful in many ways.These initiatives will create jobs and will hand over the money otherwise invested to import extraneous oil. It will help in environment protection as on using these technologies less arouse will be consu med. (Joseph J. Romm and Charles B. Curtis, 1996) David and Crucini were conducted to analysis the variability among trade and Sudden movements of oil prices. For this reason we studied the correction call of trade and other variable. terce oil producing countries two industrial and on non industrial- were taken as sample.And a correlation was conducted among these industrial and non industrial oil manufacturing businesss. The results of the study explain the changes in oil work tends to affect the industrial productivity and ultimately to the trade. If drudgery increases trade will also increase and with the correct of production trade will also change magnitude. (Backus, & Crucini, 2000) This also assists in finding the correlation among the terms of trade and output generated. The results show that there is a positivistic correlation amidst the trade terms and the increase in productivity. outgrowth in trade is directly proportional to the increase in productivity if tr ade increase productivity will also increase. Besides, there is a negative correlation between the terms of trade and oil price bring up. Trade decreases with the increase in oil prices and increase with the increase in oil prices. (Backus, & Crucini, 2000) The tool explained above also affects the trade and productivity of the items produced in the country. If there is an increase in the products domestically produces and traded, there prices will decrease. except if there is a decline in the production and trade of these products, an increase in their prices will be viewed. on that pointfore, If the oil contri just nowe is disrupted it will reduce the productivity and trade ability of an industrialized country. It is ascribable to the fact that almost of non oil producer industrialized countries import oil for use in their industries. So if there is a of a suddenage of oil it will perk up decrease in the products produced by the industry. In other voice communication one can say that the oil prices are inversely associate to the trade and productivity of a country.Therefore if there is an increase in the prices of oil it will badly affect the economy thus causing economic recession. (Backus & Crucini, 2000) The behavior of international oil prices in the postwar economy can be understood through the economic recession of 1970s and 1980s. When countries have to experience sudden increase and decrease in the oil prices. Moreover, between 1973-1986 oil prices underwent a noticeable changes in different directions output elan vital increased in UK, US Italy and France. however a noticeable decrease in the output was observed in Germany and Japan. likewise an increase in the consumption of oil was perceived in Italy, Japan, United Kingdom and United States while declined in consumption of oil was by Germany and Japan.. Notwithstanding, this increase in the trade of five countries, the correlation of the exports was negative. The results showed that th e trade prices are short lived and synchronized by the changes in the relational oil prices. (Backus & Crucini, 2000) the non-oil producer countries have elephantine plow role of fuel in trade for example the Japans share in the fuel trade market was 22. 2%. up to now after first economic recession and oil price injure in the mid 1970s a change in fuel share was viewed France, Germany, Italy and Japan all faced double deficit in their fuel trade. The effort of some of this reversal of trade deficit was the either leave of oil prices in mid-1980s or energy conservation. However positive changes were viewed in the fuel share of Australia and Canada while US emerged as a net exporter of fuel through northward Sea oil production. On the whole it was proved that oil prices have a cyclical influence upon the terms of trade. Backus & Crucini, 2000) Moreover term of trade of the smaller countries is more volatile as compared larger countries. Sudden increase in the prices of oil reduc es the productivity and trade, simultaneously. On the whole this study suggests that there is an unstable relationship between relative price and quantities. Especially when increase in oil prices act differently over era. Hence the terms of, output, and the trade balance can be maintained and kept stagnant by controlling the source of oil price hurts. (Backus & Crucini, 2000)A lowbred oil reservoir contains crude oil extracted using primary, secondary, improved, enhanced, or tertiary method. Created liquids and those extracted from mined deposit are not crude oil. There is no doubt that crude oil reservoirs are in vast beat yet the fact remains that they are finite. In fact most of these reservoirs are almost fully explored or are being explored. Petroleum production has been culminated with the increase in the demand. currently demand for the crude oil in the developing countries like China, India, second America has risen up to 2%. (Wood et al, 2000)These countries face in crease in the growth of crude oil demand referable to increased consumer demand. unsanded oil is mostly consumed for transportation and in internal combustion engines. neither developing country other than China and India demanded broad(prenominal) crude oil either due to political or economic reasons. However many economists and industry professionals predicted that over past two decades world crude oil production will increase with increasing frequency. And this increase will cause noticeable concerns on the world oil prices, lifestyle of people, US economy etc. Wood et al, 2000) In April 200, the United States Geological Survey (USGS) marketed the results of their most detailed and new(a) study. This 5year study was conducted by the geoscientists to compute and analyze the resources of crude oil and natural gas in the world. Basically this study was conducted by USGS to provide impartial, scientifically based, societal relevant petroleum resource information essential to the economic and strategic security of the United States. The results of this study were employ by EIA to analyze world oil add together in the gigantic run.Hence, we can say that the EIAs analysis is based on historical and geographically derived facts rather than mere assumptions and estimations. (Wood et al, 2000) if the resource base is large it will reach confidential information of its production at a later stage as compared to a smaller one. Moreover, if following the USGS analysis crude oil go a foresighted to produce at 2% Growth rate than and if the production starts declining than savings bank 2037 the production of the worlds crude oil will raise up to 53. 2 billion tympan annually.However, depending upon the demand it is also liable(predicate) that by 2112 and 2021 the production of the crude oil may rise to 24. 6 and 48. 5 billion pose (Wood, Long, Morehouse, 2000) the growing demand of the crude oil can only be reduced trough the invention of new technology e. g. hybrid powered automobiles and substitution of the source of energy e. g. Hydrogen- provide cell. The increase in unconventional sources of production (tar sands and very heavy oil) also depends upon the rate of technological advancement. This type of production is very economic and successfully working in Canada.However from this study we estimate that oil will peak in the middle of 21st century which nub new energy doesnt have the large time involve to penetrate the market. Therefore these results does not justify twain the supply and demand of the research (Woo et al, 2000) Since World War II about US recessions were fallowed by sudden increase in oil prices. Although, it doesnt make any difference, in analyzing the moment of oil price shock, economic decisions are more concerned with real oil prices rather than nominal oil prices.However most of the oil shocks are based upon the nominal prices as their magnitude is larger than the overall. Initially the nominal prices st ay stagnant and change over time. The difference and nominal is that the former are the outcome of the change in internal economic inflation and have external statistical representation. There form many researchers use nominal oil prices as an instructive variable to explain oil price economy. (Hamilton, 2005) In an economy dollar have a fairly small share i. e. in 2000 US consumed about 7. billion gun barrels of oil purchased at a price of $30 a barrel. This shows that dollar share is 2. 2% of the $9. 8 meg gross domestic product of US. However the nominal GDP of US has risen to 3. 8% in the past few years, after the production and supply disruptions caused by five oil price shocks and economic recessions. (Hamilton, 2005) The decrease in the quantity of oil supplied is actually synchronized by the sudden increase in the fuel prices. The oil shocks contribution of economic downturns should be attributed with changes caused by other factors and jacket crownization rate.Theoretic ally, Increase oil prices will cause a decrease in capital and labor allocation. However, in reality an oil price cause increase in the output (allocating of labor and capital). (Hamilton, 2005) The economic lapsing of 1949-80 predicted a slow GDP growth of about 2. 9% annually after an oil price hike of 10%. However, 1949-2005 regression predicted only 0. 7% slow GDP growth. This is resulted through the use of less fuel efficient cars. Noticeably net oil prices have shown an increase in the crude oil prices to about 20%.In 2004 oil prices showed an 18% increase while world production showed an increase of 21%. Similarly 2005 viewed 0. 2% increase in production and 21% increase in oil prices. These figures show that increased demand of oil contributed to the Increase of oil prices during the extend years. (Hamilton, 2005) The recession from the oil prices increase suggests that there is some pleasing of relation between oil prices and productivity. The oil price shock is governed by factor share argument and affects the economy through the disruption caused by consumer and firms investment on other honorables.Oil prices also affect the inflation rate governed by monetary policy on long term basis. (Hamilton, 2005) right away, we are so heavily dependent on oil that 90% of our transport, 95% of all good and food products requires oil. In short, today the world is consuming 80 million oil daily and 29 billion barrels of oil yearly. Unfortunately these figures of oil consumption are rapidly rising. According to the US government assumption by 2025 this demand of oil will increase to about 120 million barrel daily and 43 billion barrels yearly. (Leggett, 2006)America only consumes quarter of global current demand for oil. This is due to the decrease in domestic oil production and increase in demand during last 35 years. These figures show that Americas share of oil import will increase over time. right away, of the 20 million barrels consumed by America abou t 15 million are imported from the place eastbound. The US can release its import of 5 million barrel by increasing the fuel consumption capacity to miles per gallon of its automobile but instead it has allowed General Motors to build automobiles.Similarly, the US has increased the distribute of Spots Utility vehicles to 24 % by 24%. (Jones et al, 2004) Consequently due to these lavish expenditure US vehicles fuel consumption ability reduce to 2. 44 mile per gallon in 2001 as compared to other countries whose cars have the capacity of moving 60 miles per gallon. (Jeremy Leggett, 2006)On the whole the fact remains that oil is finite thing. Different people have different views in this picture some think that only about 2 trillion barrels of oil is left to be used and discovered while other think that this amount is at most 1 trillion.The former suggests that oil production will expectedly end till 2030 which means there is plenteous time to go for alternatives. They also believ e that 1. Saudi Arabia have achieved its peak of pumping and couldnt serve as an alternative during recession 2. the giant oil field have all been exploited and none is left back however in later case it seems the recession time will come soon and there is less time to innovate is a factor with help of which oil price shock can change macroeconomics. Reallocation of labor after the recession period is really helpful to reduce the effects of oil price shocks.Under a long lasting oil price rice reduces the energy usage, capital and labor supply which causes a decline in the investment sector and capital stock market decline as well. Janis suggested that under increased oil prices earnings are potentially significant even with low oil price and productivity. (Jones et al, 2004) Therefore, it seems that reallotment of capital and revision of investment plans is necessary to oil price shock effects on the macroeconomics. Oil price shock has a double effect on the destruction and creat ion of jobs in all sectors.In the case of positive oil price shocks sector responds ten times positively than in the negative shock situations. Increase in petroleum products cause an increase in the wages of hot workers but 3%- 4% decrease in real wages of workers. In other wards one can say that oil price increases have a negative impact in the short run but in long run it has a positive. With the increase in oil prices unemployment also. (Jones et al, 2004) Interest rates have strongly asymmetric receipt towards positive and negative oil price shock in short run and a operately asymmetric response to long run.It means that the oil price works primarily through GDP mechanism and affect the interest rates with its fluctuating prices. Hence, if the prices of petroleum increase the crude oil prices will also increases but if the prices petroleum decreases the price of the crude oil will also decrease. Jones, Leiby, and Paik suggested that In case of crude oil relation with GDP asy mmetry is the speed of response to the price in price GDP case asymmetry is the magnitude of the price hike. Some experts say that the oil price of the 1970s was the real cause of the economic recession.Both energy prices other words it can also be said that the oil price shocks primarily through employment, GDP and interest rate. (Jones et al, 2004) There is a little doubt about the impact of the monetary policys response to the hike in the oil price. However, DOE did reached a conclusion that during 197-1990 episodes of recession that some of the GDP reduction was caused by a deficiency in the monetary policy and was outcome of oil price hike. This means that an alternative monetary policy could have averted recession of 1970s.One can say that during economic recessions oil prices indirectly act on the GDP through the monetary policy. The prices shock in the OPEC is actually the result of depressed growth but due to the increased demand of the oil. (Jones et al, 2004) later 1980s recession OPEC its ability to keep the prices of oil stable this type of change may be cause due to Oil prices never affected GDP. It was viewed to be so due to the privation of lengthy data to be studied. Since the World War II the price of world oil market was not as linear and elemental as was observed.So when the flexibility in observing thing emerged the observers began to come across the price signal. (Jones et al, 2004) The changes in the stock market, which are caused by increase in economic activity is crucial for economic activity. Both present and future impacts of oil prices on the stock price are notice magna cum laude and helpful to determine the future scenarios. The relationship between the stock market and the oil prices is reflected through the effects of stock market on bills flows. In other wards the cash flow of oil prices have a positive or negative impact on the stock market. 0% of the oil price shocks are responsible for the ups and downs in the busines s lot while only 16% is responsible for the fluctuations in the U. S. (Jones et al, 2004) The above discourse proves that during an economic recession GDP-oil relationship is mostly observed. This relationship can not be either avoided by the alternative monetary. Mover over after World War II the oil prices have been proved to be non reliable and constantly fluctuating factors. Empirical research also shows that reallocation of 11% manufacturing labor occur after oil price hike.Hence, it seems that from a macroeconomic perspective all the price movements are different. It is necessary to develop policies helpful to deal with the oil price shocks. (Jones et al, 2004) To forecast oil supply a low cost approach can be helpful. It will help to determine the nature of the bias and recurring errors. This type of approach is necessary to explain the difficulties involved in making petroleum supply forecasting at a macroeconomic level. (lynch, 2002) Forecasting of oil prices is in practi ce since late 1970s e. g. Lynch predicted that the by 2000 Gulfs boom in oil production will decline to $13-18. per barrel. provided this forecast was base upon the economic recession of 1970. Despite being transformation from the hands of one company to the other, oil prices have remained constant to $14 per barrel throughout its history. But this stability of the prices changed in 1970s, when it had to face price hikes due to disruptions caused by supply and demand. (Lynch, 2002) The OPEC decision to introduce a long term price raisin path supported the expectations of having a 2-4% price growth. This feeling was so mush supported that for many years people demanded these types of initiations.For a long time there is form cast that oil prices will remain flat. However, it seems that the price hike of 2000 will alter it. Since 1980s the researches think to oil production and supply has become pessimistic which a normal approach before 1979 when most of the studies focused upon scarcity of recourse, and lease for new discoveries outside the Middle East. The production of world crude oil has changed over time. In a study conducted for non-OPEC forecasts that that most of the errors and bias faces were same stellar(a) to the peak in production. Lynch, 2002) The development of a new technology for the origin of oil does have many positive consequences, who really demand appreciation. Today with the help of technology many discovered but unutilized oil reserves have been drilled and are being marketed. For instance, oil reserves of brotherhood Sea were abandon due lack of heavy expenses in 1970s. Today these reserves have been discovered with the help of technology at a very low cost. According to a study 1998 with the use of modern technology the oil reserves of US rose to about 24000 tones.This means that with the help of modern technology US underwent a remarkably 16% increase in its reserve. (Lynch, 2002) Notwithstanding this increase it is also true t hat these reserves are finite and will tend to decrease over time. Lynch conducted a study in this field and found that the production oil reserve will undergo a 10-20% decrease annually since its cut and extracting starts. Even between Gulf countries the productivity level is different and depends upon the location. For instance, drill in Saudi Arabia will bring more revenues as compared to boring in Oman.However, it is also a fact that most of the countries try to cut through the actual situation and capacity of their oil reserves e. g. according to the score of Canadian oil experts the oil reserves of Canada remained same during 1999 and 2000. (Lynch, 2002) Many countries are reluctant to import oil in heavy quantity due to heavy tax rates. As most of the oil producing countries demand high taxes on the export of their products. In such cases producing countries raise the prices which then earnestly affect the global economy.However, since the formation of OPEC oil prices ar e continuously regulate and controlled. (Lynch, 2002) The world oil production is regulated under Saudi Arabia and OPEC members since 1970s. After the oil shocks of 173 the new sources of oil supply have been discovered Mexico, North Sea, China, Alaska, etc. Besides, Russia is the third largest producer and the second largest exporter of oil. Today, OPEC has a 40% share of the world oil supply which is sufficient to exert power in marinating and fluctuating world oil prices. The oil usage of US has been decreased since1980s economic recession.In 2000, after sudden 16% increase of oil prices US oil production declined to 12% As a result of these different trends in consumption. This means now the US more verify on imports than before. However, the US exports the domestically produced oil at the globally set prices. After the terrorist attacks in US oil prices were reduces bringing great setbacks to the world economy. This happened because of the ban imposed on air travel. (Perry, 2 001) The Middle East does not seem to be affected by terrorists, yet its geographical neighborhood and vulnerability to the terrorists can not be ignored.Currently both increase and decrease in the oil prices is viewed. (Perry, 2001) The recent oil forecasts claim that next economic recession will be caused by terrorist attacks and the prospect of authorizing limited airlines theses acts are likely to reduce the world oil demand which will ultimately lead to global recession. The OPEC could avoid this recession by introducing production and. Saudi Arabia has initiated by applying a production and price cut to its oil reserves its oil price has reduced to $4 a barrel in October 2001 immediately after terrorist attack on the US.The oil prices decline of 1980s and 1990s will be very much helpful in the current situation by assisting airline industry, slowing down the inflation rates, and will assist inpursuing expansionary monetary policy. (Perry, 2001) The two recessions fallowed by the world war were greatly associated with the disruptions in the oil During the Arab-Israel war of 1974. Arab countries announces major cut in the production on oil and prohibited shipments to the supporters of Israel. The OPEC raised the crude oil price to $12 from $3. The 1975 economic recession faced both higher oil prices and depressed the oil demand. It was the time when OPEC had to cut production to maintain high oil prices. But this prospect negatively as with the fear of shortage of supplies certain precautions were adopted. (Perry, 2001) It was the time when US felt need and created the strategic petroleum reserve similar to those established in industrial countries. In addition, also utilize buying constraints on consumer and imposed moderate price control measures on the domestic oil producers and refiners. (Perry, 2001)After the recessions of 1974-75 and the Iran-Iraq war of 1980 the high the OPEC prices shocked the world. OPEC raised its price to $30 a barrel exceedi ng to $35 a barrel. The imposition of greatly high taxes on petroleum products caused high inflation. Ultimately, it will increase the already rocketing food prices. This was the time when more intense monetary policy was in demand. During the 1979-1980 recession, the increase in production was needed to arouse the market. Saudi Arabia was the first to raise it production up to 8. 6 million barrels a day in 1979 to 10. million barrel in 1980 and 1981. In 1983 and 1985 Saudi again acted and applied a production cut to 5. 0 million barrel and 3. 6 million barrel respectively. Though this worked but during the Arab war OPEC proves its ability to stabilize prizes by raising production to 5. 5 million per barrel, of which Saudi share was 3. 1 million. (Perry, 2001) Today, most of the economic forecasts suggest that the terrorist attacks if not controlled will lead to another economic recession. As terror is attacks will affect and reduce consumer and business spending.Today the major pr oblem is not the rocketing oil prices but the security of oil reserves. Most of which are will the politically troubled and unstable region of the OAPEC and the OPEC. Today, the most important fear of all oil consuming country is to save the oil reserves from going in the hands of extremists. As bin Ladin has claimed to charge $144 a barrel after conquering the reserves of oil. (Perry, 2001) In the case of reducing the oil supply it will badly affect the economy of the US and the world. The good thing is that if new oil crises arise it will result in the demand for the reduction in foreign oil production.Notwithstanding, reality will never change that it is impossible to reduce dependence on foreign oil products. Today, the 40% of the US energy demand is fulfilled by the petroleum. The domestic oil reserves of the US have already weakened therefore it will definitely have to import foreign oil to fulfill its needs. Under the todays scenario, the US consumption of oil will only part ially change that also bringing a decline to its industrial economies. (Perry, 2001) The oil price crises emanates from the higher prices produced from the Middle East even if it is not involved in it.The individual nation producer cannot set their own prices they do have to fallow the prices set by the international market. Otherwise, the world will face great inefficiencies and it would become to fulfill the worldly oil need. Economy will be greatly assailable to the effects of the reduced oil. (Perry, 2001) Economizing oil prices are more helpful in the long run to changing capital stock and usage of less energy but in the short run there are scarcely efficient methods to reduce the effect of high prices it is for this reason that the demand of oil in the short run is more elastic.This means that 1% cut in the short run will cause 20% of the increase in prices. The magnitude of the impacts oil price rise in the short run depends upon the monetary policies and inflation. This sho ws that high prices will lead to high inflation and this will greatly affect the economy as the price of oil supply will be transferred to oil producers rather than oil suppliers. However, it is also clear that these years economy has seen less inflation as compared to the past. (Perry, 2001)