Debate the Notion That the World Economy Will Once More Be Derailed by an Oil Price Shock

Topics: Petroleum, Saudi Arabia, Peak oil Pages: 5 (1892 words) Published: January 6, 2013
Date – 8th/11/2011
Title – Debate the notion that the world economy will once more be derailed by an oil price shock

Debate the notion that the world economy will once more be derailed by an oil price shock. Introduction
The Middle East countries producing oil cornerstone and centrepiece of global energy security. It is simple to understand why, as noted by Bakshi (2007) in 1986, the Middle East as a region exported 46% of oil the Organization for Economic Cooperation and Development Countries (OECD, USA, Canada, Australia and the Europe). At the same time, it accounted for 85% of spare oil production. At the beginning of this year (2011), North African and Middle East suffered political disturbances, with citizens demonstrating against the leadership of their countries. The demonstration started in Tunisia, where a long serving president was ousted by popular revolt, they quickly spread to Egypt, Libya, Bahrain, Syria and unrests have been reported in other countries like Saudi Arabia (Bingaman, 2011). The term Arab Spring has been coined to explain this popular unrest, which when it began saw the oil prices rise by 29% (Singh, 2011)The biggest debate is whether such happenings result in the world economy to once more be derailed by an oil price shock. But to have a better understanding of this ongoing debate, and to get a correct answer, it is important to look back at the recent history of the region and try to realise the main cause factors for this current situation.

The beginning of Middle East Oil Power,
As early as 1930s, the American and Western oil companies mainly, Chevron (initially called Standard Oil Company of California), had set up shop in Saudi Arabia oil fields. For nearly three decades, from 1930s to the 1960s, a loose international structure regulated the international oil industry. Oil exploration, expansion, refining and marketing was done by seven integrated oil companies referred to as ‘seven sisters.’ By being able to regulate and control oil production in oil producing countries, these companies directly controlled the demand and pricing on the international market.

As noted by Bakshi (2007) an important change came about in 1970. This is the year when American oil production reached its highest point. The implication of this was that America did not have oil surplus to supply to its allies in case there was an oil interruption due to political issues, for example during the Suez Canal crisis of 1956 and the Arab-Israel war of 1967. Thus, as noted by Bakshi (2007) the vulnerability of America and the western countries to “oil weapon” started to appear.

The comparative strength of oil multinational companies and the administrations in the oil producing countries were suddenly altered, and in 1970s the OPEC (Organization of Petroleum Exporting Countries), took action to stop the control of their oil resources from these companies. This shift in power was applied in 1973 when Israel-Arab war broke out, and the world experienced its first oil shock. At the same time, the OPEC realized the high value of their oil and how it can use the oil as a strategic weapon. Indeed, the rapid rise in oil prices during this period resulted in global recession. The world for the first time became aware of the finite nature of oil, and how oil can result in global economic decline, when the Middle East experiences political instability. By the end of 1970s, production and pricing of oil was determined by OPEC and not the seven big oil companies. The first oil shock

The events of 1973, in the Middle East send alarm to the West. The West under the OECD countries implemented some steps meant to limit oil dependence, the steps taken included, increased use of coal to produce power instead of using oil. The dependence of OECD on Middle East as a source of oil imports also went down from 25% in 1973 to 13% in 1984. The US also put up measures to reduce its oil consumption...

References: Idea of Gas-Tax Holiday Runs into a Dead End,” Associated Press, July 19, 2008.
Spence, M. 2011. Oil Price Shocks and Global Recovery: Retrieved on 8/11/2011 from:
Hamilton, J.D., April 27, 2009
Laessing,U February 23, 2011. “Saudi King Back Home, Orders $37 Billion in Handouts,” Reuters,
Maki, D., February 24, 2011.Barclays Capital, as quoted by Motoko Rich et al., “Rising Oil Prices Pose New Threat to U.S
Crawford, N., Feb 28, 2011.Will High Oil Prices Derail the Global Economy? Retrieved on 8/11/2011 from:
Mouawad, J and Krauss,C., March 1, 2011
Bingaman, J., March 2, 2011. “World Oil Supplies,” remarks in the Senate, Congressional Record, daily edition, vol. 157, pp. S1106-1107.
Parussini, G., March 5, 2011.“IEA: Libya Unrest Starting to Hit Oil Supplies,” New York Times,
Singh, V
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