Oil is considered scarce when its supply falls short of a specified level of demand (Carollo, 2012, p.12). If supply cannot meet demand at the prevailing market price, prices must rise to encourage more supply and to ration demand (Carollo, 2012, p.13). In this sense, oil scarcity is reflected in the market price. Oil is the most traded commodity and it accounts for 10% of world exports (Berlatsky, 2013, p.32). Changes in oil market conditions, supply and demand have direct and indirect effects on the global economy. Inflation, poverty, stagnant growth, and development are some of the results of oil market conditions. Oil scarcity is measured by its price developments.
Economic problems of Oil scarcity
Reduced availability of oil results to higher oil prices (Haerens, 2010, p.33). The higher oil prices are brought about by the demand outweighing the supply of demand. The excess demand will prompt oil producing countries to hike the prices tremendously. Higher oil prices lead to a reduction in the GDP levels of oil importers, both in the long-term and short-term (Haerens, 2010, p.34). Almost all economic activities like manufacturing and trade are dependent on oil. The high oil prices will have a strain on these activities which determine the gross domestic product of a country. The extremely high prices charged by the oil producing countries willcause negative balance of payments in importing countries and this will reduce global trade.
Global trade is one of the core tools countries use in strengthening and growing their gross domestic product. Strained trade among the countries will lead to stagnating economies and negligible growth (Kirton, 2009, p.45). The number of exports will fall relative to the GDP due to the extremely high costs incurred during the process. The high oil prices reduce countries’ average propensity to consume. Other non-oil sectors like tourism and farming will be impacted by the oil prices.
The decrease in GDP will be greater in developing countries compared to developed countries. This is because developing countries depend majorly as the main source of energy (Singh, 2012, 55). All economic activities like manufacturing, transportation, and farming require energy. The scarcity will paralyze these sectors causing a great decrease in the GDP of the country; the GDP depends on such sectors. Developed countries will experience decrease in GDP but not to a greater level because they have other sources of energy.
The high oil prices will stifle the overall growth of the economy through its effect on the supply and demand for other goods (Onyemelukwe, 2005, 21).Increases in oil, caused by its scarcity, depress the supply of other goods because they increase the costs of producing them. Economically, high oil prices shifts up the supply curve for the goods and services for which oil is an input. Reduction of economic activities in the economy will lead to a reduction in the GDP of countries globally.
Increased prices caused by oil scarcity causes inflation globally (Bertatsky, 2013, p.44). There will be a sustained increase in the general price level of goods and services in the economies over the period of the scarcity. All sectors of the economy like manufacturing, transport, mining, and agriculture will be impacted. The increased prices of oil will increase costs of operations in these sectors which will result in them increasing the prices. Inflation will cause falling real income of the employees in those sectors with a pay cut or pay freeze (Bertatsky, 2013, p.45)
The countries will experience negative real interest rates due to the inflation rates being high than the interest rates (Bertatsky, 2013, p.50). This will reduce economic growth and development globally as there will be no savings culture among the people of the countries. Cost of borrowing by banks will also be affected and this will affect investment rates globally. Inflation reduces the consumer price index globally as consumers will cease to spend on the extremely expensive goods that are a result of the high oil prices.
High oil prices leads to global recession (Singh, 2012, p.77). Businesses will cease to expand, GDP greatly diminishes and unemployment rates will greatly rise (Singh, 2012, p.78). High oil prices will create a hostile for economic activities globally. Since most economic activities are tied to the price of oil, its scarcity will paralyze then sectors greatly.Countries will have minimal expenditure and economic activities leading to the recession. This will mark a period of negligible economic growth and development globally having a negative impact on international trade. There will be a decline on international trade as the supply of materials, which are dependent on the supply of oil, will be in a downfall.
Countries will increase borrowing tendencies due to the low economic productivity. Scarcity of oil will leads to shutting down of economic sectors like manufacturing globally (Miller, 2010, p.27). This will lead to laying off workers increasing the rates of unemployment. High unemployment rates will is a major indicator of recession. There has to be a balance between the supply and demand of oil at the prevailing market prices in order for economic activities globally to run efficiently.
Externalities arising from consumption of Oil
Externality is a consequence of an economic activity that is experienced by unrelated third party without it being reflected in the cost of the economic activity (Kilian, 2006, 12). Externalities can either be positive or negative. Negative externality is a cost suffered by the third party while positive externality is a benefit enjoyed by the third party (Kilian, 2006, 12). Consumption of oil give rise to various externalities; both negative and positive.
Water and land pollution
Production, transportation, and use of oil can cause water and air pollution (Maass, 2009, p.55). Oil spills, for example, leave waterways and their surrounding environment uninhabitable for a while. Such spills often result in the loss of plant and animal life in the waters. The oil spills make the waters less appealing for any activity. This situation leads to loss of tourism revenue to the area affected by the spills (Maass, 2009, p.67). Activities such as surfing, sports fishing, beach visitors are greatly depressed by the oil spills (Maass, 2009, p.70). The people living in the area will have to bear this cost even though they are not directly involved in the production of oil. Economic activities such as fishing will be hampered and this will reduce the living standards of the people living in those areas affected by the pollution.
Oil mining has an effect on the stability of land of the surrounding areas. The land where oil wells are located is always generally unstable and any eventuality like landslide can occur. The land will be rendered useless for any other economic activity rather than mining. This will reduce the economic activities of the people living near such places. Oil spills can also flow into land killing its fertility. The people living in such places bear the costs of such externalities even though they are not the only consumers of the product.
Several air pollutants are produced by the combustion of the oil (Miller, 2010, p.88). The suspended particles form a layer in the atmosphere which has adverse health effects on the health of the people. People will develop respiratory problems as a result of this externality. They will incur the cost of seeking treatment from hospitals from the illness resulting from the air pollution. The consumption of oil is the cause of these respiratory problems and it is the people who are not directly involved that are affected (Miller, 2010, p.89).
Oil refineries in global countries have an effect on the ozone layer (Miller, 2010, p.98). This results in global warming which have a number of effects on people and plants. People will develop permanent lung damages due to the polluted air, there will be a reduction in crop yields, and acid rain formation may be experienced. These effects have both financial and social costs to the people. They will spend a lot of money in protecting themselves from the externalities and also there will be an increased cost in daily activities like farming and construction.
During electricity-generation process, one of the consumptions of oil, heat energy is produced that is used to generate electricity. Much of the heat is released in the atmosphere or to water. The heated water will upset the aquatic ecosystem and this will result in decline in fish population (Miller, 2010, p.99). This will impact the fishing industry yet it is not directly involved in the oil production process.
Universities are offered with research opportunities in case of oil spills. A research team will be dispatched to the site for purposes of study. This will be beneficial to the institution because it will offer practical research to the student which is an indicator of a successful institution. The institutions can come with containment technology development to curb future oil spills.
Profit for other sectors
Other manufacturing sectors will benefit from the production and sale of dispersants and chemical compounds that help reduce water and thermal pollution. They will grow their revenue through the sale of their products and this will help in growing the companies. The industries will also create employment opportunities to the people. All these benefits are enjoyed due to the production and consumption of oil.
New courses and professions will emerge as a result of oil consumption. There will be oil spill consultants who will always have the work of advising people in case of oil spills and come up with ways of ensuring that there will be minimal oil spills in the future.
The governments can impose heavy taxes on the oil companies which cause the negative externalities like air and water pollution (Berlatsky, 2013, p.49). The government should impose heavy taxes on such companies that must pollute the environment. The heavy taxation will increase the companies’ safety practices and disposal of their wastes. This might lead to the oil prices being high.The more they are taxed, the more burden the people will bear.
Governments should sell permits to pollute which may be traded by the polluters (Berlatsky, 2013, p.50). This action will make oil companies reduce pollution activities. The governments together with the oil companies will device a better way and less harmful way of polluting the environment. The extra costs incurred in the operations will be felt by the consumers of the oil products.Regulation of the governments will help maintain the consumption of oil in the countries to a stable level.
The governments will subsidize households and firms dealing in oil products in their respective countries. This will reduce the prices of oil and increase the demand of the commodity. Subsidizing will make oil products affordable to the people (Maugeri, 2006, p.23). The government will incur some costs on behalf of the citizens in order to make oil products available and affordable to the people.
Imposing taxes will also reduce the equilibrium quantity to the socially desirable quantity. This will ensure that the oil companies do not exploit the people through prices. The taxes imposed make oil products available at affordable prices to the people. If left unwatched, the oil companies can really manipulate the oil prices in order to get maximum profits (Haerens, 2010, p.34). Taxation is the most effective and efficient way through which the governments can influence the consumption of oils in their countries.
Environmental policies and regulation
The governments should set environmental policies and regulations that should be followed by all oil companies. This will improve their ethical behavior while at the same time it will increase the price. Such an action will reduce the supply of oil because the governments will have set production limits for the companies.The demand will outweigh the supply of oil thus increasing the prices. In as much as the regulations and policies will have increased the prices of oil products, it will have protected the environment also (Berlatsky, 2013, p.61).
The government will force polluters to pay compensation to the people affected negatively by the activities of the oil companies. This action will ensure that the oil companies produce at the capacity that it will be able to handle. This will reduce the supply of oil in the countries prompting an increase in the prices of oil in the countries. Such initiatives by the governments can cause temporary oil scarcity as a result of the companies complaining.
The governments should internalize the costs resulting from the externalities that are caused by the production and consumption of oil (Singh, 2012, 54). The government can bear the costs on behalf of both the third parties and the companies producing the oil. This will help to stabilize oil prices in the countries. The companies will continue supplying oil at the initial levels while the people will continue to demand oil at the initial levels. This move will stabilize the consumption of oil in the countries.
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