A Global Development Issue Essay Sample

Introduction

The world economy is very dependent on the price of a barrel of oil. Some economists argue that the plunge in the oil prices is primarily a good thing for the economy while others claim that it is necessary not. The oil prices have continued to fall sharply in the recent times. The question numerous people ask is whether this will continue. Anatole Kaletsky in his article titled, “What is the future direction of oil prices?” uses economics and history concepts to explain whether the oil prices will continue to fall in the future. The world oil prices have fallen from $100 per barrel to $50 per barrel (Kaletsky, 2015). According to the author, a major speeding up of the worldwide growth has been experienced each time there has been a six months continuous fall in the oil prices. The author also asserts that a doubling of the oil price has proceeded each global recession ever since 1970. The author questions whether we ought to expect the $50 per barrel to be the ceiling or floor of the current trading range for the oil. According to him, the majority of analysts still see $50 price as the floor, a claim he opposes.
Kaletsky claims that we should view the present oil prices as a possible ceiling for a much lesser trading range that might extend all the way downward to $20 as per the history and economics. He substantiates his assertion by elucidating the ideological irony of the contemporary energy economics. According to the author, a struggle between competition and monopoly in the oil market has always ensued with Saudi Arabia being the present-day competition champion. The author then verifies his claims by giving the history of inflation-adjusted oil prices ever since 1974. According to him, there was a fluctuation in the United States benchmark oil price between the today’s $50 and $120 from 1974 to 1985. He goes further and claims that the price ranged from $20-$50 between 1986 and 2004. Between 2004 and 2015, the oil price ranged from $50 to $120 just as was the case from 1974 to 1985 excluding the short spikes in the 2008-2009 financial crisis (Kaletsky, 2015).
Kaletsky goes further and asserts that the competitive markets vs. monopoly pricing economics suggest why $50 will be a ceiling. The price in the competitive market equal marginal costs, but it is high in the monopoly market. The monopolist can produce less and charge high price. He concludes the article by claiming that the marginal cost of the United States oil would become a ceiling for the world oil prices at around $50 under the competitive logic. On the other hand, he maintains that the costs of marginal conventional oilfields in Russia and OPEC would primarily set a floor at around $20 under the same logic. For this reason, the trading range ought to be about $20 to $50 (Kaletsky, 2015).
The continuous plunge in the oil prices to less that $50 as Kaletsky explains in the article primarily has a positive impact on the worldwide economy. However, the prices below $50 would be a sign of trouble to the investors. The increase in the supply of oil as a result of the refusal of OPEC to cut the production has resulted in the drop in oil prices. The plunge in the oil prices would affect some economies negatively. The countries that rely on oil sales will experience economic meltdown as oil prices continue falling, eventually sending the global economy into recession.

References

Kaletsky, A. (2015, January 15). What is the future direction of oil prices? The Guardian. Retrieved from http://www.theguardian.com/business/2015/jan/15/what-is-the-future-direction-of-oil-prices-anatole-kaletsky