Chapter 9 How Globalization Works In Practice (Essay Sample)
The following article by Thorsten Fischer, senior economic adviser at Royal Bank of Scotland, discusses a number of factors that affect world oil prices ... a physical shortage not being one of them. Read the article below and take note of the domestic and international factors that play a role in oil prices.
Fischer notes that despite declining output of oil we see increasing consumption. One reason for this is that in many countries oil is subsidized, which erodes incentives to cut consumption. Moreover he notes that despite considerable reserves in the United States, oil companies are severely restricted in tapping new drilling opportunities. Moreover OPEC has declined to increase ouput. Fischer writes, “Opec, which still controls the lion's share of proven reserves, has proven reluctant to boost production or capacity. Restricting supply means higher prices. National oil companies (NOCs) are reasserting themselves, as high oil prices have shifted the balance of power.”
He continues, “The issue is not a physical shortage of oil - there is plenty of oil in the ground - but a shortfall of investment because of resurging resource nationalism and geopolitical instability. As a result, capacity will remain well below the level that would be achieved in a competitive and developed market given current high prices.”
1 The United States controls the oil prices through the regulation of the drilling rights and opportunities. This way the oil in supply within the market is low and hence the high prices. This is part of the incentive to reduce the level of consumption of the oil and the resultant fossil fuels.
2 On the other hand, OPEC understands the fact that oil is one of the most precious commodity in the international markets. Those countries that hold the highest reserves have the ability to control the power shifts within the global geopolitics. As such, the interest of OPEC lie with the power quotient that is allocated to them by default given that they are largest producers of the commodity.
3 Fuel sales subsidized, is a phrase t
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