Economics Of Oil

Oil is the single largest source of fuel for the United States, accounting for 40% of its energy use. Because it must import over 50% of its oil supply, the American economy is vulnerable to oil price fluctuations which have historically contributed to inflation and economic recession recession.

Oil price volatility stems from three major issues: supply challenges, growing demand, and political instability.

Supply: Oil is a fixed resource, meaning its supply is only finite and is managed by alliances which are formed by oil producing countries. OPEC, the Organization of Petroleum Exporting Countries, controls over 40% of world oil production and two-thirds of global oil reserves. By setting unified supply targets, OPEC is able to influence oil prices and the economies of large oil importers such as the United States.

Additionally, the world's oil supply is growing increasingly difficult to extract as the most accessible oil reserves are near depletion. Areas such as the North Sea and the Tar Sands in Northern Canada, where oil extraction is difficult, will increasingly contribute to the world's oil supply.

Demand: Newly industrialized nations are projected to contribute heavily to global oil demand. Large countries without domestic energy resources must increase their oil imports to meet the energy demands of their growing infrastuctures. In fact, China and India are expected to account for 43% of the overall increase in world oil use between 2003 and 2030 (EIA).

Political instability: World oil reserves are heavily exposed to the risks of political instability. Some of the largest oil producers such as Saudi Arabia, Iran, and Russia, have histories of oil supply challenges as a result of attacks on oil infrastructure.