Written By: Meiting Xu
People often assume that conflict in the Middle East causes spikes in oil prices, not without reason. Modern conflicts in the Middle East do frequently produce some of the greatest fluctuations in oil prices, leaving consumers either scrambling for alternatives or voicing complaints to their representatives, an experience some of us may share. Some of us might have even experienced those. While global events determine the price of oil, I believe that oil prices illuminate much more about the state of the world today.
Interestingly, even as climate change gains greater global attention and many groups lobby against the growth of fossil fuels, oil industries have carried on drilling, and have even seen their profits reach record levels, leading to an inherently incompatible dynamic. Therefore, I think that an incredibly large, healthy oil industry signals that consumers are unreceptive to moving onto sources of clean or renewable energy, a debate that remains at the forefront of many geopolitical summits and conferences. It seems too unbearable for consumers and producers to change gear, at least within a short span of time, and switch to consuming alternative sources of energy or forgoing lucrative oil businesses. According to Kyle Hammond, who is a general manager of Permian Deep Rock Oil Company, “We are going to be drilling wells like this for the next 40 years.” (Elliott, 2024). It is obvious that there is little incentive to give up lucrative deals when a constant stream of consumers are lined up to pay for the products and when businesses are projected to continue reaping benefits in the long term.
The transition from reliance on the oil industry to renewable energy sources will not be a short one because consumers often prioritize short term benefits over long term ones, and hence this transition will prove difficult. The steps countries and corporations could take to facilitate this transition are not realistic without major population mobilization.When we make decisions, short term benefits always appear more attractive than the long term ones because we receive instant gratification from them. However, long term benefits are less certain and involve many factors we cannot account for throughout the course of our decision making process. Despite higher oil prices today than what we paid for in the past, the fact that people are still vehemently defending their consumption of oil means that transitioning to alternative energy sources will likely be an even costlier and longer process. This means that more still has to be done to ensure a smooth transition before we collectively decide to end the oil era. This transition would include the sharing of renewable energy technology between all countries so that they start developing their renewable energy sources, ensuring their access to raw materials, enhancing global cooperation so that productions are streamlined, subsidizing and investing in more renewable energy resources (United Nations, 2021). While these steps are highly commendable, they are primarily based in theory and do not present a realistic outlook on the future of environmental technology. First, I believe that consumers have to be convinced that the job market in renewable energy is expanding and they would be guaranteed jobs after upgrading their skills. While the environment has been a contentious issue for far too long, mobilizing a huge population of people requires more than just data, and words. People have to be assured that they can survive and adjust to the new energy era. Hence, the jump in oil prices and people’s willingness to rely on them for the foreseeable future means that we still have many more hurdles to cross before we fully transition into clean energy.
In addition, I see fluctuations in oil prices serve as one of the best indicators for us to make judgments about the state of the economy. Oil prices are invariably linked to other economic indicators and they have short-run and long-run impacts on unemployment rates and housing markets. For instance, rising oil prices generally leads to higher unemployment rates while falling prices tend to cause lower unemployment rates (Nusair, 2020). Oil price shocks cause economic slowdowns by increasing the cost of production, which in turn results in reduced outputs and increased unemployment rates. However, this pattern is not observed in all countries despite it being a relatively standardized model. In the case of unemployment rates in the US and Canada, falling oil prices have a stronger short run effect on them than other countries. The impact of oil prices on unemployment rates is determined by the extent of the country’s dependence on fossil fuels and its capabilities to adopt energy saving technologies. Likewise, oil price changes can affect housing markets. They can impact housing prices positively via increased construction costs and inflation hedging and negatively by shrinking household income and thus reducing housing demand (Nguyen et al., 2021). The impacts also vary between oil exporting and oil importing countries, as well as between oil dependent and less oil dependent regions, and studies have shown that asymmetric effects exist in both short and long term (Nguyen et al., 2021). One example the authors gave in their findings is that during financial crises, there is a clear correlation between housing and oil markets such that an equicorrelation is observed between these markets (Nguyen et al., 2021). Hence, oil prices help to indicate the pattern in housing markets and their accuracy further improves when analyzed with different economic indicators such that they become highly contextualized.
On the other hand, some may question the extent to which oil prices accurately reflect the full state of the world given that oil prices are just one more macroeconomic variable. For instance, the entertainment industry is one economy that is not heavily dependent on oil. After the Covid-19 restrictions were lifted, the entertainment industry saw a 5% increase in 2023, which outpaced overall economic growth (Statista, 2024). Oil prices rebounded as people started to travel and return to their workplaces (US Bureau, 2022). Consumers were spending more on both entertainment and oil although the expectations were that they would consume less of other goods and services as their savings decrease. However, the decrease in purchasing power did not deter consumers from buying more entertainment products with less money.
Finally, I imagine that boom and bust cycles of oil prices predict the future geopolitical tensions and possible inflations that have the potential to disrupt supply chains. Existing geopolitical tensions are the main reason for oil prices to rise in the first place and just as much as how global conflicts have made their marks seen in the volatile oil prices, oil prices are equally capable of foreshadowing future global order and economic stability. In fact, some conflicts might arise due to unstable oil prices. Indeed, countries endowed with natural resources might have to defend their rights to use their resources in order to maximize enjoyment. The predictive power of oil prices can predict how oil prices will continue to change.
As illustrated, the interrelationships between oil prices and the direction our world economy is heading towards cannot be ignored. By and large, oil prices are strong signaling agents that can direct, or at least hint at, what economic agents should do.
References
Elliott, R. F., & Rios, D. (2024, July 16). Why Is the Oil Industry Booming? The New York Times. https://www.nytimes.com/2024/07/16/business/energy-environment/oil-company-profits. html
Five ways to jump-start the renewable energy transition now. (2021). United Nations. https://www.un.org/en/climatechange/raising-ambition/renewable-energy-transition
Guttmann, A. (2024). Statista.
https://www.statista.com/statistics/237749/value-of-the-global-entertainment-and-media market/#:~:text=Published%20by,by%20the%20end%20of%202028.
Nguyen, T. T. H., Naeem, M. A., Balli, F., Balli, H. O., & Syed, I. (2021). Information transmission between oil and housing markets. Energy Economics, 95, 105100. https://www.sciencedirect.com/science/article/pii/S0140988321000050
Nusair, S. A. The Journal of Economic Asymmetries.
https://www.sciencedirect.com/science/article/pii/S1703494919300921#:~:text=rights%2 0and%20content-,Abstract,larger%20impact%20than%20rising%20prices
US Bureau of Labor Statistics. (2022). PPI and CPI seasonal adjustment during the COVID-19 pandemic. https://www.bls.gov/opub/mlr/2022/article/ppi-and-cpi-seasonal-adjustment-during-the-c ovid-19 pandemic.htm#:~:text=Prices%20for%20crude%20petroleum%20products,and% 20then%20later%2C%20they%20rebounded.