Rise and Fall of Oil Prices
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This study explores the macroeconomic variables that cause oil prices to rise and fall. The study demonstrates that there are a number of reasons why these macroeconomic variables can only be delineated with considerable difficulty.
- The majority of studies have focused on the macroeconomic effects of oil price changes, rather than on the macroeconomic causes of such changes.
- Despite intense research on oil prices, particularly within the last 30 years, certain misconceptions remain widespread and radical disagreements persist among economists over several fundamental variables that affect the price of oil.
- The major causes of shifting oil prices in recent decades have not been purely macroeconomic: Oil prices have more often risen and fallen in response to political instability and other non-economic variables than because of macroeconomic conditions.
The Economics of Oil Prices
Determining the macroeconomics causes of changes in oil prices is made difficult by the fact that most economic studies of oil prices consider oil as a major input in global economic performance. As such, the emphasis is on the impact of oil prices on macroeconomic performance—on how “movements in the price of oil drive the economy”, instead of on the macroeconomic factors that determine oil prices. Moreover, particularly since the oil price shock of 1973-4, economists and other researched have been engaged in intense, unresolved debates regarding such fundamental issues as the relationship between the U.S. energy sector and national income. Seemingly solid empirical investigations of the connections between oil prices, oil consumption, and real economic output have generated radically divergent results.
Furthermore, the widespread disagreements that plague investigations into the macroeconomic causes and effects of oil price fluctuations have been exacerbated by a number of false but influential assumptions about the nature of oil markets. Prominent among these assumptions are the closely related notions that that world oil markets are characterized by scarcity and that the Organization of Petroleum Exporting Countries (OPEC) plays a dominant role in oil price determination.