Currently the oil prizes are at very high levels compared to the most recent historical oil price record. The question is whether this oil prize rise is a temporary phenomenon or its prize will continue to rise in the short, medium and long-term. There is a diverse view among economists and experts regarding the nature of oil prize increases in the current times.
However, based on the technical feasibility and on the cost of production basis as well as on the availability of oil reserves including the middle east it can be said there exists a sever constant and the supply of oil at least in the short to medium term. In addition, the war in Iraq and it is a major source of oil supply and it's in the midst of political instability aggravate this constraint still further. In the context of new sources of energy development is slow and it's comparatively technically not feasible on commercial terms and not competitive in cost terms oil remains the major source of energy at the current times and will not change in the near future at least in the short to medium term. This is the supply side of the oil.
If you analyze the demand of oil it will continue to increase as the third world will consume more oil due to its aggressive industrialization particularly in India and China.
As well, in America in particular the oil consumption will not come to a sustainable level because there is not close substitute for oil to be consumed if the price increases and they use oil consuming vehicles and not energy efficient.
Given the supply and demand conditions it is self evident that the prizes will not come down very soon at least in the short to medium term. However, the long term cannot be predicted with certainty whether the oil prizes will come to sustainable levels. But according to experts the prizes may continue to rise if no action is taken to dampen
demand for oil and the development of alternative energy sources and energy technology and the transfer of this technology to the developing world. Given the environmental issues recognized at the political level and by the business community and community in general there is a possibility that resources will be sufficiently allocated to find some energy alternatives in the long term and energy saving technologies and energy use regulation by the government and by carbon trading system which is currently put in place in some western countries. However, the demand for oil will continue to rise because of rapid industrialization of the Indian and Chinese economies and they are dependent on oil imports from world markets. On the basis of the economic analysis, it can be argued the oil prize shock is not temporary in nature like the oil shock in the 1970's but it is a serious issue and it is most probably a permanent one.
The economic effects on the global economy are mixed. However, if the oil prizes continue to rise it may produce inflationary pressures and it may not be easy to control such inflation by monetary policy or a mixture of fiscal and monetary policy alone. And it may affect economy by distorting prizes and there fore allocating resources to unproductive sectors and may cause stagflation in most countries and may trigger world wide recession or even depression if prices continue to rise faster then in the current period.
The best prize stabilization policy regarding oil price is to regulate demand for energy by fiscal, regulatory and price mechanism and in the medium to long term develop and invest in alternative energy sources and reduce the dependency on oil for the energy requirements of the world economy and tackle environmental issues by global co-operation and technical transfer to third world to dampen the rate of increase in oil price in the medium term and to stabilize prizes in the long term. If these policies are not practiced widely and not implemented effectively then it can be said the oil price will continue to rise and will have a very negative impact on the world economy and may produce a devastating depression like in the 1930's.
