Effects of Crude Oil Prices

Executive Summary

What affect does the price of oil and gas have on the economy? How does this affect the daily lives of the entire population? The preceding questions are the basis for the enclosed report. The primary objective of this report is to give a few reasons as to what causes prices of oil and prices of gas to rise. Among these reasons, speculation of things that may or may not happen, like a terrorist strike, is one of the leading factors. Another reason for the continued rise in prices of oil and gas is the constant growth that China is experiencing in population and energy consumption.

While each of these natural resources is often spoken of in conjunction with one another, they are very different commodities with different market drivers and uses within the economy. Supply and demand play an important role in each of the resources, but there are a myriad of other factors as well, from speculation, transportation, permitting constraints, and environmental concerns.

Crude oil is highly subject to speculation, but is also greatly affected by growing demand in developing countries. The most notable new mass consumer is China, with a population of over one billion people and a demand profile that is rapidly increasing to place a strain on oil supply in the world market. China has the capacity to require more oil supply than the rest of the world combined.

Natural gas is another story. For the most part the U.S. produces most of what it consumes. This is because transportation of natural gas from a non-domestic location is an expensive and dangerous process that is met with resistance; however, it is almost exclusively supply and demand that drives the price of natural gas.

EFFECT OF CRUDE OIL AND NATURAL GAS PRICES

Introduction

Oil and natural gas are natural resources that consumers use every day. Oil is used to make many of the products used from plastics and pharmaceuticals to gasoline and heating. Natural gas is used primarily to make electricity. But, how much does the price of these commodities affect everyone and the economy? Where does the supply come from? What causes the price of these commodities to be so volatile?

Purpose and Scope of Study

These commodities are important to everyone because of the extent to which they are involved in the economy. Manufacturing, power generation, transportation, pharmaceuticals and many more industries rely heavily on these natural resources and the price at which they are acquired may have drastic effects on the entire world economy. The question is: How extensive is the impact of oil and natural gas prices on the U.S. economy? It is the purpose of this paper to research the effects of the price of gas and crude oil on the United States economy.

In order to accomplish this goal it is necessary to understand where these natural resources come from, what drives the price, and how profitable the business is of being involved in the recovery of oil and natural gas. These questions will be answered by performing secondary research. Many sources will be used including the annual reports of ExxonMobil and Anadarko Petroleum, discussions from local experts in the industry, and government agency materials.

Additionally, it will be important to understand what the perception of the public is on these same topics. A survey will be conducted to gain the perspective of everyday people on oil and natural gas. It is the intent of the survey to test common knowledge of the industry and gain some insight into the opinions of each person who is willing to participate. Admittedly, the findings will be limited primarily to students and will not constitute the general populous perception but will be sufficient for the scope of this project.

Procedures

The study was conducted in a technical and objective manner. The secondary research was directed by the survey used for the primary research in this study. The survey, which will be discussed in detail later, was intended to test general knowledge and opinions about the source, price, and future of oil and natural gas. It seemed on plausible to research the knowledge questions within the survey itself to verify what the actual answers to the questions asked were. The answers for these questions were found from the Department of Energy, American Petroleum Institute, and presentations from technical experts within the industry, such as the University of Houston's Michael Economides.

The survey was taken from several University Center students and co-workers. While this in no way is representative of the entire population, it did provide a slice of information necessary for comparison. The survey was intended to provide an insight into common knowledge of the oil and gas industry and opinions of those surveyed. The survey included three questions for a demographic baseline, four questions related to knowledge of the oil and gas industry, and eleven questions of opinion related to the oil and gas industry. The opinion questions dealt particularly with prices of by-products such as gasoline. A total of forty surveys were conducted.

Findings

Secondary Research

Oil and natural gas effects consumer's daily lives in aspects of not only petrochemical costs but also items such as electricity, clothing, and medication. Today the saying has been, "as goes oil, so does the economy" but the price of oil has not always been known in this way. Two reasons said to be responsible for the rising prices in oil have to do with wealthy countries and the fact that predominant oil companies are not willing but have the ability to find new oil. Pertaining to the wealth aspect, incomes have risen therefore it seems easier for those consumers to afford the higher prices that are now effecting the economy. As incomes rise, households are able to afford automobiles and household appliances that are energy efficient. By consumers continuously making purchases of oil, countries such as Saudi Arabia and Russia bring problems to the world's economy. Prices of oil have significantly risen since the late 90's. Statistics state that due to the economy being much larger and consumers purchasing habits increasing to 70 percent of the economy, therefore able to by bigger vehicles such as SUV's, the total consumption of oil has risen 20 percent and since 1980 (Benjamin). China has become the world's second largest consumer of oil due to their increasing purchases of automobiles. Currently, the country has around 20 millions automobiles and is estimated that by the year 2020 there will be 120 million.