Chapter 9 How Globalization Works In Practice

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The following article by Thorsten Fischer, senior economic adviser at Royal Bank of Scotland, discusses a number of factors that affect world oil prices … a physical shortage not being one of them. Read the article below and take note of the domestic and international factors that play a role in oil prices.
Fischer notes that despite declining output of oil we see increasing consumption. One reason for this is that in many countries oil is subsidized, which erodes incentives to cut consumption. Moreover he notes that despite considerable reserves in the United States, oil companies are severely restricted in tapping new drilling opportunities. Moreover OPEC has declined to increase ouput. Fischer writes, “Opec, which still controls the lion’s share of proven reserves, has proven reluctant to boost production or capacity. Restricting supply means higher prices. National oil companies (NOCs) are reasserting themselves, as high oil prices have shifted the balance of power.”
He continues, “The issue is not a physical shortage of oil – there is plenty of oil in the ground – but a shortfall of investment because of resurging resource nationalism and geopolitical instability. As a result, capacity will remain well below the level that would be achieved in a competitive and developed market given current high prices.”