Economic Recession and Oil Essay

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Oil prices across the globe are characterized by major swings and fluctuations, which have attracted considerable attention from scholars, policymakers, and practitioners. The increased attention in oil prices are attributable to the fact that they have significant impacts on the global economy. Based on academic literature, oil prices fluctuate for various reasons including supply disruptions, changes in global demand, and precautionary intentions. For instance, in the aftermath of the 2008 global economic recession, oil prices fell because of an overall decline in global demand (Lee & Huh, 2017). Fluctuations in oil prices have been evident since 2012 to the end of 2016 because of various factors that contribute to changes in these prices. Despite these various factors, there are several measures that are utilized to predict oil prices in the future. This paper discusses the reasons for changing oil prices, oil price fluctuations between 2012 and 2016, and prediction of oil prices for the next five years.

Reasons for Changing Oil Prices

As previously mentioned, oil prices have been characterized by major swings and fluctuations, which have received considerable attention because of their potential effect on the state of the global economy. According to Caldara, Cavallo & Iacoviello (2016), a decline in oil prices despite of whether its caused by supply or demand factors depresses economic activities worldwide, especially in emerging economies. Policymakers, practitioners, and scholars have continued to examine factors that contribute to fluctuations in oil prices. These attempts have been geared towards understanding oil price fluctuations and making predictions on future prices of oil in order to promote growth in the global economy. The existing academic literature highlights several reasons that contribute to changing oil prices including changes in global demand, precautionary intentions, and supply disruptions (Caldara, Cavallo & Iacoviello, 2016). The changes in global demand, which in turn contribute to major swings in oil prices, are fueled by different economic factors. For instance, in 2008, the world experienced a global economic recession, which contributed to an overall decline in demand that in turn resulted in decline in oil prices.

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According to Lee & Huh (2017), oil prices during this period fell and started to increase in early 2009 after the impacts of the economic recession. When supply disruptions occur, they affect the global demand for oil, which in turn generates major swings and fluctuations in oil prices across the world. Similarly, precautionary measures undertaken by industry players in handling this commodity affect supply and demand aspects, which contribute to fluctuations in the prices of oil. The other factors that contribute to fluctuations in oil prices include decrease in the revenues of economies or countries that produce oil and uncertainties regarding the maintenance of future oil producing capacity. Moreover, oil prices experience major swings/fluctuations due to decrease in the assets of major international oil companies and decline in investments in crude oil development by the major stakeholders (Asia Pacific Energy Research Centre, 2016).

Oil Price Fluctuations between 2012 and 2016

In the aftermath of the global economic recession in 2009, oil prices increased following an increase in global demand of industrial commodities including oil. During the 2008 global economic recession, economies across the globe experienced a significant decline in oil prices because of decline in global demand for industrial commodities. The decline in global demand for these commodities was fueled by the significant negative effects of the economic recession. Since then, oil prices have been affected by relatively smaller supply and demand shocks in the oil market, especially in the period between 2010 and 2014. For instance, in 2011, oil prices increased and experienced major swings because of the uprising in North African countries, particularly Libya. Oil prices between 2012 until the end of 2016 have been affected by supply and demand factors. In 2012, oil prices increased between $0 and $9 because of tensions in Iran, which caused supply and demand shocks in the oil market (Baumeister & Kilian, 2015). As shown in Figure 1 below, the period between 2012 and early 2014 was characterized by stability in oil prices by close to $110/bbl (The Oxford Institute for Energy Studies,.....

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