Rise and fall of Oil   By Jon25

Oil is one of the key drivers of the world Economy. The impact it has on keeping the gears of economic machinery running smoothly is not difficult to relate. The huge impact it has on current and future economic growth is recognized by the Economic experts and its utility in keeping check on the recession is understood clearly by the Governments. Oil is used in all sorts of mechanical devices which use Internal Combustion engine using Petrol, Diesel, Turbine fuel, ATF, Natural Gas which are just a few products out of crude oil. The power plants, which are fueled by the oil, are another example which holds key to the Global Economy. Any rise in oil prices has the cascading effect on the cost of essential goods because any oil price rise triggers the increase of transportation costs and hence the essential goods which are usually transported from the location of production to their market.

The oil prices have been found to be having a proportionate impact on the way economy is growing. Any increase in oil prices is considered healthy for the Economy while any negative trend in the oil prices indicates the Economic slowdown. Hence, oil prices are a good quantitative indicator of the recessionary trend on the Economy.

The price of oil is a matter of trading. There are two types of price indicator used – one is called Spot price trading while other is called as the future price trading. Spot price of oil is defined as the price which you need to pay to the seller for a physical barrel of oil. In case of future price of oil, the buyer gets into a contract to predict the price of oil down the line and sell it at the existing rate during that time. For example a fund may get into a future contract of $100 in January to be applied in Jun. In Jun, if the oil prices are $110, the fund is benefited as it will buy oil at $100 and sell it at $110, thus getting a benefit of $10. The situation could be just opposite of oil price had fallen to $90 in Jun. The catch is that the no fund can not store oil in future trading rather it has to supply the physical quantity promised. There are arguments and counter-arguments on how spot and future prices are related but none of the arguments are found to be exactly true to predict the oil prices clearly.

It is interesting to note how oil prices keep going up & down. Usually, anyone would expect the oil prices to keep rising as it is a limited resource which is being used heavily on a daily basis. But against any logic, oil prices bottomed out to less than $50 from $147 per barrel within 1 and a half years. The reason attributed to this anomaly has been the recession as less and less people were using less oil and less commodities transported with machines run by oil thus triggering a downward spiral where the oil driven economy has come to a virtual halt with showing no signs of improvement.