The U.S. financial crisis and its impact on the global oil market

Abstract

Oil prices fell sharply with the US financial crisis, going below $35 a barrel before going back up to the current $77 per barrel. This article attempts to identify the causes behind the rise of oil prices in the last two decades, the impact of the US financial crisis on the price of oil followed by an analysis on the future of oil prices. It is argued that an increase in demand, lagging supply, low spare capacity and the inelasticity of both supply and demand, speculation and finally depreciation in the value of the Dollar have driven up prices in the past two decades. Subsequently, the 2008 US financial crisis led to the slow down of the global economy and as a result oil demand shrunk, bringing oil prices to under 35 dollars. While the global economic crisis seriously curtailed oil demand, however this was a short term decline. The US economy slowly began to recover starting in 2009, leading to recoveries elsewhere around the world. This brought oil prices to over 70 dollars today. Furthermore it can be expected that since the fundamental reasons behind rising oil prices, being demand and supply, are still valid, thus in the long run oil prices will increase to pre-crisis levels of over a hundred dollars.