Fuel prices have risen and affected every nation in the world since the early years of this decade. Nandia Mongia (2008) reports that crude oil prices have increased in the world market from 22 U.S. Dollars up to almost $90 U.S. Dollars per barrel. This affected the prices of petroleum products like diesel, kerosene, propane, and gasoline and hit lower-income households. Figure 1 shows the rising trend of oil products from 2000 up to 2006.
Mongia (2008) mentions five (5) reasons for the rising of oil prices: (1) increasing demands for oil in the world market, (2) reduction of buffers, (3) uncertain oil supply, (4) assumption in the global oil market, and (5) lack of investments on exploration and refining. Robert Hirsch et al. (2005) mentions the notion of oil peaking. They note as perceived by geologists, oil is a limited source found under the earth's crust and its production will soon reach its peak or maximum and from there production will decline. They also emphasize that oil peaking is not related with running out of oil but it only describes the maximum production rate of an oil reservoir when half of its oil is recovered. (Hirsh et al. 2005) Oil peaking can be attributed to rising oil prices since the decreasing supply of oil may not meet the required demand so prices will go up in order to decrease the demand. Figure 2 explains the shift of the supply curve (S1 - S2) and the rise of equilibrium price ($1 - $2) because of the decrease in oil production.
C. Implications of the Rise in Oil Prices
Mongia (2008) finds that the macroeconomic effects of the increase in prices of oil are not yet seen. As shown in Figure 3, the inflation brought by the increase in the average price of crude in 2000's was matched by the growth of the world's real GDP although signs of slowdown were seen. For the developing countries in Asia, the effects of inflation hampered GDP growth which has not changed since 2004. (Mongia 2008) Oliver Blanchard and Jordi Gali (2008) prove four (4) reasons for the mild impacts of the recent oil price increase: (1) lack of adverse shocks which happened in the 1970's, (2) lesser share of oil in production, (3) highly flexible labor markets, and (4) enhancements in the monetary policy.
Figure 3 (Real GDP Growth, Crude Price 1990 - 2006)
On the other hand, the microeconomic effects of the rise in oil prices were experienced by the poor. As stated by Mongia (2008), many developing countries are oil dependent and spend more resources on importing oil. Poor households use petroleum products like kerosene, liquefied petroleum gas, diesel, gasoline, and chemical fertilizers in their daily living. The rise of in the prices of oil will force them to use other sources like biomass or fuel wood and crop remains. These effects will harm some Millennium