Oil Based Recession Essay

3139 WordsSep 30, 201213 Pages
Oil Based Recession To say that oil plays a key role in global economics is a major understatement. Nearly everything that modern societies produce and consume is tied to oil in some manner. To say it another way, oil has become ubiquitous. It is for this reason that oil has gained the ability to cause recessions. In fact, it is possible to effectively argue that drastic spikes in the price of oil are responsible for many of the recessions experience by the United States and the world. This is due to the fact that rising oil prices add to inflation which directly affects global economic growth patterns. To demonstrate the power of oil, there will be an analysis of many of the major contributing events that have taken placed since World War II: 1944 Bretton Woods, the 1971 lift of the Gold Standard, the 1973 oil embargo, and the 2008 oil crisis.. To begin, it is necessary to understand the manner in which oil is traded. Oil is traded in the New York Mercantile Exchange. Furthermore, it is traded in the capacity of a futures commodity. The futures commodities market was created to allow farmers to the ability to know how much they would be paid for their crops (Verleger, 2007). However, now oil is being traded by investors that are guaranteeing to deliver a set amount of oil at some date in the future. To further complicate this issue, much of the oil that is trading on the futures market is being bought and sold by speculators, investors that buy oil stocks with the intention of selling the stocks at a later date for a profit. The speculative investor does not take physical delivery of the oil; he or she simply trades for the paper that represents a set amount of oil. At one point in 2008, there were 27 barrels of oil being traded for every one barrel of oil being consumed. Finally, add in the fact that speculators are equipped with large amounts of
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