Recently, the international price for crude oil has been on a sharp, continuous rise. The price per barrel has exceeded US$30, breaking the ceiling set during the 1991 Persian Gulf War. The international price has increased by 200 percent since it began its rise from approximately US$10 per barrel last March. This large-scale price increase has triggered painful memories of the global economic depression and inflation caused by the oil crises of 1973 and 1981. US President Bill Clinton even began to consider tapping the petroleum reserves set aside for times of war.
Although the price increases have provoked worldwide panic, the role played by oil in economic activities is no longer comparable with that of the 70's and 80's. This is because the structure of the global economy has shifted from energy-intensive industries to the information intensive service industry and information data industry. Therefore, the recent oil price increases have had a very minimal impact on the world economy. Even if the price of oil remains high, the impact on the world economy will still be relatively limited.
Oil prices climbed up from US$10 to US$30 a barrel primarily because OPEC reached an agreement with some non-OPEC countries to cut production in order to increase revenues. Past experience tell us that the participating countries usually will secretly increase production. Therefore, it is very difficult for this kind of agreement to continue in the long run. Surprisingly however, participants in the March pact have kept their word.
If the major countries of the world had maintained their economic structure from the 70's and 80's, the two-fold increase in oil prices in less than a year would have lead to a global economic depression and the inflation that typically accompanies an oil crisis.
However, the global economy performed exceptionally well last year. For example, the growth of the US economy was not the slightest impacted after a nine-year boom. The economies of the euro region, Japan and the developing countries continue to recuperate. In terms of prices of goods, the price increase in the US remains the lowest ever in the last 10 years. The prices of goods in other areas have remained relatively stable as well.
In comparison with the last two oil crises, the economic structure of the major countries have undergone some enormous changes. The energy-intensive industries of the past have been replaced by knowledge-intensive industries such as service, information data and software industries, among others. The costs of energy and raw materials now make up a significantly smaller percentage of total product cost. In addition, the popularization of the Internet and electronics has also helped the companies to bring up operational efficiency and decrease operational costs.
According to statistics, the amount of oil required to produce each unit of goods in an industrialized country is less than half than that used during the first oil crisis. If the price for one barrel of oil increases by US$10, the increase in importation costs to the industrialized countries is less than 0.5 percent of GDP. For Taiwan, the amount of oil consumed to produce each unit of good is only 1/6 of the amount during the second oil crisis. The oil price takes up only 2.3 percent of the CPI.
Based on these figures, it is not hard to discover that the importance of the role played by oil in world economic activities has significantly declined. With the economies of each country continuously shifting toward the service and technology industries, oil's importance will continue to decline.
The era of oil producers calling the shots on the world economic stage is long over.
Huang Jyh-dean is an associate professor in the international business department of the National Taiwan University.
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