Macroeconomic Perspectives on Energy Production

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Several factors affect the nation’s economy. This sample essay explores the macroeconomic perspectives of energy production.

Macroeconomic perspectives on energy production

As with many human products and institutions, studying the macroeconomic elements of the oil industry show it play the biggest role in human life, the world’s dependence on oil production and trade is fairly recent. This “dawn of the oil age”, as the Economist puts it (2013), caused the expansion of oil into virtually every aspect of human life, sparking new trends and focus in economic, commercial, political, and security-related fields.

Ever since it began to be produced in the mass-market in the late part of the 19th century, the demand for oil has continued to rise as humanity becomes increasingly dependent on automation and energy production. As such, oil has become a continuous (if not stable) aspect of the economy and macroeconomic studies as a whole.

Understanding the principles of the energy industry's supply and demand

In order to gain a full picture of the macroeconomic effects on energy production, and vice versa, one can look to the basic concepts of supply and demand. Within microeconomics, supply and demand means the factors that determine price in a relatively free market. Essentially, it means that what is demanded by the consumers will be equalized with what is supplied by producers.

The four basic concepts of supply and demand, as listed by Ronald Braeutigam, are as follows:

1. If demand increases and supply remains unchanged, a shortage occurs, leading to a higher equilibrium price.
2. If demand decreases and supply remains unchanged, a surplus occurs, leading to a lower equilibrium price.
3. If demand remains unchanged and supply increases, a surplus occurs, leading to a lower equilibrium price.
4. If demand remains unchanged and supply decreases, a shortage occurs, leading to a higher equilibrium price.

This conception of supply and demand also holds relevancy on a macroeconomic level, as seen in oil production and trade. For example, if the oil consumption in America stays consistent and two foreign importers experience a larger production of oil, there will be a surplus of oil that needs to be traded. This causes the prices in the U.S. to decrease and cause potential hardships to the country's economic structure.

Monopolies are also relevant to the macroeconomic conception of oil trade, as they are controlled both by public governments and private markets. Because of this, no real monopoly on oil trade exists – there is no one specific enterprise that is the only supplier of the commodity. Many states and companies have a stake in the trade, which is what makes it such an explosive (no pun intended) issue.

Macroeconomic factors affected by oil production and trade

As previously mentioned, oil production (or lack thereof) now affects three issues directly related to contemporary macroeconomic issues:

1. Economic
2. Commercial
3. Geo-political

The economic effects are largely related to state intervention and policies. The commercial effects are related to the practices of oil and petroleum producing companies. Finally, the geopolitical effects are related to the power relations between nation-states, relative to their stake in oil production.

Of course, each of these major individual issues are affected by a wide range of macroeconomic factors, such as supply and demand, employment, ecological systems, Gross Domestic Product, and technological processes. Each of the major effects will be looked at (in brief), with the macroeconomic factors considered when relevant.

Economic effects of energy production

First, the effects of oil production and international distribution on the economy (both global and in the United States) are perhaps the easiest to examine. Essentially, oil production is a volatile trade (again, no pun intended), dependent on too many outside variables to be stable. As Jeremy Warner assesses in his column with the Telegraph, the rising price of oil is both “deflationary and inflationary” which makes for a dangerous economic mix (2013).

In other words, if the price of oil rises too high, it will subsequently (and essentially) depress the economy but add to the economy’s inflation at the same time. While Warner recognizes that this is often solved by a weakened demand, he also states that a modern twist of events – faster-growing markets and a more manipulative OPEC – has “undermined the old rules”, so to speak, making a weakened demand less of a driving force in the market than it should be in pure supply and demand economics.

Of course, the shift in more recent years toward the development and extrapolation of shale and fracking in the United States has offset this inbalance. In CitiGroup’s “Energy 2020” report, researchers report that the results of shale development in the past decade “have been stunning” (Adelmann, 2013).

In terms of numbers, natural gas use grew by 46% and over two million barrels of crude oil every day, which, according to CitiGroup, has all but ended “coal’s century-long domination.” The effect of this is that North American energy output should “start to have a tangible effect…on global prices” (Adelmann, 2013). This also affects the United States as a global power.

Energy production and commercialization

Second, the macroeconomic issue of oil and energy must concern itself with the practice of capitalism and commercialism. First and foremost in this consideration is employment in the United States. The expansion of oil and natural gas production in the United States (especially Texas) means an upturn in employment rates in the state.

In Ed Crooks’ Financial Times article, he notes that the Permian (an oil producing region in West Texas) is “one of the centers of the onshore oil boom that has lifted U.S. production almost 50 per cent over the past five years” (2013).

While this has great implications for the United States as a whole, a boom in production also means a boom in domestic employment. Another aspect of the commercial effect of oil production is that the world’s dependence on the product is completely interwoven with other technological advances. As energy and production technologies outside of coal and oil begin to take more of a market share, the demand for oil has wavered.

In other words, it is possible that oil demand has already peaked. As noted by the Economist, both fracking and automotive technology, such as increased electric car sales and CNG-certified vehicles, threaten oil’s place as a market driver. It may take awhile, but these changes in technology may begin to take their toll on the macroeconomic equilibrium of oil production. To not act would be a grotesque manifestation of opportunity cost. Whether this is a good development or a bad turn for the global market is another question altogether.

Energy macroeconomics and geopolitical implications

Finally, and perhaps most interestingly, is the geopolitical aspect of oil production (which, in its own right, has great influence on macroeconomics). This effect is relative to the stake that each state has in energy production – as can be seen by returning to the fracking issue.

Wu Sike, a former Chinese envoy to the Middle East, said of fracking: “The United States will become less and less reliant on Middle Eastern oil until this reliance finally ends” (Adelmann, 2013).

This would dramatically shift both Middle Eastern players’ stakes in maintaining good relations with the United States, and the United States commitment to aid in the Middle East.

As Warner notes, “the energy ‘trilemma’ – balancing the priorities of affordability, security and emission targets – no longer exists” (2013).

Many Middle Eastern states, such as Saudi Arabia, have staked their security and autonomy OPEC and oil production.

As the Economist states, Saudi Arabia’s ability to avoid the recent Arab Spring may dampen if “the oil flows into the kingdom’s coffers less readily.”

These geopolitical effects hold implications for the world economy, as they act outside of traditional conceptions of supply and demand. So, it has become clear that the oil trade gives some great insights into macroeconomic concepts, such as supply and demand, opportunity cost, and monopolization.

Oil production supersedes traditional conceptions of supply and demand, while at the same time calling up the most important drives for monopolization of individual markets and an avoidance of opportunity cost. While the conceptions of these macroeconomic principles given here are not exhaustive, they give insight into their application in the real world.

References

Adelmann, Bob. (2013, 05 December). Saudi Texas is changing the world’s economic and political landscape.” The New American. Accessed: http://www.thenewamerican.com/economy/markets/item/17100-saudi-texas-is-changing-the-world-s-economic-and-political-landscape

Braeutigam, Ronald. (2010). Microeconomics. 4th ed. New Jersey: Wiley.

Crooks, Ed. (2013, 07 July). Texas heartland leads the US oil revival.” Financial Times. Accessed: http://www.ft.com/cms/s/0/36f6252c-e58f-11e2-8d0b-00144feabdc0.html

Economist.com. (2013, 03 August). Worlds thirst for oil could be nearing peak.” The Economist. Accessed: http://www.economist.com/news/leaders/21582516-worlds-thirst-oil-could-be-nearing-peak-bad-news-producers-excellent

Warner, Jeremy. (2013, 21 November). Oil is both the lifeblood and the poison of the global economy.” Accessed: http://www.telegraph.co.uk/finance/oilprices/10465340/Oil-is-both-the-lifeblood-and-the-poison-of-the-global-economy.html