Oiling the world economy

Oil companies pay rents to countries to exploit oil

Few things frighten governments as much as the boom and bust in oil prices.

Since entrepreneurs first started to extract oil from the ground in the early 19th century, the commodity has spawned a billion-dollar industry.

The provision of heat, light and transport often depends on oil and some of the great economic dramas of the last century have been triggered by a change in the price of oil.

The price of oil

"Black gold" has made instant millionaires of many, providing the inspiration for Dallas, a 1980's television drama about a ruthless oil tycoon, JR Ewing.

From the minute an entrepreneur strikes oil, to when a car driver draws up to the petrol station, many people can make a buck from the sale of oil.

Shell operates many UK petrol stations

Oil companies negotiate rents from countries for the right to exploit oil and licences to explore for oil are a handy source of income for many countries.

Thousands of oil deals are struck at commodity exchanges, such as London's International Petroleum Exchange.

Many of these arrange for delivery of oil at a future date at an agreed price, so people can protect themselves against sudden changes in the oil price.

Crisis in oil

The price of oil is influenced by many factors, but the most important ones tend to be supply and demand as well as political uncertainty or change.

Think of high oil prices and many people think of Middle Eastern sheikhs holding the West to ransom.

The oil-producing countries originally banded together to regain control of a commodity they felt Western oil companies were monopolising for profit.

These companies had kept oil prices low, increasing the West's dependence on oil as a source of energy and fuelling Western prosperity.

Iraq is an Opec founding member

In September 1960, Iran, Iraq, Kuwait, Saudi Arabia and Venezuela met in Baghdad to set up the Organisation of Petroleum Exporting Countries (OPEC).

Ineffectual for many years, OPEC asserted itself in the early 1970s when it raised oil prices 130%.

The oil crisis of the seventies prompted a world recession.

Oil companies and manufacturers rushed to pass the cost on to consumers, prompting inflation, recession and high unemployment in industrialised countries.

Among other things, the oil crisis prompted a three day week in the UK, as part of an ongoing effort to save energy.

As well, it resulted in the death of the petrol engine in London's black cabs, many of which have now been replaced by diesel engines.

Oil - a recession trigger?

Many analysts make the link between high oil prices and global recession.

Recessions in the 1970s, the early 1980s and the early 1990s were all preceded by a rise in the oil price.

A second oil shock in 1979, combined with the 1979 Iranian revolution and the beginning of the Iran/Iraq war sent prices higher.

During the Gulf War, prompted by Iraq's occupation of Kuwait in 1990, oil prices again shot higher, out of fear that fighting in the area would affect supply.

In recent years, the US and Europe have benefited from the fall in oil prices, triggered in part by the 1997 Asia financial crisis.

This allowed the US economy to grow, without a simultaneous boom in inflation.

When the price of oil hit $10, it prompted OPEC to cut production last March.

This conspired with the emergence of Asian countries from recession - and an increase in the demand for oil -to push the oil price to over $30.

Oil may be less important to the world economy than it was in the 1970s, but in a US election year, a high oil price raises fears about inflation as well as disgruntled voters.

The cost of oil has also driven US imports higher, sending the US trade deficit to record levels in the past year.

The oil companies

Last year's low oil prices helped bring about mergers between BP and Amoco and Mobil and Exxon.

While these companies will benefit from a higher oil price, many traditional oil companies are looking to diversify into other fuels, such as gas.

Shell now defines itself as an oil and gas company and it is investing in renewable energy technologies such as solar, wind power and wave power.

Other manufacturers have found that in an increasingly competitive world, instead of passing the cost onto consumers when the oil price rises, they have to take a hit on profits themselves.

Profits of airline companies, among others, have been hit by the high cost of jet fuel.