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How oil price fluctuation/shock effect United Kingdom economic growth from 1970 to 2009

The recent upsurge in oil prices and unrest in oil rich countries for the past few months has resulted in rapid increase in the oil price send shockwaves globally affecting the major GDP nations. However, it is argued that the recent increases in oil prices can be altered as compared to the slowdown occurred in 1970s (Barrell and Pomerantz, 2004). Before making any analytical statements, it is necessary to find the costs involved in production of oil and gas. The figure below shows the oil and gas production statistics from 1969 to 1988 with breakdown of cash flow for each barrel of oil purchased. It is shown in the figure (Fig.1) below that out of the total cost required for oil and gas production, 10 percent of the share goes to the producer, 36 percent towards tax which includes 7% royalty, 15% petroleum revenue tax and 14% corporation tax. and remaining 54 percent of costs towards development, operation and exploration charges (Band, 1991)1. Figure 1: Oil and Gas Production Though the break down clarifies that maximum of the cost goes towards production of oil and gas, the price of oil has been increasing for the years which is shown in graph below. The figure (Fig 2) shows the increasing trend in oil prices from 1989 to March 2011 in US and UK currencies along with year on year (YoY) change. The graph shows that there was sudden rise in oil prices during 2000 with 69.8 percent change to the previous year at $28.5 per barrel after which continued its increasing rate till date at $114..7 per barrel (HM Treasury, 2011)2. Figure 2: Increase in oil prices from 1989-2010 Since there has been continuous increase in oil price and its components, its effects on the economy of the United Kingdom is analyzed in this chapter by using the information available in HM Treasury and Peak Oil Task Force. The analysis is presented in graphical form and data is made available through tables within the text when and where required. Results According to International Energy Agency, consumption of fuel oil has drastically reduced from 1972 to 2008 whereas middle distillates and gasoline products have increased (www.iea.org). The first report of the Industry Taskforce on Peak Oil Energy Security (ITPOES) 2008 highlights the probability that future oil production volumes are unlikely to rise much above the record global extraction rate of 87Mb/d. The report further forecasts probability of future oil crunch which lasting impact on the world and UK economy. Figure 3: UK energy production and consumption 1970 to 2009 According to figure 3, consumption of oil has remained constant whereas the rate of production has been increasing continuously during the same period stating great demand (Dukes, 2010). The figure (Fig.4) shows that oil price has remained constant for most of the time from 1920 to 1970 below $30 per barrel after which there was rapid increase in the prices. The significant rise in prices over past decade presents a cause for concern which may represent a turning point in the history of oil production, the point where the highest practicable rate of global production has now been achieved and from which future levels of production will either plateau or begin to diminish. According to the report, Industry Taskforce on Peak Oil Energy Security, the global rate of production has been moving upwards indicating an existence of huge resources (ITPOES, 2010). According to DECC