Causes And Effects Of Oil Price Fall Essay

Question:

Describe in detail about causes and effects of oil price fall.

Answer:

Introduction:

The world economy is vastly dependent upon the components related to the oil. Its factors including price, demand, supply etc. have a significant monetary impact on the global economy. It is noticed that the price of oil was stable till the mid of 2014 but after that, it has been fluctuating. Following to this fluctuation in oil price, some economy has earned huge profit where some other has incurred severe losses. The assignment deals with all the issue stated including, the economic impact of oil, countries that gained advantage and countries that suffered from losses etc.

Background:

The history claims that the fluctuation in the oil price always affects the economy according to the trend of the variability. In the 1980s, when the oil price had reached to a level which is marked as all-time low, the demand for the product had declined. A survey undertaken by Baumeister & Kilian (2016), states that due to the global expansion the demand for oil has started rising during 1999-2008. Again during 2008-2011, due to the great recession the price fluctuation of oil occurred which was partially resolved on 2012 (Baumeister & Kilian, 2016). This discussion has taken place because again from the mid of 2014, the oil price starts falling through the demand for the oil is increasing day by day. The report analyses the causes and the facts behind this strange behaviour of the oil price trend.

Future Scope:

The oil price is very mutable in nature and it changes if any economic changes occur (The Guardian, 2016). So, there is always some scope to research regarding this topic. This assignment teaches that there are several causes occurred for which the oil price could not be stable. Sometimes, lack of demand or sometimes due to excessive recession changes occurred in the price of oil. Reasons might occur differently and in a different way in future which can bring new scopes to study in future.

Aim of the report:

Oil price is an important factor for the economy and there are many countries whose economic condition depend on it. It is important to assess why these price fluctuations take place. The aim of this report is to identify and analyse the reasons for which the oil price fluctuation has taken place. Moreover, this assignment needs to state the effects that have occurred due to the reasons.

Reasons behind oil price fall:

It is seen in the report of Plumber (2016), that from the last half of 2014 till date, the oil price has been falling rigorously. This fall is not negligible because as per the analysis, it has dropped near about $38 per barrel which indicates that the 60% of the oil price has already dropped and still it shifts towards downward (Plumber, 2016).

According to the theory of demand, price and supply, if the supply of product increases, the demand of the product remain unchanged then the product’s price starts dropping ceteris paribus (Wetzstein, 2013). Apart from the supply and demand, more components are there who have relations in provoking the price of the oil. In this specific situation, no major changes have been found in the demand factor of the oil price informed by Terra (2015). Moreover, the consumption of the oil price which has not changed substantially supports that this case of oil price fluctuation has taken place not only due changes occurred in supply but also due to changes occur in some other factors to.

It is an important factor to be noted that the dollar value has been stronger day by day which simultaneously decreases the value of the commodities. The unit ‘$’ is usually used to measure global products (IMF, 2015). So its value increases automatically with a clear decline in the value of global goods. It is a main driver behind the oil price fluctuation.

The conflict among the OPEC countries with regards to cut off production of the oil is another major reason behind this fall. In order to control supply countries have to cut the production to firm up the demand and so as the price. The problem has arisen because Saudi Arab along with other gulf countries have refused the proposal while Iran, Algeria, and Venezuela have wanted to do it (The Economist, 2016). This has been creating an oversupply of oil. So, increasing supply caused the problem of excessive supply of oil and hence will create pressure on the price towards downward.

Most important of all, referring to the theory of demand and supply, it is to be noted that, the oversupply of the oil has increased the stock of the product. The production in 2015 has exceeded its expected level. The oil inventories have risen and hence declined the price level.

Krauss (2016) has informed that the nuclear deal between Iran and US needs more oil exports which create fear in investor’s mind that this will cause again oversupply of oil. The market has come with the clear reaction in decreasing the price of the oil (Krauss, 2016).

Effects of fall in price:

India and China are two of the largest oil importing countries who import near about 80% oil of its total need (Bowler, 2015). This is the key reason that fall in oil price has been affecting the economy extensively. This oil price fall has risen the GDP growth of both the countries. The Economist (2016), states that this fall pressurizes the government of China to restructure the fiscal system and taxation system (The Economist, 2016). The deficit in current account balance of India and China has been reduced and gained surplus value due to this price fall. Consecutively the economic growth is improving. The oil price fall is considered as a boon to Indian economy because it decreases the inflation rate and the price of goods and services. Again it reduces the losses of the company and fiscal deficit of the country which was increased due to the high price of oil before. It also strengthens the value of the rupee.

Some negativities are present related to these falls. India is known as sixth biggest oil exporting country (Bhattacharjee, 2013). Declined price impacts the export rate. India is suffering from trade deficit because an excess of imports and less of exports, so any fall in the export will affect the economy negatively. Critically speaking, in China, investment in the production of gas, oil, and other energy resources has been decreased due to this fall. As a result, China has been receiving lower GDP growth contribution from this industry (Kotak Securities, 2016).

The oil exporting countries are facing severe losses as a result of this price fall. Both the countries will face a severe deficit in exporting the oil to other economies. Also due to the price fall the government of Iran and Saudi Arab as well will face losses in the domestic market to. The annual income of the Saudi Arab has fallen near about 23% in 2015 (Bowler, 2015). This industry brings 75% of the total earning in the Arabian and Iranian economy (Bowler, 2015). Bowler (2015), has added that a heavy budget deficit of $100bn has occurred and the share price has fallen sharply in Saudi Arab. This oil price has occurred as a ban for these major oil exporting countries. Still due to this price fall, the consumption side of the economy is getting benefitted. Due to the fall in oil price, people can consume more oil in the domestic economy and it erases the problem of oversupply.

The Indonesian economy has lost 253trillion of its earning. The production of oil and gas industry have suffered 8% loss due to lack of potential investment in Indonesia (Yudha, 2015). This pressurizes the government to reconsider the subsidized price of oil in the economy which automatically will bring some major economic changes. The countries like the USA or Indonesia who are related to huge domestic consumption of oil has been affected in few aspects. It has failed to meet all benefits that could have been achieving if this situation had not occurred. However, it is seen that price fall of oil has occurred as a boon to the developed economies including USA (Appelbaum, 2016). It indirectly affects the economy because now it can consume more oil in less price.

The USA is the biggest exporter of the automobile goods like cars, bikes etc. Demand and supply theory state that fluctuation in the price of complementary goods affects the demand for actual goods. If the price of oil falls then more people can afford it and will use personal vehicles instead of public transport. This will increase demand for both goods.

Another important factor has been revealed that is the nuclear deal of USA demands more oil. During this price fall session, the USA can stock more oil because it is a necessary good for the deal. Simultaneously, the part who sells oil in the domestic market incur losses during the era.

Affected Industries; Winners and Looser:

In due courses, there are some industries who are being affected by this serious price fluctuation in oil. The effects come as both positive and negative way. It ultimately concludes that there are some winners and losers as a result of this price fall.

The reduction in the price of oil reduces the fuel cost used in the airlines industry. It is observed that the airlines industry in different zone started providing attractive offers to the customers (Goodyear, 2016). Prices are set at a cheaper rate relative to before. This cost reduction has done a record in past three years because the price of oil has been declining at such a rate that even after providing those offers, the industry has achieved healthy revenue. Although it is justified because this oil is used as fuel in airlines industry and if the price of it falls then surely they will gain an advantage.

Automobile industry also gains advantage from this phenomena because this oil and the vehicles are marked as complementary goods to each other. So, if the price of one falls then demand of other will increase (Bowler, 2015). This price fall drives the demand in automotive industry and hence they will enjoy a higher revenue and growth as well.

Goodyear (2016), has added that the oil producing industries along with their nations face severe losses by this event and it seems a fatal for them. Major oil producing economies like Saudi Arab, Iran etc. will suffer from losses because now they will get a lower amount of revenue by producing and selling the same amount of oil. This happens because the product price has decreased drastically.

On the other hand, the banking industry will also suffer because falling price of oil can decrease the number of loan intakes. If the amount of taking loan decreases then banking industry will receive a lower amount of interest rate. It declines to earn of the industry. So, they are considered as a sufferer in the era (Goodyear, 2016).

Conclusion:

This detailed analysis and discussion of the effect of oil price have highlighted several interesting fact. It is generally considered according to the economic perspective that a fall in a product’s price generally is a good factor for the economy. This assignment teaches that there are some exceptional goods to. The price fall for this good ultimately is considered as the loss for the economy. Oil, Gold are such kind of products and any modification in these products changes the situation of the world economy. This is to be kept in mind that every factor has some positivism but some major loopholes where this case of oil price fluctuation is not an exception. It is not that all outcomes brought by this case have gone wrong. It is to be concluded that both the causes and effects of oil is leaving some major irrevocable smudge in the world economy.

Recommendations:

The economy is getting very dynamic day by day but its dependency upon the oil is stable rather increases. The economy should have a quest of some alteration of oil, so that if its price fall harms then they can go for the substitute. Likewise, the use of diesel, battery, natural gas should increase to reduce the dependency on oil. It can save the economy from massive losses. Besides enjoying the advantages, the economy should have some proper arrangements to overcome its disadvantages.

References

Appelbaum, B., 2016. This Time, Cheaper Oil Does Little for the U.S. Economy.

Baumeister, C. & Kilian, L., 2016. Forty Years of Oil Price Fluctuations: Why the Price of Oil May Still Surprise Us. JOURNAL OF ECONOMIC PERSPECTIVES, 30(1), pp. 139-160.

Bhattacharjee, P., 2013. A STUDY OF THE IMPACT OF CRUDE OIL PRICES ON INDIAN ECONOMY

Bowler, T., 2015. Falling oil prices: Who are the winners and losers?.

Goodyear, S., 2016. Sinking oil prices: Winners and losers.

IMF, 2015. Global Implications of Lower Oil Prices. U.S., IMF.

Kotak Securities, 2016. 5-ways-falling-oil-prices-affect-India.

Krauss, C., 2016. Oil Prices Explained:Signs of a Modest Revival.

Plumber, B., 2016. Why crude oil prices keep falling and falling, in one simple chart.

Terra, C., 2015. Principles of International Finance and Open Economy Macroeconomics: Theories, Applications, and Policies.

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