Basic Studies Establishing The Oil Price Economic Growth Relationship

The consensus from the 1970s and 1980s was that there was an inverse relationship between oil prices and real economic activities. This belief later changed when the oil price crash of the mid-1980s failed to boost economic growth. Researchers then believed that increasing oil prices negatively affect the economy whereas falling oil prices have very little impact and by the 1990s this impact was assumed to be minimal (DePratto, de Resende and Maier 2009). More recently, researchers have found that increases in the oil prices adversely affect the economy whereas the impact of a decline in oil prices on GDP growth is only negligible (Jimenez-Rodriguez and Sanchez

The United States consumes more than 25% of the world’s petroleum products which is a large percentage, considering only 3% of the world’s oil reserves are produced by the United States. Given the demand for petroleum products such as gasoline, understanding why Crude oil prices have skyrocketed in recent years, is not hard. According to the article “Ending America’s Oil Addiction,” the surge in crude oil prices can be reduced in large part to the simple concepts of supply and demand. (Cooper, 2008)

In a revealing article by George Perry (2001) the author discusses the economic impact that a disruption in the oil supplies would have on world oil prices. He states “Currently 28 percent of the world's crude oil comes from the Organization of Arab Petroleum Exporting Countries (OAPEC) consisting of Arab Muslim nations, some of which are not part of the OPEC cartel. The governing regimes in all these countries are at some risk [due to the war on terrorism].” He goes on to state that in a worst case scenario the economic consequences of oil supply disruption would be “oil prices rise to $161 per barrel driving gasoline price to $4.84 per gallon. The increase in the nation's bill for products of crude oil rises by about 10 percent of GDP, which adds perhaps 15 percent to the inflation rate in the first year. And the recession is the steepest and deepest of the postwar period, with GDP declining nearly 5 percent the first year.”

This report will consist of the causes and consequences of the changing price of WTI crude oil and recent trends in the global price of oil. It will also include the effects of the ever-changing price of oil on individuals, business firms, governments and the economy.

One macroeconomic objective that might be affected by rising oil prices is the current account of the balance of payments. The current account is a record of the trade in goods and services, income flows, and current transfer. The balance of payments is a record of the financial transactions over a period of time between a country and its trading partners.

Graph 1 represents the major companies and nations which product crude oil. It also represents how the bent crude oil price has fluctuated from 2004 until 2014. From 2004-2008 it is evident that there is a steady rise in oil prices, from $35-$150 per barrel. Towards the end of 2008 it is evident that there is a significant drop in oil prices, from $150- $32 per barrel. This is due to the Global Financial Crisis (GFC) where the stock market collapsed on October 28, 1928, through this came the rapid decrease in oil prices. From 2009-2011 there is a steady increase in oil prices which was caused by the stock market repairing itself from impact of the GFC. In 2013 we are able to see declining oil

Assuming the OPEC has created a more competitive oil market, and it leads to a dramatic decrease in the world average oil price. Deal to the situation as described above, Australia is standing at a position that the rate of inflation decreases significantly. Considering the relevant response towards the change of rate of inflation, the level of real GDP and the unemployment rate in the short term operation and long term operation respectively, this analysis on OPEC would be divided into two main parts: the outcomes without the lower inflation rate causing a change in potential output and the outcomes with such a change in potential output. In addition, the framework of aggregate demand and the aggregate supply would be employed in the explanation

With many of Europe’s economically struggling countries the increase in production of oil which in return yields lower prices has benefitted them. Europe’s weak economy is able to contribute to this drop in oil prices in that Europe’s currently low inflation rate and weak economy has greatly lessened the demand for oil. The lack of demand for oil in one of the most prominent import continents in the world has forced oil manufactures to lower their prices in order to retain Europe as a top oil export. Large oil exporters do not want to lose Europe as an export because that would also mean losing billions of dollars per year.

During this period, the price of ‘Brent’ crude oil (like WTI) reached an all time high in July of 145.61 USD/BBL in response to strong economic conditions prior to the Global Financial Crisis hitting in early 2009. The price of ‘Brent’ crude oil also similarly bottomed out in 1970, with a record low of 2.23 USD/BBL and following the GFC, prices sharply fell, with prices at 62.04 USD/BBL as of April 2015. Over the 45-year period, significant events such as the GFC, the Iran/Iraq war, the Iranian revolution and various OPEC cuts (as shown in graph 1) has caused the price of ‘Brent’ crude oil and crude oil as a whole to historically be fairly volatile and as such, these various political and economy-wide factors provide an explanation for volatility in prices over the past 45 years.

As crude oil is invoiced in USD, it is of interest to note how fluctuations in the value of the USD affect oil prices. Another of our factors is the price of natural gas, the closest substitute as a source of energy to oil. Lastly, we seek to establish a relationship between returns in the S&P500 and oil prices.

The present study is intended to analyse the relationship between oil prices fluctuations and its role on GDP growth of United States economy. Oil crisis is prevailing in almost all developed and emerging nations for more than 40 years. Remarkable increase in oil prices have commenced from 2001 and decrease in prices was observed in 2008 during financial crisis. During decreased demand in Dec 2008, the crude oil prices dropped from 145 USD to 33 USD. However, soon prices started to rise sharply as then before. Oil caters 36% of US energy demand currently (Kilian, 2008). Oil is reported as main mover for US economy as 70% were consumed for transportation and rest 24% for industry and manufacturing and final 5% for commercial and residential sectors. The primary oil consumption rate continues to rise linearly and achieved its peak during 2008 and 2009.

The purpose of this paper is to explain the effects of oil prices on various parts of the economy. The Impact of Lower Oil Prices by Bruce Lantz and Contemplating Collapsing Oil by Leonard Melman assist in explaining the advantages and disadvantages of declining oil prices. Both articles address the issues of unemployment and changes in total spending caused by the price of oil. Taking into consideration the opinions of chief brokerage and wealth management companies, as well as the actions of various prominent oil and gas companies, Lantz and Melman share their predictions in regards to the outcome of the current oil situation. However, after considering the facts presented in these articles, it seems very likely that these low prices will ultimately become a serious problem. Before delving into the meat of the above mentioned articles, several vital economic concepts must be tackled.

During the 1960s, OPEC was only modestly successful in influencing oil prices, which remained relatively stable. OPEC member counties did not gain control of their own oil production decisions until the 1970’s because oil companies had a large stock, and therefore a proportionately large say, in many of the OPEC countries’ oil production businesses. During the period of 1969-1972, OPEC countries began setting barrel prices without negotiation with the

Over the past year oil prices have dropped significantly. This is mainly due due to an increase in technology, which has allowed for a significant increase in the production of oil. The United States whose top import is Oil has started to produce more oil domestically. Oil prices have dropped from $110 a barrel of WTI to a whopping $41. This reduction in the demand for oil would usually curb supply, but many countries are afraid to curb supply incase of loosing market power. Another reason prices are dropping is people are being more environmentally conscious and reducing there oil use. In recent years we have seen many alternative fuel sources introduced into the market and people seem to gain utility from “going green” even if it cost more. The reduction in oil prices is heavily affecting economies that are reliant on oil exports. Oil prices, which continue to drop, are negatively affecting the GDP of countries who are reliant on oil exports. This drop in prices is can be simply by supply and demand there is most evidently a higher supply of oil then demand has brought prices down. Since the oilrigs have already been drilled countries rather sell oil at a loss then not sell any oil at all, so that some of the money can be recovered. This means countries are choosing not to curb the supply but continue to produce even though the market price is so low.

Over the last years, the oil industry practiced its deepest recession since 1990s. That being said, the recovery for this industry finally starts getting better. The Organization of the Petroleum Exporting Countries approved to change the production last year, 2016. This arrangement has been holding over to this year, with oil prices increasing for the past several months. But in recent weeks, United States records have been found greater oil prices have been faded. Experts think it will be years before oil returns $100 a barrel, a price that was regular till late 2014. But after the oil price recovered from below $30 in early 2016 to over $50 by the end of the year, there was increasing certainty in the industry that crude oil could rise