How Deflation Impacted The Commodity Market And The Labor Market

Some economists believe total energy independence would reduce the demand for the US dollar, as the oil trade is done is US dollars. Since oil prices are set for the total supply of oil, the global market will decide the price of oil regardless of whether the US imports oil or not. Therefore, to keep the dollar strong we should continue to import oil. However, the U.S Department of Energy claims that although US petroleum production has increased and net imports have decreased oil imports have cost our economy around $116 billion in 2014 and oil price shocks and price manipulation are to blame. The solution the US Dept. of Energy has set out is to developed more advanced and fuel efficient vehicles, and create new energy sources to replace petroleum.

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 recession of 1973 through 1975, was due to the Organization of Petroleum Exporting Countries (OPEC) who rose gas prices and imposed an embargo against the United States. This quickly caused oil production to be cut dramatically, leaving no choice but to increase the price in oil. This recession, I am going to pin point the causes, fiscal and monetary policy the government uses to help the economy slowly come out from the recession. Also I am going to pin point the recession’s recovery and expansion.

The Chairman’s first lecture at The George Washington University highlighted the damage deflation caused during the Great Depression. The gold standard and errors by monetary policymakers in the period exacerbated a difficult situation and allowed deflationary forces to spread financial distress and panic in the banking sector. The Chairman argued that had the Federal Reserve expanded the money supply during the Great Depression, deflation could have abated and the severity of the financial crisis would have been avoided. In recent years, deflation has returned to the forefront of economic discussions as an increasing number of economies have faced the potential of falling prices.

The featured article “The End of Oil,” the author, Alex Kuhlman argues that oil production is decreasing due to the costs of production are rising because cheap and easily accessible oil is hard to find despite increased consumption.(Kuhlman, 2007). Kuhlman (2007) provides evidence both from oil demand and supply aspects to illustrate the imbalance which causes the end of oil.

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.

Oil prices affect most American's daily lives. Whether it is used to fuel your car, a plane, to heat your home, or even if it is just used inside products, like plastic that we use daily, oil plays a role in all of our lives. Last year, in 2015, an extreme decline in gas prices swept the United States. For example, oil prices have decreased to less than $30 a barrel which is the lowest it has ever been in 12 years. There are many factors that can contribute to this sudden decline in gas prices, but their are three that are the most relevant. These include, the recent advancements in other fuel sources, the changes in the leading oil suppliers of the world, and the simple economic concept of supply and demand. These three ideas are all important in contributing to the fall of gas prices.

The oil industry is full of economic booms and busts. Recently, the industry is in a downturn and the price of crude oil has dropped significantly. In recent times, the price of oil has dropped by more than 40% since June 2015. This crash came after nearly five years of stability and the economies hardly hit by this downturn are oil-exporting countries such as Russia, Nigeria, Iran and Venezuela. In the past one year and a half, oil prices have been cut in half and oil executives have predicted it will be years before oil prices return to $100 per barrel. The major causes of the downturn are the declining prices of a barrel of oil, which is as a result of the strong U.S. dollar, oversupply, OPEC and declining demand.

Noting deflation as the main course of the great depression seems rudimentary, although a valid main cause, one must understand it was not the only main cause for the economic crisis in the United States. If we do consider it as the main and fundamental cause of the great depression, we can justify our reasoning due to the spiral effect deflation has on consumer behavior, banks and even government economic policy. Deflation is defined as a decrease in the price of goods and services. One can assert that due to deflate the public would consider their money more valuable from one day to the next as deflation increases. As money becomes an investment itself, this results in less consumer spending on unnecessary goods, which expectedly results in less profits for businesses, and even lower employment to cover costs. As unemployment rises and less individuals are making money an increase in defaulted debt is seen alongside fewer issuing of loans for new businesses. Deflation, not only causes lower prices for goods, but it also increases the value of a prior debt and lowers consumer demand in general.

Since 2008 many oil companies in the US have been selling 3.5 million barrels more than they did because the oil prices go up and down constantly. In New York the oil price has dropped nearly half in six months. Out of the 12 biggest oil producers in the world most all of them are in the Middle East because they don't have many jobs over there except drilling oil. The US is the biggest buyer of oil. China, Japan and then Western Europe are some other big buyers but they are slowly buying less and less. More oil is pumped than the world needs, that is why the prices of oil are going down. People that drive in vehicles are clicking their about this but oil companies are scratching their heads because they aren't making that much money.” Anytime

The lower cost of gas means that people will be able to save money—which is exactly what any consumers would want in the market. Specific consumers who benefit the most from cheap oil are working and middle-class people who spend an unbalanced amount of their money on gas to fill up their cars and to heat their homes. As a result of cheap oil, the amount of money that people will save can now go to expenses like buying a new car, purchasing new electronics, traveling elsewhere, or even as small as going out to a nice dinner (p.34). All these results will cause a hotel boom, a restaurant boom, and labor shortages that will increase wages (p.36).

In addition to the decline of the Chinese economy, demand for oil is also affected by environmental concerns because burning oil creates carbon dioxide, a greenhouse gas that is contributing to global warming. In recent years there has been a growing emphasis on reducing carbon emissions in order to become more environmentally friendly. Businesses, countries, and consumers are encouraged to pollute less and leave a smaller carbon footprint. For example, China, the world’s largest consumer of oil, now holds the most wind turbines which shows a push to become less reliant on oil and more environmentally friendly. This is especially evident after the recent United Nations Conference on Climate Change, or COP 21, which was held in Paris last December. At this conference world leaders agreed to combat global warming by trying to reduce greenhouse gas emissions and aiming to become carbon neutral by the second half of the century. This will certainly negatively affect the demand for oil not just in the present, but for years to come as the world tries to shift from a strong oil reliance to alternative fuels. Although the world may be in search for of alternative fuel sources, cheap oil hinders this search because it lowers its incentives. The

Is it true what experts say, when the price of oil drops the economy gets better, and when the price of oil rises the economy suffers? Of course as consumers we love to pay less at the gas pumps, but as we play much less now for gas then we did last year many of us are suffering due to the dramatic drop in the price of oil. As I strongly agree that the low cost of oil is hurting the economy in general, as I was one who fell victim to the recession working for an oil company up until January 2015, but fell victim to lay off due to the big drop in prices.

Oil prices are largely driven by the global supply and demand. When oil prices rise, it becomes more expensive to manufacture and transport the goods, in this case, autos. Deputy CEO An of Geely, a private Chinese company, expresses his disappointment by the oil- price changes. He added that changes in the oil prices have a bigger impact on the auto industry as this makes a lot of demands on the carmakers and raises the standard and they have to design the product thinking more about the fuel consumption (O’Rourke). The increase in the cost to produce the products must be factored in the higher price of the product. The sale of automobile is affected by the rise in the oil prices and there is a possibility that the volume of sale may decline as the result of higher prices that the producers now have to charge for their products. Even though the auto industry decreases its price significantly, their sale would decrease. This is because the demand of oil is inelastic in the short term. This can be better explained by giving example. If the oil price rises, the economy doesn’t stop. People still have to go to work. The result of an inelastic demand for the oil is that people will continue to buy and pay more for the oil because they do not have immediate alternatives, but they will change their spending behavior elsewhere because of their fixed amount of income (Enzo). In the long run, people would find the

Discuss the role of government policy in reducing unemployment and inflation. In your discussion make use of the diagrammatic representation of the macroeconomy developed in lectures in Term 2