Introduction
Is oil a blessing or a curse?
This report will be focusing on the above question to determine how both the rise and fall in the prices of oil has affected the aggregate demand and aggregate supply of a nation that relies solely on oil for its revenue. The report would clearly shows the Aggregate Demand (AD) Curve in respect to its effects on the oil-exporting nation, United Kingdom. The cause of oil prices drop and impacts of the economy due to shift of the AD and will demonstrate on a diagram form. The brief of United Kingdom governments’ budget due to oil prices drop. This report will also follow by some recommendation and conclusion.
The report will demonstrate a clear understanding of the issues regarding Global oil prices fallen sharply over the past year. Also this report will highlight significant revenue shortfalls in mainly energy exporting nations, and the adverse effect this will have on importing nations who are likely to pay less to heat their homes or drive their car. The report will also critically analyze the effect of falling oil price on global economy.
Falling oil prices: Global oil prices have fallen sharply over the past seven months, leading to significant revenue shortfalls in many energy exporting nations, while consumers in many importing countries are likely to have to pay less to heat their or even to drive their cars.
Changes in oil costs and the degrading of the Naira (Nigeria currency) have had a noteworthy effect on the
The consumption of the oil cause changes in the supply and demand. The United States produces 11 million barrels of oil every day. We are one of the biggest countries to have a big influence on the production and prices of the oil. The basic supply and demand theory explains that the if a product is produced more, the cheaper it should sell. If a country were to double the output of oil day, prices would fall and the Production is high, but the distribution of oil isn’t keeping up with the market. The United States builds an average of one oil refinery per 10 years. This is a net loss due to the fact construction has slowed down since 1970s. Since 1970s, the United States has 8 less oil refineries today. The reason why we are not oversupplied with cheap oil is because of the other countries’ higher net margin and the only operate at 62% of their capacity. Excess capacity is only there to meet future demand. With demand moving accordingly, oil prices will continue to be set mostly by the market — despite external players’ best efforts. (McFarlane)
When trading oil it pays to keep an eye on the major consuming nations, as any increase or decrease in usage is sure to have an impact on the commodities performance. Something that is also worth monitoring – with this tying into the performance of major consuming nations – is OPEC, the Organisation of the Petroleum Exporting Countries. This international organisation works to ensure both the stablisaiton of the oil markets, along with coordinate and unify petroleum policies. Current members of OPEC include mass-producing oil nations (13 in total, including Saudi Arabia, UAE, Iran, Iraq, and Qatar). Considering that OPEC has the power to decide policies related to the production and sale of petroleum oil, it certainly has the power to impact the price, flow, and distribution of oil worldwide.
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.
In the recent months, the prices of crude oil have dropped from 140 dollars per barrel to 60 dollars a barrel in the latest date. To begin with, there is technological revolution in the energy extraction referred to as “fracking” which has significantly increased supply of natural gas and petroleum in the America, allowing them not to depend heavily on the foreign sources of crude oil. Secondly, Saudi Arabia and the other countries
With the current spike in oil prices, many American consumers have asked, 'what is going on?' In order to fully understand the current situation and how it is affecting the economy one must look at a variety of factors including: the history of oil crisis in the United States, causes of the current situation, and possible outcomes for the future. It is only after meticulous research in these topics that one is prepared to answer the question, 'what is the best possible solution to the oil crisis?'
Over the longer-term, some of the major trends that affect the price of oil are consumption for business and personal use. For example, Anderson and Boul (2005) note that China's economic growth has resulted in that nation having steadily increasing demand for oil. Much of this comes from growth of the country's consumer class, with automobile sales, and from growth in industrial uses for oil. India, the US, and the world's modern economies are all big users of oil, so the drivers of demand in these nations can have an impact on world markets for oil.
Another weakness for countries reliant on oil/gas is the sensitivity of the oil/gas market. As can be seen on the figure alongside, over the years oil prices were subjected to fluctuations arising from different events like the Iranian revolution and different political conflicts like the Iraq’s invasion of
Besides the effect in the terms of trade, an oil price increase may have immediate effects on aggregate demand by means of higher consumer energy prices since inflationary pressures reduce consumers’ real disposable income, and, therefore, consumption. This is known in the literature as direct first-round effect. The size of the direct effect of an oil-price increase depends on the share of the cost of oil in national income, the degree of dependence on imported oil and the ability of end-users to reduce their consumption and switch away from oil .
There are various empirical literatures, investigating the relationship between oil price variations and economic growth. The existence of a negative relationship between macro-economic activities and oil prices has become widely accepted especially after Hamilton’s 1983 work. He pointed out that increase in oil prices, reduced US output growth from 1948 to 1980. Hamilton's findings have been confirmed and extended by many authors and researcher. Hooker (1996) confirmed and extended Hamilton’s work for the period 1948 to 1972 and demonstrated that the oil price level and its changes do reflect the influence on GDP growth. This is shown in the third and fourth quarters after the shock that rise of 10% in oil prices lead to a GDP growth decrease of approximately 0.6 %. Accordingly, Lee et al. (1995) Mork (1989), and Hamilton (1996) presented the non-linear transformations of oil prices to re-establish the negative association between oil prices increases and economic decline, as well as these researchers also analyzed Granger causality between both variables. The result of Granger causality test proved that oil prices Granger cause U.S. economy before 1973 but no
The currently high price of crude oil amounting to almost US-$ 70 per barrel (May 2006) definitely has a significant impact on the global economy. But the high oil price does not influence every economy by the same degree. Industrialised nations for instance experience a less severe impact than developing countries do. This is because developing countries are generally more dependent on imported oil and because they are not able to use energy as efficiently as industrialised nations. The cause for their lower efficiency and therefore higher dependence is often a lack of availability of advanced and expensive technologies such as efficient fuel powered vehicles, and expensive oil dependent energy production. On average, developing countries need more than twice the amount of oil to produce the same economic output as industrialised countries do. The impacts described in the following part are valid for both ¬- industrialised and developing countries - but for the latter the impacts on the economy are usually much
There has been a sharp drop in the prices of oil. Over the past decade there has been a recurrent drop that has been recorded. Estimated the place effect has been in the range of 0.5 to 1 %( dadush 2015) the drop in the prices has have caused contending large deficits in many countries especially those which receive oil exports. The effects are both negative and positive depending on the boost of the global aggregate demand. Non OPEC countries have had the opportunity to have the eventual decision to enable the price to align according to the global economy
Oil is an essential element to our modern community. People need oil to fill up their tanks for their car, light up their light bulbs at home, and much more. Most of the world’s oil have got imported from the Middle East, in Arab countries. The oil crisis has led America on the road of not depending on other countries imported goods, and try to create their own with their own resources, this is one reason why America is the top economy country in this world. In American history, Americans recognize three oil crisis, or energy crisis, which happened in the years of 1973,1979, and 1990.
Moreover, they presented two interesting results concerning the relationship between oil price changes and macroeconomic variables. First, they showed that monetary and fiscal policy measures alone cannot explain the effects of oil price shocks on macro economy after oil market disruptions. Thus, oil shocks also have an impact on economic output by other means than inflationary cost-push effects. Second, oil price effects on the U.S. economy did not change after 1973 when the OPEC period began. Hooker (1996) confirmed Hamilton’s results and demonstrated for the period 1948-72 that the oil price level and its changes do exert influence on GDP
The methodology will be carried out using secondary data mainly from the Central Bank of Nigeria (CBN) Statistical bulletin, the National Bureau of Statistics (NBS), the Nigerian National Petroleum Corporation (NNPC) and a few from the CIA World Fact Book, World Development indicators (WDI) and, Organisation of Petroleum Exporting Countries (OPEC) for the period of 1980-2013. The variables to be used include; Gross Domestic Product growth (GDP Growth), Domestic Crude Consumption, Crude Export, Manufacturing Growth, Domestic Savings, Export Growth, Foreign Direct Investment (FDI) Net Inflows and Agricultural Growth. They will be assessed in two sets with different dependent and explanatory variables:
It goes into the relationship between oil prices and macroeconomic fundamentals, including economic output and value and volume of international