Reasons For Falling Oil Prices

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This report will evaluate arguments and present conclusions on the following statement: “The recent fall in oil prices has been described as either a big tax cut or a contributor to potential deflation in the UK’’.


3.0 Falling Oil Prices:

From 2010 until mid-2014, world oil prices was fairly stable and their costs was oscillating at around $110 per barrel. The situation changed rapidly in June 2014 when prices have more than halved. At the moment, Brent crude oil has now fell below $50 a barrel for the first time since May 2009 and US crude is down to below $48 a barrel.

Source:, (2015).

The graph above presents how crude oil prices per barrel changed over 10 years. In 2009, the price
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BBC, (2015).

4.0 What is a tax cut?
A tax cut is a decrease in taxes. The effects of a tax cut are the reductions in the real income of the government and an increase in the real income of tax payers. There are two main types of tax cuts: income tax cuts that cuts the tax of an individual or corporation tax cut.

The Liberal Democrat Treasury minister, Danny Alexander stated that falling oil prices act like a giant tax cut to the economy and will further boost UK’s economy. He also added that he is I am persistently pressing airlines, petrol retailers, bus companies and package tour operators to cut their prices as much as possible. Mr. Alexander stated that it is fair that consumers and the economy take the full advantage of oil prices fall as they already felt the pain where the prices were high., (2015).

5.0 What is supply-shock?

A supply shock is an unexpected event that changes the supply of a product or commodity, resulting in a sudden change in its price. There are two types of supply shocks: negative (decreased supply) or positive (increased supply). Investopedia, (2015).

In an article that The Economist, (2015), published, it is stated that positive supply shock, such as the fall on oil prices is causing increase in output while supressing inflation. To offset the deflationary effects of positive supply shock, the bank would have to lower interest rates to
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