How Does Oil Prices Affect Economic Growth?

Several oil-countries have been facing economic and political turbulence as a result of the crash in oil prices, and there is disagreement among OPEC as how to handle the situation. (Krauss) While this is happening, America’s oil production continues to rise, as it inches closer to becoming an energy superpower in production and consumption; and countries that depend on their oil exports face recession.

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.

However, in the economy of an oil-exporting country, AD will likely be high due to high profits when exporting oil to foreign consumers. This would mean that there will be an increase in the balance of trade due to an increase in (X-M) causing the AD curve to shift rightwards causing demand pull inflation. In order to produce more output to meet the increased demand, firms are forced to bid for increasingly scarce resources, raising their costs. They therefore require a higher price to be willing to supply more. With exports rising, the price elasticity of demand is low and there is a relatively small decrease in quantity demanded for oil. Therefore export revenue will probably rise, resulting in an improvement on the current account.

The demand for oil has been predicted to increase despite the high price of oil. Sources of the demand for oil continue to increase with time worldwide. As countries industrialize and develop, their oil consumption increases together with their economy. Examples of countries that have their economy growing fastest and steadily are India and China. These two countries have their economy growing and the impact their economic growth has on oil demand is great. Some developed countries are also about to change their habits on oil demand. This will be likely adapted faster if the prices of oil continue to rise. Oil prices are determined by the traders and speculators who control and manipulate the future oil market (Anderson, 1).

This research paper provides an overview on why there is oil price falling in the United States. It will examine the reasons that are influencing fall of oil prices. Additionally, the paper will seek to explore the effects caused by the fall of oil prices in the American’s economy.

The oil age has become an age of inequality. The discovery of oil has brought the wealth of a few people, and has brought misery to most people. Many oil rich countries suffer from the distortion of the economic development, the financial instability, the increasing gap between the rich and the poor, the serious

Oil makes up over ⅓ of humanities primary energy supply. The production of oil, especially the refining of it is has a huge impact of on the modern day world. Oil has been collected and used since Old Testament Bible times. Oil or petroleum is naturally found in various countries including in and around the United States of America. There are many men who can be linked to the beginning of the American oil industry, but out of all of them the most famous, if not the most influential is John Davison Rockefeller. The history of the United States petroleum industry was influenced by John Rockefeller, and helped define his legacy.

Therefore, due to a dramatic change in the quotes of the production, the market is affected, which is presented by “Rising non-OPEC oil production is changing global trade patterns”

The combination of rising unemployment and rising cost of living will lead to increased recession and higher poverty levels. A crisis in the oil industry eventually leads recessionary effects. Recessionary effect in turn lead to a vicious cycle of poverty, starvation, and bankruptcy. Agricultural industries are highly dependent on the cheap energy provided by crude oil. Lower agricultural productivity due to effects of the oil crisis and higher energy costs will make food prices higher. The world may face more serious hunger and famine problems.We will observe effects of bankruptcy and poverty due to bad debts

Price is depended on supply and demand. There are two different laws: The Law of Demand and the Law of Supply. The Law of Demand is a relationship, which involves price and quantity. It states that as the price of a product goes up (oil goes up), the quantity of the product (oil) will go down; therefore, this is a strong relationship between price and quantity. The Law of Supply, however, is the direct relationship between price and the quantity in which the seller produces. So as price goes up, the quantity the seller will produce will go up because the price allows for the seller to produce more output. Demand shifts are caused by economic growths. Economic growth is an increase in the capacity of an economy to produce goods and services, from a certain

Quite simply, a higher supply has led to a lower demand for oil. This is driven by the fact that the domestic oil production in the United States has almost doubled in recent years. Countries such as Saudi Arabia, Nigeria, and Algeria who used to sell oil to the United States are now being forced to find customers in different markets, but they continue to produce oil in record numbers. Worldwide production of oil is increasing at a rate that is out growing the demand for oil, which causes the price to drop in order for these companies to continue to gain revenue. (nytimes) On top of this, the demand for oil has also began to lag because vehicles are becoming more and more energy-efficient every day. (nytimes) All of these factors pushed the oil industry to its limit when prices reached a new low.

Golub (1983) and Krugman (1983) in their individual works concluded that oil exporting (oil importing) countries may experience exchange rate appreciation (depreciation) when oil price rises and vice versa. A depreciation of the USD reduces the oil price to foreigners relative to the price of their commodity in foreign currencies, thereby increasing their purchasing power and oil demand and in turn, pushing up crude oil prices in USD through the law of one price for tradable goods Bloomberg and Harris (1995). The positive correlation between oil and exchange rate dependence found in studies indicates that oil and currency markets move together and differs across currencies. Gasser and Goodwin (1986) found that crude oil prices has a significant impact on a broad range of macroeconomic indicators and this effect exceeded that of fiscal policy and sometimes exceeded that of

The volatility of crude oil prices have been experienced since the end of the 20th century. The March 1999 spikes were experienced due to the restriction of crude oil production and cooperation among OPEC member states, the growth of oil demand in Asia that signified its recovery following the Asian financial crisis and decreased production from non-OPEC countries (Al-Abri, 2013). The world market reacted with a sharp rise in prices with the increase in crude oil going beyond 30USD/barrel in the last quarter of 2000 (Chen, Hamori and Kinkyo, 2014). OPEC countries tried to stabilize prices through the increase or reduction in production to a range of 22USD per barrel to 28USD per barrel (Ghosh and Kanjilal, 2014). The incident on September 2001 caused a deep reduction in crude oil prices, irrespective of earlier decreases in production by exporters that are non-OPEC and quota reduction by OPEC countries. After a short while, prices rose to 25USD per barrel with prices going beyond this in 2004 to about 40USD per barrel (Jimenez-Rodriguez, 2011).

In the last few months, much has been said of Iraq’s invasion of Kuwait in 1990. Interestingly enough, one of Iraq’s motivating factors was economics. Kuwait provided Iraq with a pretext for war as it violated the economic policies of the Organization of Oil-Exporting Countries by exporting oil above its quotas. This is but one chapter in the complicated history of OPEC. OPEC is an international assembly of nations which co-ordinates and unifies the petroleum policies of eleven countries and has enjoyed the highs and weathered the lows of oil prices in the last few decades. To solve their problems, both member countries and oil-importing countries must address the complex nature of oil price

Crude oil is still a driving force of the world economy today. Changes in the price of oil have significant effects on economic growth, development and welfare in countries. Oil price volatility has had its ups and downs in the past year as well as the past decade. Oil prices fluctuate for a number of reasons. One reason why oil prices fluctuated is because of rising global economic activity. It can increase demand and push prices higher, while rising production can cause prices to decline. During the last financial crisis there was a grueling time for oil prices as they had fallen about 50% during that time. (Moors, 2011) Many studies have shown that economic effects of oil price can increase or decrease and they typically show that for oil importing developed economics (Moors, 2011). This paper that I have written thoroughly investigates the role of oil price volatility. My paper also focuses on the variability of positive and negative oil price shocks as seen in Germany, Japan and United sates.