OIL impacted by these acts of fluctuating

 

 

OIL
PRICES

 

 

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Team
10

Akshay
Ravi

Anantu
Satish

Annie
Amrutha

Bhavana
Raj

Parvathy
Menon R

Introduction

            Oil is an expensive
resource and the history of this expensive resources starts from the war
between Egypt and Syria, in 1973 which resulted in quadrupling its price. The oil price has a huge impact on the world
economy.

The
fluctuation in oil price affects the world economy because; this scarce
resource is highly in demand in most of the countries which had reflected on
their economy. When oil was on the top of the wars between Arab and other
countries, it directly impacted on US GDP and led them to the recession. When competition and its effects
rose, US started production of oil. Due to this, the Organization of Petroleum
Exporting Countries (OPEC) started
influencing the market shares by producing oils at lower rates. The oil rates
fluctuated in 2008 when the producing countries couldn’t catch up the increasing
demand and also during the wars between Middle East countries.

In
2016, when different countries increased their production of oil the countries
were outstripped of demand. The competition was tightened by Saudi Arabia to acquire
the market shares from the US oil producers. Now, even though there is a need for balance between demand and supply, there
won’t be a significant positive fluctuation in
oil prices.

The
oil importers and exporters were and/or are going to be impacted by these acts of fluctuating oil prices. The
importers will be benefited when the costs fall
which results in their growing profits whereas
the exporters will be adversely impacted when their income goes down due to
stress on oil prices. Many of the exporter country’s total revenue is from the oil, which will be reflected on
their GDP directly.

            Figure
1 shows the history of how oil prices
have increased since 1850 to 2008. The price indicated in the graph is the monthly
average spot price of a barrel of West Texas intermediate crude oil, measured
in U.S. dollars. The gray bars in this and all the following figures represent
recessions, as defined by the National
Bureau of Economic Research.

 

 

 

 

 

 

 

 

From
Figure 1, we see that the oil prices were stable until 1973. In fact, the
1970s show two distinct jumps in oil prices: one was triggered by the Yom
Kippur War in 1973, and one was prompted by the Iranian Revolution of 1979.
Since then, oil prices have regularly displayed volatility relative to the ’50s
and ’60s.

Figure 2 shows the “real” oil price, obtained by dividing
the price of oil by the GDP deflator. This, in
turn, removes the effect of inflation and
hence gives a more accurate sense of what is happening to the price of the commodity
itself. The “real” measure allows you to compare oil prices over time in a way
that you can’t when inflation is also part of the change in price. You can
understand that oil prices have changed over time, but large fluctuations occurred more over short periods.

 

 

 

 

 

 

 

 

Why the
rise?

The reason for the rise could be because both
increases in the demand and fears of supply disruptions have exerted an upward
pressure on the prices. The global demand has surpassed every gain in oil production and excess capacity. A major
reason is the rapid growth of developing nations, especially China and India. The
fast industrialization and urbanization
of these economies, has contributed to an increase in the demand for oil. 

It
is necessary to remember that both the demand for and the supply of oil react
sluggishly to changes in prices in the short run, so very large changes in
prices can be required to restore equilibrium if demand should move even
modestly out of line with supply.

Oil
price increases can also stifle the growth of the economy through their effect
on the supply and demand for goods other than oil. Increases in oil prices can
depress the supply of other goods because they increase the costs of producing
them.

Oil
prices and its effects on the world
economy

Oil is very important to
the world economy as it accounts of almost 1/3rd of the world’s primary
energy supply. It has become an important source of energy and it directly contributes
to about 2.5% of the world’s GDP.

The oil price movements
can be estimated through an increase in global demand or supply of oil. The
major reason for oil prices to fluctuate is basic demand and supply of oil.
Natural calamities are also another reason for the oil prices to fluctuate.

When oil price increases,
it leads to inflation and reduces economic growth. It indirectly affects the
cost of products using petroleum and also increases the cost of manufacturing,
transportation and other processes which involve using oil. At an individual
level, when the price of oil increases, people tend to spend less on other
goods and services. Therefore increase in oil prices indirectly affects the
economy on a larger scale.

A drop in fuel prices
will benefit various manufacturing and service sectors, especially sectors
which are directly or indirectly using oil in their processes. For example,
transportation sectors will benefit directly if there is a drop in the oil
price and the people who make use of the transportation will benefit indirectly
because the cost or transportation fare will reduce systematically. If there is
an increase in oil production, then the oil prices will gradually reduce. This
situation can also disrupt the economy because it will directly affect the oil
companies and also the domestic oil industry workers.

Indian Scenario

Crude oil prices are determined
by highly dynamic demand-supply
conditions. India imports around 70% of its crude oil. Hence the fall in oil
prices save the country from import bill which in turn narrows the current
account deficit. The fall in oil prices helps to manage the finances better
because lower subsidies will be imposed on petroleum products which leads to a lower fiscal deficit. Lower oil prices reduce
inflation which can be visible as the prices of petroleum products decline.

            India
imports oil in large quantities. This is an essential commodity and it affects
India’s economic growth rate. When crude oil prices in the world market
fluctuate, India’s currency cannot remain stable. High oil prices result in
high inflation rates hence overvaluing of India’s currency.

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