Regional Impacts of Changing Oil Cost
The price of oil plays a vital role in shaping the global economy as it makes the largest traded commodity internationally. This is due to its use in mechanical work and production of electricity; hence, it falls under the hydrocarbon economy. Oil is used to produce other fuels which are significantly used in majority of the industries controlling the prices of energy-intensive goods and services that require energy.Oil prices have faced a downward trend for the past three decades but the highest drop was witnessed in 2014. In 1985, non-OPEC (oil producing and exporting countries) maneuvered into the market making OPEC countries to desist from using pricing as their strategy and concentrate on mass production. In 2000, there was a drastic increase in the oil price, from around $30 a barrel in 2001 to more than $100 in 2008, which was unpredicted in the entire globe (Henriques 78).
The oil price fluctuated significantly due to the worldwide economiccrisis in late 2008, but then gradually recovered to its pre-crisis level until June 2014, when it was cut by roughly a half. Actually, oil prices have remained unpredictable despite the great role played by oil in driving the world’s economy. Oil is a product that is consumed by almost each country in the world which shows its significance and the need to study its price changes. The impacts of such varying oil price on global economic status are many, but it is difficult to cross examine them with the same perspective as they vary across countries. Therefore, this study looks at the world oil price trend superficially and its impacts around the world.
Background Of Study
The United States Department of Commerce indicated that the prices of imported petroleum at an average cost of $47 in 2015 which was a drop from $48 dollars witnessed in 2014 (Baffes and Marc 7). The Census Bureau attributes these significant changes to the sharp prices decline for the last four years. Actually, in 2008 a barrel of petroleum could trade at $140 where it decreased to $80 in 2009 and analysts predicts further decline in 2017. In 2011, a decrease in the prices pushed the prices of energy imports downwards which accounted for 44% of the total U.S. merchandise trade deficit (Henriques 82). In Brazil, the situation is not different with the current price ranging from 41 to 57 US dollars per barrel. The Brazilian government has continually regulated the oil prices as a way of curtailing inflation since 2006. This has been facilitated by the deteriorating worldwide oil prices knowing that the country produces oil. In 2013, Peoples Republic of China took over from the United States of America as the most prolific oil importer which means it is important to highlight oil prices in the country. The country has the world’s second largest economy with and the changing oil prices attributes to this growth.Industries such as logistics, air transport enjoys the price of $45 per barrel translating to huge foreignexchanges in China.
Germany is another country that is a huge beneficiary of the declining oil prices as it heavily relies on car manufacturing industry. Germany is expected to increase its exports in the Asian countries which produce oil experiencing a favorable balance of trade. However, Germany will be the ultimate beneficiary as the world is geared towards a sustainable environment where cars will be pollutant free. As a result, Germany is exporting oil at relevant low prices in order to maintain a lasting relationship with the Asian countries. In Mexico, Oil is retailing at $50 per barrel despite the fact that it is an oil producing company (Baffes and Marc 24). Its largest oil extracting firm Pemex minimized its production reducing the seven-decade monopoly. The adverse consequences from the collapse in oil prices will be greater in Mexico than in other exporting countries because lower oil revenues decisively affect Mexican public finances (more than 30% of which depend on oil income). South Africa is among the countries where the prices of oil have elicited an upper trend with a barrel trading at $98 to $107 in worst economic status. However, it is still a significant drop from the oil prices in 2008 that could hit around $160 per barrel. In light of this, the prices of oil have declined in all parts of the world signifying a change in the oil products market trends. Therefore, there is a need to understand how these fluctuations will affect the economic, social, environmental, and global political sphere.
Figure 1: Crude Oil Prices from 1960-2014 in U.S
Current trends in oil prices
In comparison to the previous 30 years, the period between January 2014 and 2015 is quite conspicuous due to the sharp declines in prices experienced. Such declines were witnessed in 1985-1986 when the OPEC policies changed and in 1990/91 during the recession and the demand for oil were quite low (Gault et al 73). The current price decrease witnessed between 2014 and 2015 is quite significant one since it has declined sharply and it has stayed for a while with analyst expecting a further drop. The decrease in oil prices that was witnessed in mid-2014 largely contributed to tendency of decreasing commodity prices that had been experienced for a while. In fact, the prices hit rock bottom during the worldwide financial crisis, most goods and services attributed to oil only hit the apex at the first quarter of 2011 (cooper 5). From the time, the cost of metals, agricultural and raw materials have weakenedprogressively due to the weak global demand and stout supplies.
Conversely, oil prices plunged within a slightly to retail at $105 per barrel until June 2014. In 2012 and 2013, as a result of weakening global demand on oil markets was reduced by issues related to geopolitical climate and pricing policies exercised by OPEC. Due to these factors, the pump price started to drop suddenly in June 2014. By February 2015, the cumulative fall in oil prices was even higher than the prices of goods attributed to oil products since their peaks in 2011. The forecast for the oil industry is quite different from how it looked some years ago where cartels controlled the business. Currently, the supply has increased widely shifting the demand downwards resulting to an imbalance market favoring the consumers. It is estimated that most of the strong economies in the world are purchasing oil at a price of $50 per barrel with the others ranging to a $100. From 2014, the charges have significantly plummeted and before outlining the impacts of the price drop, it is important to understand the causes of these oil price
Figure 2: Current trend in Oil prices
Causes of the Sharp Drop in Oil Prices
Previously, oil was quite expensive product that made the oil producing countries filthy rich and achieves a monopolistic market. Consequently, the prices have dropped as witnessed in the section above begging the question what has led to these drops. The following include some motives that contribute to the price decline for oil products.
- Change in OPEC policy/objectives
Oil Producing and Exporting Countries relied on the price targeting strategy resulting to higher oil prices. Previously, OPEC could regulate its supply so as it can increase the prices of petroleum. This was possible because there were very few oil producing countries and they enjoyed monopoly. This allowed the OPEC to target prices at $100-110 dollars per barrel until the demand declined (Gault et al 77). In November 2014, the policy changed, as there were various alternatives of acquiring oil. Instead, OPEC worked on increasing its production; hence, the prices declined.
- Developments in supply and demand
The Bank of Canada states that the predicted one-third oil production in the world is quite uneconomical since the supply over rules demand. Similarly, new technology is decreasing the cost of exploration and many countries are discovering oil in their regions. Alternatively, Biofuels have been discovered in place of oil products. This has switched the need for oil as biofuels can be used for the same purpose. Biofuel production has increased from the beginning of 21st century accounting for an estimated 3 percent of arable land. The production of these biofuels got to 1.4 mb/d of oil in 2014, responding to the 1.5 percent consumption rate globally. It is quite significant that the countries that have been leading in the demand for oil have discovered biofuel. Canada on the other hand is producing shale oil which affects the demand and supply for oil.
- Political influence
The apparent conflicts experienced in the Middle East and other oil producing countries result to price fluctuations. This is because production is affected and sanctions in the countries bring tension and unfavorable international trade.
- Currency rate fluctuations
Oil is traded in US dollars which meanits fluctuations largely affect the market. Between June 2014 and January 2015, the currency appreciated an estimated 10 percentage in comparison to other major currencies in trade-weighted nominal terms. Pragmatic suggestion of the extent of the U.S. dollar outcome cover a vast scope: on the upper hand the suggestion is that a 10 percent appreciation is associated with a decline of about 10 percent in pump price, whereas the low estimates is around 3 percent or less (Zilberman 280).
Regional Impacts of Declining Oil Prices
After establishing that the global oil prices are on the decline, it is safe to identify what are impressions attributed to these changes. As mentioned earlier, oil is a paramount commodity that largely influences the global politics, economy, and even the social welfare. Therefore, the following are some of the impacts attributed to drop in oil charges.
- Economic and financial consequences
- Reduction on revenue earned in exporting countries and benefits on importing countries
Oil prices impact the economy of a region through an array of channels such as direct prices elicited through the importing and exportation, indirect effects experienced through trade, monetary and fiscal effects, and how people invest. The prices of oil affect the parties involved depending on whether they are exporting or importing. To begin with, exporting countries benefits by earning foreign exchange where the government gains in terms of revenue. This revenue aids in government expenditure by funding its projects. Countries such as the United Arab Emirates have benefited from exporting oil and in term they have elicited huge developments and infrastructure installation. Among the Arabic nations, UAE trails second in terms of economy with an estimated GDP of $377 billion (AED1.38 trillion) as per the year 2012 (Baumeister and Peersman 1087). A third of the GDP earned ion this country is attributed from oil revenues.
Actually, U.A.E has become a tourist destination where the visitors go for entertainment and observing magnificent infrastructures. However, the decline in the prices translates to reduced revenue which may cut downthe developments in exporting countries. Some countries such as Nigeria where the population is high, the revenue earned currently is quite low forcing the government to cut its expenditure. There has been an economic slowdown on oil dependent countries such as Nigeria, Qatar, UAE, Oman, Sudan, Kuwait, Libya, and Venezuela among others. The GDP dynamics have been affected badly and much deterioration is expected in future makingthe balance of payment to dwindle in these nations. For instance, Germany traded its car manufacturing industry with U.A.E oil industry but the decline in prices has abolished this trade.
The importing countries have their share of benefits at last after a long period of huge investment in oil and oil products. The declining prices enhance cheap imports and production as oil products are on the decline in term of prices. Countries that import oil whose prices of oil are facing a downward trend are doomed to diminish medium-term inflation outlooks beneath the target and cut the exerted pressures on economy and the central bank may retaliate with supplementary monetary policy flexibility, which, in turn, can support growth. The importing countries are enjoying the benefits associated with the reduction in oil prices.
- Inflation rates
Oil prices have determined the inflation rates in majority of the countries’ economies. High expense in oil products results to high living standards that lead to inflation. The reduction in prices has changed this picture where the relationship between oil prices and inflation is becoming insignificant over the time. The experienced 10 % reduction in oil prices has reduced inflation by up to 0.3 percentage point (Baumeister and Peersman 1090). A 10 percent decrease in oil prices would reduce inflation significantly by around 0.2 percentage point in a sample they conducted of 23 countries for 1980-2005. The study further indicates that a 45 percent decline in oil prices, if sustained, would reduce global inflation by about 0.7-1.2 percentage point through 2016.
Decrease in oil prices translates to an increase in investment and the consumption of durable goods. Investment is largely impacted by the oil prices as physical projects rely on oil products for constructions. Lower prices attract many people to engage in investment projects. Literally, lower prices leaves entrepreneurs with disposal income that they indulge into investments programs; hence, a decrease in oil prices encourages investment.
- Non-oil commodity prices
The recent decline in oil products shows that there are high chances of an impact in some of the goods. These commodities include
- Natural gas: the cost incurred in exploring natural gas and Liquefied Natural Gas (LNG) is dependent on oil prices. Therefore, a decline in oil prices leads to a reduction in natural gases especially in Europe and Asia. Between 2014 and 2015 the prices of natural gas in Japan dropped with 11 percent while in U.S.A the impact was quite low.
- Agriculture: the World Bank Organization suggests that agriculture is five times energy intensive as compared to the manufacturing industry. A decrease in the pump price will be felt in transportation and preparing of crops using machinery. Similarly, the manufacture of fertilizer is dependent on natural gas whose prices are dependent on oil prices. A decrease in oil prices reduces the cost of producing fertilizer; actually, there has been a 45% price decrease in fertilizer since 2011. This reduction is enjoyed by the farmers; hence, it boosts farming.
- Transport: clearly, the transport industry is efficient with lower petrol prices as most of the machines depend on oil products
- Manufacturing and processing; manufacturing and processing industries enjoy subsidized oil prices as they help in reducing the cost of production.
- Political sphere
There has been one common trend among the oil producing companies, conflict. From the Iranian revolution, inter-state war in Middle East, the Gulf War, Sudan civil war, Russia-Ukraine conflict, Libya civil war among others (Baffes and Marc 16). Analysts argue that the impending conflicts can be traced back to the presence of oil in the countries. Political kingpins instigate wars so that they can control the production and sale of oil due to its benefits; high prices reap great profits and most people are interested in controlling these benefits. The decline in oil prices may lead to a reduction in the political instabilities elicited in oil producing companies. This argument is a speculation as scholars do not have empirical evidence supporting it, but there has been an observation of the oil producing behaviors. This means the decline in prices will bring integration and cohesion among nations as there will be nothing to fight for.
- Social implications
- Poverty: there are indirect effects of oil prices associated with the poor in the society. Firstly, the oil producing companies will reduce their expenditure and government spending which will affect social amenities and infrastructures. This means the poor will be largely affected though indirectly. The importing companies may enjoy the price reduction when it is passed to food production and development. There will be an increase in food production and agricultural activities eradicating poverty.
- Unemployment: decline in oil prices leads to availability of oil products which revives various industries. This means that most of the population will be absorbed in the companies associated with oil. For example, the transport, manufacturing, mining, and processing industries that depended on oil will be functional decreasing unemployment.
- Tourism: most of the people fear vacations due to the costs associated with travelling. Oil price reduction will reduce the cost of travelling and it will attract more travellers boosting the tourism industry.
- Development:it has been noted that the construction activities rely on oil and decreased prices increase human activities. Governments and the private sector capitalize on this to construct and build more infrastructures leading to much development.
- Policy implications
Governments embrace monetary and fiscal policies to counter economic situations and even curb inflation. High prices of oil were largely associated with increased inflation in various countries making central banks to uphold tight policies. Monetary policies become flexible in the instance where the oil prices are reduced. Among large oil-importing developing countries, joint impacts associated with the prices downfall results to the current account deficits and inflation getting back in line with policy targets has given various central banks an opportunity to cut interest rates in recent month (Zilberman 280). When it comes to fiscal policies, the reduced oil prices cut the need for fuel subsidies, and provide an opportunity for subsidy reform with limited impact on the prices paid by consumers. Such subvention reform should lead to an ample and permanent change towards more market-based fuel pricing. Governments have an added advantage as the increased production in the country leads to increased taxes and levies earning revenue.
- Environmental implications
The world is geared towards sustainable environment and a reduction in environmental pollution. Human activities are associated with the pollution around the globe and the adverse effects such as heat waves, reduction in natural water resources, wildlife extinction, and illnesses among other impacts. The pollution is attributed to human activities such as car emissions, logging, constructions, and mining among other activities. All these activities are driven by oil related products. This means that a decline in oil prices increases the activities that in the long run lead to environmental degradation. Therefore, oil prices reduction is a negative attribute in relation to the environment.
The prices of oil have been fluctuating since it was discovered and became an international trading commodity. Nonetheless, the prices have constantly sustained a rising tendency in terms of prices other than in three specific periods. They included in 1985-1986 when the OPEC policies changed and in 1990/91 during the recession and the demand for oil were quite low and recently in 2014 and 2015. The 2014/15 instance has maintained a sharp decrease for more than a year which has attracted attention from an array of stakeholders. The impacts on these fallen prices are varied across the globe but some are similar across board.
First, the drop in oil prices has decreased the prices of food products, transport, agriculture, and manufacturing. Unemployment is on the low as many industries have revived allowing more human resources to be attached in their institutions. Some industries such as tourism are beneficiaries of reduced oil prices due to the reduction in transport costs. Similarly, it is helping in poverty eradication as cheap production results to issues such as food security and low cost of living. There is an attribution of increased integrity and cohesion among conflicting countries as the prices are low reducing the causes of conflicts. Nonetheless, the reduced prices have also had negative impacts especially on the environmental issues. Low oil prices encourage increased use of oil products which are leading in environment pollution. In conclusion, there are favorable benefits identified that are associated with the decreased oil prices.
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