The Global Economy

Question:

Write an essay on Hubbard & O’Brien.

Answer:

Hubbard & O’Brien (2013), have stated hat the global economy is hugely dependent on some global goods like Oil, Gold etc. and if any fluctuation occurs to them, then it automatically affects the whole economy. Some major elements like price, demand or supply of those goods affect the economy. The price of was used to be stable during 2014 and started falling after that. This report aims to identify the causes and effects related to the fall in oil price (CIA, 2016). The project shows that how this fall in oil price affects countries but in a completely different way. In due courses, it can reveal that some of them win and vice versa. 

Background

The trend of oil price in past few decades claims that an all-time highest record of achieving a hiked price in 1980 was a remarkable record for the economy. As a result of expanding the good in the global market had arisen in 1999-2008 (Gandel, 2015). However after this era, the recession cause a massive price fall which was again recovered in 2014. Now it is most important to note that from 2014 to present, the scenario of oil price fall is degrading day by day.

Scope

Oil price is very fluctuating in nature and it has sufficient capability in affecting a world economy. This automatically generates some new scope for researching with the same thing. Different sort of recession affects in a different way and there is always scope in researching this topic. However, being important global goods, some economic changes always occurred with it and this thing will bring a thousand scopes to research further.

Aims of the report

The oil price hike or fall is seriously a subject to discussion. History claims that this event always brings some major economic consequences with it. This reveals the actual motive to conduct this research. However, the aim of this report which helps to bring an appropriate result. The aim of this report is to assess and evaluate the reasons behind this price fluctuation along with the consequences that occurred due to those reasons. 

Key Reasons behind oil price fall:

Green, (2015) informs that from the year 2014, the price of oil has been declining severely which was negligible in nature (Green, 2015). It was fallen about to 38 dollars per barrel which evaluates that 60% of the price was degraded in due courses (CIA, 2016). The theory of demand and supply says that demand will decrease if the supply increases and vice versa ceteris paribus. However, as per the macroeconomics fundamentals, there are some more element who affect the oil price. In due courses, it is seen that the consumption part of oil has not been affected which clearly proposes that the supply is the only factor who has created all these circumstances. 

The world’s most important factor to note in this context that the value of the dollar because this currency is considered when any global transaction takes place. Increasing rate of the dollar decreases the value of some global goods and services in the economy. Oil, Gold are considered as some global goods in the world (Plumber, 2016). So due to increasing in the value of the dollar these goods are being affected.

The factor which had snatched all limelight toward it is the recent nuclear deal with USA and Iran. This nuclear deal claims that it needs more and more oil to be exported and that genuinely creates scariness in investor’s mind because this process can increase the problem of oversupply (IMF, 2009).

Another major important point to consider is recent conflicts among OPEC countries regarding oil production. Microeconomics theory of supply clearly advises cutting down production level in controlling the stock of a good. The Saudi Arabia clearly informs that they are not willing to adjust with their market share in order to stable the price of oil again. Nevertheless, the problem has been created because some of the OPEC countries want to cut down the production whereas some of them did not agree on it. So the problem of oversupply arisen which is one of the major reason behind oil price fall (The Guardian, 2016). This has created the problem of excessive supply and lower price. Though the demand factor has not been affected too much yet. The production of oil in the year 2015 has been increased beyond the expectation. With the increase in the inventories of oil, the level of price has declined. 

America became an important name in the list of major oil exporting countries in these days. But due to some technological faults, the country could not compete in the industry which has hampered the domestic and international markets. 

Major Consequences of oil price fall:

There are basically two parts of the world, one who exports oil and another who imports it. This price fluctuation seems a boon for the oil importing countries. 

Impacts on China and India:

India is China are two of those countries who import a significant amount of oil from the major oil exporting countries. These country imports near about 80% of their total consumption (Maiden, 2016). China almost meets all of its oil requirement by importing them from the outside while India meets very less percentage of its oil requirement by its own production. However, this major oil price fall has positively affected these countries because now they can consume more oil but in lesser price. Also, there are some major economic consequences too. It is noticed from past few years that the current account deficit is being decreased hugely simultaneously with the fall in the price of the oil. It automatically decreases the upward trending inflation rate along with the price of commodities. Now several companies who use this oil in their production purpose decreases. The fiscal budget deficit has also decreased which was increased hugely during the period when oil price hike has taken place. 

Along with this positive effects, there are some major drawbacks to such that India is considered as sixth major oil exporting nation. Now the fall in oil price obviously will cause serious loss to the investors, oil companies etc. India is already facing some issues related to the excessive consumption of oil and less of exports. So a serious deficit was occurring due to an excess of fall in the price of oil. Similarly, it is observed that investors in China became scared due to this price fluctuation and they had started investing less money on these products and consecutively, other energetic resources was neglected by them. GDP growth became start falling downturn and growth contribution from this industry was decreased (Bowler, 2015).

Effect on Saudi Arab and Iran:

Moreover, on the other hand, the economy of the oil exporting countries like Saudi Arab, Iran, Teheran etc. are majorly dependent upon this industry. So this oil price fluctuation certainly has occurred as the curse for the nation because almost 75% of the total business was done by this industry. The Saudi Arabia has been facing some severe trade deficit because exporting the same kind of good like before but not making a profit like previous times. The nation’s annual GDP growth has decreased to 23%. The share price of the industry is being degraded day by day and it affects the country’s GDP growth negatively (Bowler, 2015). 

Due to this oil price fall the domestic demand of Saudi Arabia, Iran has increased and this became successful in controlling the supply of oil to some extent. It is being observed that the proposal of cutting down the production of oil by OPEC had not been agreed by Saudi Arab because the nation was not intended to sacrifice with its market share. Wit negatively affects the country by creating the problem of oversupply and hence, oil price falls more rapidly (Jha, 2008).

Impact on the Indonesia and the USA:

The economy of Indonesia is also a major sufferer during the era because the industry of natural and global products. Due to this massive price fall, a maximum of the investors was not interested in invest which makes government helpless to think about the subsidize price because it was creating a reason to degrade the economy. However, it is informed that the recent nuclear deal with the USA requires excessive oil and hence it becomes a major factor that increases oil consumption. Now the nation can enjoy more oil in lesser price (Yudha, 2015).

Both of the countries the USA or Indonesia are the biggest oil consuming countries. The brighter side of the event says that the fall in the price of the oil became a boon for the major oil consuming nation. PWC (2016), states that the USA is considered as one of a giant automobile units of the world. It states that the country has a clear connection with the major oil consumption. According to the theory of demand and supply, if the price of a good fluctuates then it definitely affects the good who is related to it (PWC, 2016). For instance, oil and car, sugar and tea etc. are some examples of complementary goods. So, oil price fall occurs as a benefit to the demand of the automobile industry. 

Industries that are affected; Winners and Losers:

Throughout this discussion, it is revealed that this oil price fall has affected different industries or business in a different way. So obviously these effects have made some of them winners and others became the losers. 

Benefited industries:

It seems that the declined trend of the oil price has benefitted the airlines industry because the crude oil is used the main fuel. So obviously, the good is used by the industry rigorously. Now, after this fall in price clarifies that the industry can consume more oil in lesser price than before. Automatically, the cost of the production deteriorates and hence enhance the growth factor of the industry. This continuous reduction since past three years has helped to acquire healthy growth in the airline industry (Gandel, 2015).

Gandel (2015) reveals that automobile industries are a giant contributor to an economy’s growth. However, it is already discussed that this is considered as the complementary good of oil. So price fluctuation of oil enhances the demand for cars because now the consumption cost is less. As a result of the sales of the automobile industry along with the growth. 

Damaged sectors:

It is quite natural that the businesses or industry who are a major producer of oil has majorly been affected this oil price fall. The revenue of these industry has degraded massively. They now need to sell same amount product at a lesser price due to this price fall. Nowadays some major competitors of oil like natural gasses, diesel etc. have grabbed 30% of the market share. When the price of oil was high, this product was vastly highlighted and people started using it massively. It also has damaged the sector. The banking sector had also been affected because of fewer loan intakes due to major fall in oil price (The Guardian, 2016). 

Petrol pump sector also gets affected because the lower price of oil lowers their amount of profit share and hence they achieve lesser revenue.

Conclusion:

This in-depth analysis based on the oil price fall has unfolded some serious facts and emphasized on some major factors too. Generally, the price fall of the product does not consider as bad apart from the seller’s end. This price fall is not at all beneficial for the whole world. The fluctuation of the price in such a rigorous way may bring some major economic imbalances. Oil or gold are some international goods so that a tiny change with this good may cause some major consequences. A factor certainly has some negative and positive effects and oil price fall is a recent example of it. It is to be concluded that this economic changes may bring some major sign to the world. 

Recommendations:

The discussion reveals that the world now should start thinking some substitution to this product and which can give a supportive backup when required. For instance, the government should encourage people in producing and using much of Diesel, natural gas or battery system. The economy is upgrading day by and technology should be used to remove these flaws. The world should always be ready to face consequences so that can compete with the difficulties.  

References

Bowler, T., 2015. Falling oil prices: Who are the winners and losers?. [Online] 

Available at: http://www.bbc.com/news/business-29643612

[Accessed 25 05 2016].

CIA, 2016. Australian data. [Online] 

Available at: https://www.cia.gov/library/publications/the-world-factbook/geos/as.html

[Accessed 26 05 2016].

Gandel, S., 2015. The world’s biggest winners and losers from cheap oil, in one chart. [Online] 

Available at: http://fortune.com/2015/01/07/oil-winners-losers/

Green, R., 2015. How Australia got left behind in manufacturing and innovation.. [Online] 

Available at: http://www.abc.net.au/radionational/programs/ockhamsrazor/how-australia-got-left-behind-in-manufacturing-and-innovation/6163528

[Accessed 23 04 2016].

Hubbard, R. & O’Brien, A., 2013. Macroeconomics. Boston: Pearson.. Boston: Pearson.

IMF, 2009. Macroeconomic Fundamentals, Price Discovery and Volatility Dynamics in Emerging Markets. US: International Monetary Fund.

Jha, R., 2008. Contemporary Macroeconomic Theory and Policy. Kolkata: New Age International.

Maiden, M., 2016. Australian growth. [Online] 

Available at: http://www.smh.com.au/business/comment-and-analysis/theres-a-flaw-in-australias-economic-growth-report-20160302-gn8q8w.html

[Accessed 27 5 2016].

Plumber, B., 2016. Why crude oil prices keep falling and falling, in one simple chart. [Online] 

Available at: http://www.vox.com/2016/1/12/10755754/crude-oil-prices-falling

[Accessed 25 05 2016].

PWC, 2016. Economic Outlook. [Online] 

Available at: http://www.pwc.co.uk/services/economics-policy/insights/uk-economic-outlook.html

[Accessed 31 05 2016].

The Guardian, 2016. The economic implications of the tumbling cost of crude are momentous but mixed. For the environment, though, it should at least mean that more fossil fuels stay in the ground. [Online] 

Available at: http://www.theguardian.com/commentisfree/2016/jan/13/the-guardian-view-on-the-economic-and-environmental-impact-of-falling-oil-prices

[Accessed 25 05 2016].

Yudha, S., 2015. Low Oil Prices: Impacts for Indonesia. [Online] 

Available at: http://nbr.org/research/activity.aspx?id=557

[Accessed 25 05 2016].

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