Business Foundation
2009-2010
Economics coursework
Would lower oil prices
be good or bad news for the world economy?
Prepared
by Zakharova Irina
Business
Foundation Group 1
Teacher:
Mr. Street
St Andrews College,
Cambridge
Content
Introduction
Advantages of low oil prices
Disadvantages of low oil prices
Conclusion
References
Introduction
Nowadays
oil is one of the most important resources on the Earth, it is an essential
part of the world’s trade and economy. It takes the leading place in world’s
fuel and energy sector and is an essential product for most of countries, which
both produce oil and use it for production purposes and energy yields. The
prices for oil, as for any other product, are measured by the demand and supply
measures, but as the demand for oil is quite inelastic (people would anyway buy
the same amount of oil even for higher prices), even inconsiderable fall of
supply would cause a sharp rise in prices:
At
the same time, when some other oil reserves are found, the supply is going to
increase, therefore causing lower oil prices. This is rather bad news for the
world, than good, as there are much more disadvantages rather than advantages
for the world’s market, economies of countries and our planet from ecological
point of view.
Advantages
of lower oil prices
Depreciation
of prices on oil would be beneficial for the countries, importing and consuming
oil. Among the top oil consumers there are such countries, dependent on oil, as
the United States, which by 2007 were consuming 20,680,000 barrels a day, from
which over 13 mln barrels are imported. But not as much for the US (because
fall in oil prices would also be a bad news for them as producers of oil), but
for such countries, trying to get out of economy’s recession, as Ireland, which
is from 2008 trying to get out of recession (recent figures for GDP = -1,28% by
January 2010), Italy ( which is also getting out of recession with current GDP
rates of -0,3%, while its oil imports are over 1,7 mln barrels a day), Greece,
which economy is also in trouble and other oil consuming countries. As oil
becomes cheaper, the country spends less on importing oil, and the money saved
are spent on government spending, therefore the national GDP grows as well as
people’s material living standards, and the economy gets out of recession and
high unemployment rates in the country.
Disadvantages
of lower oil prices
However
there are more disadvantages of cheap oil, rather than benefits, and firstly,
it is bad news for countries exporting more than 80% of the oil they produce,
such as Singapore (which exports 10,909% of domestic oil produced), Belgium (5,
816%), followed by Netherland, UK, some members of OPEC (Saudi Arabia (80,9%),
UAE (100%), Nigeria, Kuwait, Venezuela (which oil exports account for 1/3 of
its GDP) and others), Norway (about 3 mln barrels – 101,3%) and other
countries,. As the price for oil goes down, the demand for oil will remain on
the same level, and countries would make less profit than expected for oil
exports. That would lead to fall of GDP rates, and would be followed by cutting
government spending and increasing taxation, also as result unemployment would
rise, and all that may even bring the country’s economy into recession because
of their vulnerability to oil shocks.
Moreover,
cheaper oil also would cause decrease in private investment into oil producing
companies, as they see it quite risky and returns become too uncertain for
financing. As a result, oil producing companies’ development slows down, and
that process reflects on decreased volumes of production and exports. That
would therefore bring less profit into a national economy, and result again in
decrease of GDP rates and cause internal problems in the economy.
As
a result of poor investment in oil companies and GDP falls, the world, which is
dependent on strong oil exporting and importing countries, will have to
overcome a general fall in GDP, which is bad in common.
In
addition to this, low oil prices are also bad for the world. As the price on
petroleum gets lower, more drivers, working for taxi and public transport,
would try to benefit from cheap petrol by making more extra rides. Some
companies, that produce plastic goods, might buy more oil to produce more
products. As a result of it, the environment suffers the most. More pollution
is caused because of increased emissions of carbon dioxide, and the government
would have to increase spending on solving the problem, attempting to reduce
petrol emissions, creating social campaigns, encouraging people to switch to
using bio-fuel or natural gas, which are less dangerous for the environment. On
the other hand, as more petrol would be bought, more oil would be required from
the companies, and that would increase oil production, which is also
environmentally damaging. That would even make environmental situation worse.
Conclusion
To
sum up, oil prices in the world play an important role in each country’s
economy, and most of the countries with strong economies are less likely to
benefit from low oil prices, as they are bringing less profit, causing more
extra spending (made by governments, e.g. on economy’s recovery) and even cause
environmental problems. At the same time, those countries, which are trying to
get out of recession, are more likely to benefit from buying cheaper oil and
using it for increasing production (output) and therefore increasing its GDP
rate and improving living standards in the country.
References
Class notes
Websites:
1.
www.nationmaster/graph/ene_oil_con-energy-oil-consumption
2.
www.import-exportite101/article.cfm/countries_dependent_on_oil_imports
3.
www.tradingeconomics/Economics/GDP-Growth-Annual.aspx
4.
www.trud/article/18-07-2008/131246_neft_utekaet.html
5.
www.import-exportite101/article.cfm/leading_oil_export_countries
6.
seekingalpha/article/111251-low-oil-prices-kill-energy-investment
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