Saudi Arabia, Norway, Venezuela, Kuwait , Nigeria and five oil importing country i.e. Pakistan, India , China, Japan , Germany. Secondly, we will not only demonstrate the relationship between oil prices and real economic growth but we will also analyze the role of the real exchange rate for real economic growth.
They usually produce more when demand more and subtract when demand reduce to control the price of oil. Anyway, speculator is another factor we have to consider in short run. From demand side of view, every country is trying to reduce the consumption on petroleum, the government use tax strategy to control the oil price. Further more, government strategic oil reserves have to be considered as a factor which causes oil supply shortage. Next, let¡¦s discuss in detail how the demand and supply relation affect the price of oil.
Answer 1) Short Run Aggregate Supply is the relationship between Real GDP and the Price Level. In other words, it shows how much the economy can produce in the short run. An increase in price level of oil in the short run will force the producers to reduce the supply of oil in the economy . Following diagram will suitably explain the effect of rise in oil prices on Short Run Aggregate Supply: SRAS’’ SRAS Demand The above figure shows that when the price of oil increases, producers will shft the supply backwards on account of high input prices. As a result, real GDP falls and price level rises and a serious situation of Stagflation is created.
According to the study, the price of crude oil, which is the primary fuel of the industrial activity, plays an important role in shaping the political and economic development, not only to continue to have an impact on aggregate indicators, but also to influence countries operating costs, and the income (Istemi and Berna, 2009). When the stock market is efficient, positive crude oil price shocks would negatively affect the cash flows and market values of companies, causing an immediate decline in the overall stock market returns. On the one hand, Christos, Catherine, Stephanos (2011) has examined that rising oil prices always lead to higher transportation, production, and the cost of heating, which could put a drag on corporate earnings. Moreover, the higher oil prices impact on inflation expectations and consumer discretionary spending. As a result, inflationary pressures may cause pressure on interest rates and through this channel, affect economic activity and stock price valuation.
Impact of oil prices on world economy 1. Increased financial indebtedness of oil importing nations due to constant rise in oil prices Oil importing countries budget primarily comprise of oil cost which increases the indebtedness of these countries towards oil producing nations. The prolonged indebtedness may give rise to insolvency of these counties in long term. 2.Increase in oil price has a direct impact on both micro- and macro economics of oil importing countries. Oil price increases are generally linked to increase in inflation and reduce economic growth.
This resulted in the rightward shift of aggregate demand from AD1 to AD2, since exports are a part of the factors that affect aggregate demand. The average price level increases from P1 to P2, as real output also increases from Y1 to Y2. In Figure 1, the Bank of Japan’s quantitative monetary easing and its effect on the short run is shown. Yet, cautions are spreading as some experts say that an extravagant drop in the price of yen is going to hurt the Japanese economy more than it will help. In the past, when the economy was majorly dependent on its exports, a cheap yen would have made Japanese goods and services very competitive, resulting in the increase in e... ... middle of paper ... ...emand.
“Market failure is a situation in which the market mechanism operates inefficiently and, as a result, does not achieve the most desirable results. (Layton et al,2016, p 99)” Energy industry is a strong backup force of the national economy. The advanced degree of the energy enterprises is the standard of judging the strength of the national economy. With the rapid development of world economic globalization, the international operation of the oil industry will make progress simultaneously. However, growth in the oil consumption demand increasing has become a common problem, this problem of resource misallocation resulted from excess development.
These factors affect the price of oil and gas in independent ways, but also are related. Supply and demand has a direct affect on the price of crude oil and when supply is high, usually the price of oil decreases. When supply is low, the price of oil increases. In terms of demand for example, an oil price increase is seen as reducing aggregate demand because of a reduction in spending on goods and services (Olatubi & No, 2003). In terms of supply, this increase will likely produce even more widespread effects and oil price increases will cause overall production costs to rise, shifting the aggregate supply curve to the left (Olatubi & No, 2003).
Introduction Background of Study: Oil price affects the countries around the world differently. In general, low prices are considered good for importers of oil because it not only improves consumer spending but also improves the trade balance of a country. Therefore an increase in oil prices has a significant negative impact on the GDP growth in all oil importing countries. On the other side decrease in Oil Price is bad for oil exporters as it could put a depression in revenues of oil exporting countries where oil exports play an enormously important role in supporting economic growth and government finances. Moshiri &Banihashem (2012) concluded that, many oil-exporting countries are heavily dependent on exports from oil revenues, so when oil prices are low, their economies suffer, and when oil prices are high, their economic activities boom.
A sharply higher oil prices can set difficult economic challenges for oil importing economies as it can simultaneously slow economic growth while stoking inflation. In net oil-importing countries, high and volatile oil prices ripple through the numerous segments of the economy. As prices move up and down, so does the cost of production, which has far-reaching effects on the economy, fiscal and trade balances, businesses, and household living standards. As Petroleum Products consumption form significant part of economy, oil availability and prices thus affect the output capacity, rate of growth and level of inflation and hence oil price fluctuations can have important macroeconomic repercussions depending on the composition of oil sector in the economy. High and volatile oil prices affect economies at both a macro and micro level.