Describe about the Macroeconomic effects of high oil prices on the Swiss economy?
With the effect of globalisation, the overall demand of oil and gas has been increased in a significant manner within the globe. In this regard, Lukoil (2013) argued that effect of globalisation and internationalisation has influenced the demand of oil and gas approximately at a rate of 1.2% annually. On the other hand, consumption of energy has been increasing approximately around 50% in every year. As an impact, the petroleum business has turn into one of the developing commercial ventures among the globe (Atukeren, 2011).
In this assignment, the objective is to identify and analyse the potential factors, which have influenced the costs of petroleum commodity in the world over the last few years. At the same time, the study will try to highlight the significant causes, which have lead massive revenue shortfalls on the balance of oil and gas exporting nations. In this regard, this particular study will emphasise towards US, as a petroleum exporting nation for identifying and understanding the effects on economy in terms of aggregate demand and supply due to the shortfall of oil prices (Blanchard and Riggi, 2013).
Overview of Petroleum Industry
In Chen et al., (2012) order to highlight, overview of petroleum industry it can be stated that overall performance of oil and gas industry has remained volatile since after the year 2009. In this regard, in order to identify the potential causes, it is revealed that poor global financial operation and the effect of recession have highly influenced the overall performances of oil and gas industry within the globe in a diversified manner. In this regard, based on the report of EYGM Limited (2014), it is identified that ‘Organization of the Petroleum Exporting Countries’ (OPEC) has provided its utmost attention towards the oil and gas industry with an aim of reinforcing the situation of energy resources within the globe by reducing the price of these commodities. As an effect, the overall prices of oil commodity have remained stabilized since after the year 2010. On the contrary, the prices natural gas has kept going upward direction and it has influenced challenges for the emerging as well as developing nations (Organization of the Petroleum Exporting Countries, 2013). A picture is depicted below for improved perceptive the prices of petroleum industry in the world (Drakos and Konstantinou, 2012).
Figure 1: Prices of Oil and Gas Industry/ Per Barrel
(Source: Organization of the Petroleum Exporting Countries, 2013)
So as to highlight the causes of inflation in the prices of oil in the world, it can be stated that exhausted spare capacity of US has affected the prices of petroleum commodity in an extensive manner. At the same time, embargo on the Arabian oil companies have reduced overall supply of the petroleum commodity within the globe. As an effect, it is witnessed that the costs of petroleum has been increased in a significant manner amid the oil and gas market. Apart from this, the war between Iran and Iraq has also influenced the prices of petroleum commodity in a diversified manner. Simultaneously, Saudi Arabian swing producer role have also affected the performance of oil and gas industry. As an effect, it is witnessed that the overall prices of oil have been also remain volatile in between the year 2009 to 2013 (Hamilton, 2011). In this relation, it can be also claimed that due to the effect of Asian financial crisis, the prices of oil and gas has been increased in a significant manner. Similarly, global financial crisis has also affected the global trading prospect of petroleum industry. As an effect, the costs of unrefined petroleum and common gas have been increased in an extensive manner. Thus, in order to highlight the potential causes of volatility of unrefined petroleum and common gas price, it can be stated that these are the above stated factors have influenced the costs of petroleum commodity (Energy Information Administration, 2015).
In order to highlight the impact of supply and demand on US, it can be stated that the overall demand of oil was 89.17 million barrels/ day during the year 2012, which has been increased 1.07 million barrels/ day in terms of year 2011 (Huang and Chao, 2012).
The aggregate demand can be defined as the total demand for output of an economy like production of goods and services over a given period of time. The demand may come from a sector of the society like households for consumption, firms for investment or governments for exports. There is an inverse relationship between price and demand as aggregate demand rises with fall in price. The aggregate supply can be divided into two categories as long-term and short-term aggregate supply. In the long run, the money is neutral as any change in the money supply will be proportional to the change in prices and the boost in money availability would not affect output of the economy. In terms of short run, the money is not neutral, as the increase in money supply may not immediately trigger raise in price. With increase in output prices there is an alteration in higher cost of living and neglecting the increased profits (Khan, n.d.). The effects of oil prices volatility in aggregate demand and supply on the US economy are discussed below for better understanding.
In this context a number of case studies can be taken into account but the most important incident is of the 1990 oil shock which shook the three nations namely United States, Japan and Germany with an adverse effect on the economy. This scenario has affected the economy of exporting countries as at that time the importing nations were not ready for intake of any petroleum products due to high oil prices (Ozdemir and Akgul, 2015).
The decreases in the trading terms for importing nations depict the increase in wealth of oil exporters. The oil exporting nations would not extent to offset the overall aggregate demand in respect to importing countries. The rise in oil prices would profit the exporting countries but at the same time it would decrease the demand for oil from the importing nations of the world. And vice versa, the decline in oil prices proves worthy for importing countries but affects the exporting nations (Shirai, 2014).
During the period of high oil prices the demand for oil in the exporting nations also decrease as it becomes unbearable by the consumers. In this context, an example of Iran and Iraq the two most leading countries as producers cannot suffice the internal demand if there is decrease in the oil prices. As with the decrease in the oil prices there is decrease in the revenues of that nation thus affecting the economic condition of the country (Valadkhani, 2014).
This effect can be well explained by taking into account the US economy where the noteworthy fall in oil costs since mid 2014 ought to increment general US financial movement. As the expense of generation abatement’s for organizations, particularly for those that are vigorously subject to oil inputs. This will support both business and employment. Hence it depicts that the oil prices directly affects the economy of the nation (Wang and Chueh, 2013).
While wistful changes frequently affect the share trading system instantly, genuine changes will produce results over the more drawn out term. In the event that oil costs stay low, this at last influences financial arrangement system, private part action and corporate productivity, as per the Jadwa Investment report. Taking a gander at the general population division transmission, change in oil costs will influence government income. High oil costs maintained for more than year will bring about a fabricate up in financial offsets bringing about higher government use, which pushes up GDP development rates and corporate gain fullness and eventually interprets into a constructive outcome on the share trading system. Maintained low oil costs have the inverse impact. At each phase of the transmission prepare in the general population part there are immediate linkages and thump on impacts to the private segment.
The fall in oil costs, and their anticipated constancy, has essential ramifications for both the reasonable way of swelling and the fitting reaction of money related approach. The fall in the oil cost could produce inflationary weight by boosting interest and with little impact on potential supply in the economy. As dependably in financial approach, the answer relies on upon the wellspring of the shock. As it is supply as opposed to request that has been the predominant component behind the late fall in the oil value (Wu and Ni, 2011).
The fall in the oil value ought to have a noteworthy positive effect on the economy of the exporting nations by expanding general financial action as the expense of creation diminishes for organizations, particularly for those that are reliant on oil inputs. Despite the fact that the oil and gas extraction area is adversely influenced by the lessening in the oil value, parts such as horticulture, air transport, coke and defined petroleum producing and oil-escalated assembling parts will advantage as the cost of a key info falls. In rundown, lower oil costs ought to be certain for most parts of the exporting nation’s economy, families and the government. In any case, the size of these advantages remains exceedingly questionable contingent upon how oil costs develop in the upcoming days.
Atukeren, E. (2011). Macroeconomic effects of high oil prices on the Swiss economy: 2003 2008. IJSE, 3(1), p.1.
Blanchard, O. and Riggi, M. (2013). Why are the 2000s so Different from the 1970s? A structural Interpretation of Changes in the Macroeconomic Effects of Oil Prices. Journal of the European Economic Association, 11(5), pp.1032-1052.
Chen, P., Chang, C., Chen, C. and McAleer, M. (2012). Modelling the Effects of Oil Prices on Global Fertilizer Prices and Volatility. Journal of Risk and Financial Management, 5(1), pp.78-114.
Drakos, K. and Konstantinou, P. (2012). Investment decisions in manufacturing: assessing the effects of real oil prices and their uncertainty. J. Appl. Econ., 28(1), pp.151-165.
Energy Information Administration, 2015. What Drives Crude Oil Prices?. Spot Prices. [Online] Available at: https://www.eia.gov/finance/markets/spot_prices.cfm [Accessed July 26, 2015].
Hamilton, J. (2011). Nonlinearities and the Macroeconomic Effects of Oil Prices. Macroecon. Dynam., 15(S3), pp.364-378.
Huang, W. and Chao, M. (2012). The effects of oil prices on the price indices in Taiwan: International or domestic oil prices matter?. Energy Policy, 45, pp.730-738.
Khan, A. (n.d.). Oil and Economy: Factors Influencing Crude Oil Prices and the Significance of these on the Global Economy. SSRN Electronic Journal.
Lukoil, 2013. Global Trends in Oil & Gas Markets To 2025. Global Trends, pp. 1-64.
Organization of the Petroleum Exporting Countries, 2015. An Introduction to the Oil Industry & OPEC. Public Relations & Information Department, pp. 1-68.
Ozdemir, S. and Akgul, I. (2015). Inflationary effects of oil prices and domestic gasoline prices: Markov-switching-VAR analysis. Petroleum Science, 12(2), pp.355-365.
Shirai, M. (2014). Effects of Quality and Price Appeals on Consumers’ Internal Reference Prices and Quality Perceptions. ME, 05(08), pp.831-840.
Valadkhani, A. (2014). Dynamic effects of rising oil prices on consumer energy prices in Canada and the United States: Evidence from the last half a century. Energy Economics, 45, pp.33-44.
Wang, Y. and Chueh, Y. (2013). Dynamic transmission effects between the interest rate, the US dollar, and gold and crude oil prices. Economic Modelling, 30, pp.792-798.
Wu, M. and Ni, Y. (2011). The effects of oil prices on inflation, interest rates and money. Energy, 36(7), pp.4158-4164.
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