Home » Investing » how oil effects economy?
Drowning in credit debt?

how oil effects economy?

The price of oil affects individual spending choices. It forces companies to make difficult decisions. It can even change relations between countries. Oil is perhaps the world’s most important natural resource.After floating greater than $100.00 per barrel since 2011, the world price of crude oil has taken a sharp dive, falling increasingly over the past numerous months to below $65.00 per barrel.

1

Falling oil prices is good news for oil importers, such as Western Europe, China, India and Japan; however, it is bad news for oil exporters, such as Venezuela, Kuwait, Iraq and Nigeria. Lower oil prices has helped to reduce the cost of living. Oil related transport costs directly fall, leading to lower cost of living and a lower inflation rate. For oil exporters a falling oil price was a bad news in 2014. Many oil exporting countries rely on tax revenue from oil production to fund government spending. Falling oil prices has lead to a government budget deficit, and  require either higher taxes or government spending cuts.

Let’s see the industries to be more affected by the oil prices.

Transportation

The Oil Pipeline Transportation industry is the most negatively impacted by a continuation of falling oil prices.Industry operators transport the majority of crude oil to refineries in the United States, and as a result, they have faced the largest shift in sensitivity to declining oil prices Declining oil prices has potentially lead to a decline in oil production, lessening the need for oil producers to transport surplus crude oil. falling oil prices most positively has its impacts on the International and Domestic Airlines industries. Lower fuel prices is, all else held constant, a welcome boon to airlines. A decline in crude oil prices and consequent declines in airplane fuel prices has eased the pressure, particularly for smaller airlines that are less able to withstand sustained profit margin pressure.Overall, lower crude oil prices has granted airlines greater freedom in their operations.

Passenger and goods transportation is typically highly dependent on gasoline and other petroleum-based fuels, which represent the largest single cost for many transport industries. Given that gasoline and other petroleum-based fuel prices tend to move in line with crude oil prices, albeit following a delay, a continued drop in oil prices has significantly benefit many industries by reducing fuel purchase costs.

Metal industry

Aluminium had the highest combined power and fuel costs as a percentage of site costs at 31%, in 2014 (with fuel cost contributing only 1%).  However, aluminium gains the least of all the metals, since smelters are typically located close to cheap electricity sources and the energy mix is dominated by hydro and coal.  Site costs decrease by an average of 0.7%, relative to the base case.

Nickel producers benefit the most under the scenario.  With the second highest power and fuel costs of these metals, nickel site costs decrease by 2.8% on average over the period.  Copper producers see the second largest benefit with site costs decreasing by 2.2%.  Fuel costs accounted for 11% of site costs, which is the highest of the metals.  For lead and zinc, site costs decrease on average by 0.7% and 1.0% respectively between 2015 and 2019.

3For the non-ferrous metals industry as whole, analysis estimates that the average site costs would decrease by 1.3% ($33/t), relative to the base case, between 2015 and 2019.  This $33/t decrease in costs across non-ferrous operations represents an annual saving of $3.6 billion.  However, this should be seen as a minimum saving as the drop in oil prices has also lower other costs that have been held constant in this analysis.  The bottom line is that lower oil prices  have a positive impact on site costs at non-ferrous operations, regardless of how much further prices fall or how much longer they remain low.

Gasoline prices

5Domestic U.S. Gasoline prices are very closely correlated with the price of crude oil.Oil prices.The national average price of a gallon of regular unleaded gasoline in May 2014 was $3.66.LNG prices in Japan already declined 11 percent from June 2014 to January 2015. If low oil prices persist, the price of LNG, mostly destined to Asian markets, will drop even further.Gasoline prices often follow a cyclical pattern, rising in the spring, peaking in the early summer, and falling through the autumn. The average for May 2014 is 7 cents higher than the average for May 2013.

The current unrest in the Middle East, particularly in Iraq, has the potential to spike the world price for crude oil because of potential supply disruptions in key areas of Iraq and throughout the Middle East.

Food and agriculture

The connection between food and oil is systemic, and the prices of both food and fuel have risen and fallen more or less in tandem in recent years (figure 1). Modern agriculture uses oil products to fuel farm machinery, to transport other inputs to the farm, and to transport farm output to the ultimate consumer. Oil is often also used as input in agricultural chemicals. Oil price increases therefore put pressure on all these aspects of commercial food systems.

hujkjk

The plunge in agriculture prices, meanwhile, has hit most major U.S. crops. Corn is down 15 percent from a year ago, soybeans have fallen 20 percent and wheat dropped 20 percent.

Most importantly, falling fuel prices are witnessed to reduce production and transportation, including cost of chemicals and fertilizers, some of which are crude oil byproducts or directly made from natural gas and are thereby used in the agricultural industry.

Conclusion

Oil is one of the world’s most important commodities, and as a result, the nations that control the bulk of the world’s supply have (and exercise) a great deal of power over its availability. The supply of oil in the world market has an impact on its price, and the fluctuations are passed on to consumers, especially in nations that use a lot of oil, such as the U.S. Oil prices are also determined by quality and ease of refining. Investors have the option of investing in oil futures, which themselves have an influence on the price of oil that is reported in the media.

 

 

Facebooktwittergoogle_plusredditpinterestlinkedinmailby feather

About Mali 123