Premium Essay

Oil Price Fluctuation and the Economy

In: Business and Management

Submitted By vlamey
Words 7099
Pages 29
Research Proposal

Impact of Oil Price Fluctuation on the Macro Economy Von Lamey

Eastern New Mexico University

December 3, 2013

Table of Contents

Introduction……………………………………………………………………3

Review of Literature…………………………………………………………..5

Theory…………………………………………………………………………15

Application…………………………………………………………………….18

Summary & Conclusion……………………………………………………….20

Tables…………………………………………………………………………..22

Bibliography……………………………………………………………………24

1. Introduction Oil price fluctuations have affected the people and economies of the U.S. for most of the twentieth century. The commodity has seen minor changes and major fluctuations during this period. Major price changes within a short timeframe are called shocks. The research I propose will attempt to answer the question: What is the impact of changing oil prices on the macro economy of a country? Research has demonstrated oil price fluctuations do impact economies as well as supply of and demand for the commodity. This influence on macroeconomic activity generated symmetric movement between price and many macroeconomic indices in the 1970's. However, after 1982, macroeconomic indices did not demonstrate the same proclivity to react to oil price movement. Information spreads almost instantly with the emergence of the internet. This expedient movement of news has led to an evolving trend of speculation which may or may not be beneficial to commodity pricing. One may infer that the recent prevalence of mass media leads to rapid movement back and forth of oil prices. I insert this topic at this point to bring to the surface that mass media was in early development during the proposed study periods.
The research on oil price fluctuation has produced varying reactions among academia and policy makers. Impressions about the impact of oil price fluctuation and the resulting effect...

Similar Documents

Premium Essay

Causes of Erratic Oil Price Fluctuations on a Global Scale

...Causes of Erratic Oil Price Fluctuations on a Global Scale Crude oil is a significant commodity that has a far-reaching global economic impact. This is mostly because it is used as a primary raw product for extracting various forms of energy, such as diesel, petrol, and kerosene. The products extracted from crude oil are used in the various facets of human life. For instance, diesel is a crucial component used in manufacturing facilities (Mankiw 115-133). There are constant fluctuations in oil prices, making the price of a barrel of crude oil vary on a minute-by-minute scale. Fluctuations in fuel prices can be a primary factor in the cost of transportation and manufacturing to name but a few. Therefore, fluctuations in the price of crude oil have constant effects on the global economy. These effects have made many investors and citizens alike to be wary of any fluctuations (Butcher 45-77). Oil price fluctuations are bad for the global economy. High crude oil prices contribute to a higher cost of living, thereby affecting national and global economic performance. The question then begs; what is the cause of the erratic crude oil price fluctuations in global scale? There are various reasons as to why there are frequent fluctuations in crude oil prices. In particular, just crude oil production itself can cause major fluctuations in crude oil prices. For instance, reduced production would create shortage of crude oil in the market, and following microeconomics......

Words: 1633 - Pages: 7

Premium Essay

Diversification of Income Resource in Saudi

...Diversification of Income Resource in Saudi Arabia as Result Decrease Oil Price Names Institutional Affiliation Abstract The main objective of this paper is to study the idea of diversification of the income resource of Saudi Arabia due to the effects of the instability in the oil market. Saudi Arabia as a country has developed due to its oil source which makes it the kingpin in the world oil market. Approximately 85% of the country revenue is earned from the oil economic sector. This is a sign of over reliance on the oil market making the country economy vulnerable because of changes of oil prices. The instability of the oil prices in the global market has signaled the need for economic diversification to build a stable economy (Shoult, 2006). This paper discusses the possible ideas which can be used to up bring diversified economy which does not depend on a single or few sectors of income generation. Introduction Saudi Arabia is a country that is located in the western part of Asia. It is the world largest producer and exporter of petroleum products. The economy of Saudi Arabia has in the past been pivoted on the oil as source of revenue due to the fact that the strength of the economy, foreign investor’s ideas and development of the infrastructures were all dependent on the oil. Fluctuations in the oil prices and demand in the world market has greatly affected the economy of Saudi Arabia and well as a source of livelihood to the majority of the citizens. The......

Words: 1429 - Pages: 6

Premium Essay

Economy Growth in Malaysia

...econjournals.com Effects of Oil Price Shocks on the Economic Sectors in Malaysia Mohd Shahidan Shaari School of Business Innovation and Technopreneurship, Universiti Malaysia Perlis, Malaysia. Email: shahidanshaari@unimap.edu.my Tan Lee Pei School of Business Innovation and Technopreneurship, Universiti Malaysia Perlis, Malaysia. Email: pui_tlp@yahoo.com Hafizah Abdul Rahim School of Business Innovation and Technopreneurship, Universiti Malaysia Perlis, Malaysia. Email: hafizahrahim@unimap.edu.my ABSTRACT: This paper aims to examine the effects of oil price shocks on economic sectors in Malaysia. A unit root test was conducted, in which data were shown to be non-stationary in all levels, and stationary in the first difference for all variables. The co-integration model was applied, and the results indicated that one co-integrating equation exists, suggesting the long-term effects of oil prices on the agriculture, construction, manufacturing, and transportation sectors. Finally, Grange causality test was performed, and the results implied that in Malaysia, oil price shocks can affect agriculture, similar to Hanson et al. (2010). Oil price instability also influences the performance of the agriculture sector, contrary to the results of Alper and Torul (2009). In addition, the construction sector was found to be dependent on oil prices. Therefore, the current study has an important implication for the Malaysian government in formulating policies on oil prices. The......

Words: 3901 - Pages: 16

Free Essay

Oil and the Economy

...Case Study 1, 2, 3 OIL AND THE ECONOMY WHERE IS ALL THE CURRENCY THE HISTORY OF U.S. GOVERNMENT DEBT Submitted by: Julie Ann G. Ropan Carl Cedric P. Albunian BSBA- Bus. Econ III- A Submmited to: Mrs. Pimeh C. Tolentino PH.D Introduction The large production of oil is originated at the Middle East. Crude oil is one of the inputs of production of many goods and services that much of the world comes from Saudi Arabia, Kuwait, and other Middle East Country that which included in the monopoly. Monopoly is one of the market structures that a firm is a sole seller of product without close substitute. When some event (usually political in origin) reduces the supply of the crude oil flowing from the region, the prices of oil rises around the world. Because they think that it would be much profitable to them. But since the U.S is much affected to the inflation of the oil it is not favourable for them. U.S. firms that produce gasoline, tires, and many other products experience rising cost, and they find it less profitable to supply their output of goods and services at any given price level. The result is a leftward shift in the aggregate-supply curve, which in turn leads t stagflation. The countries with large oil reserves got together as member of OPEC, the Organizational of Petroleum Exporting Countries. OPEC is a cartel—a group of sellers that attempts to thwart competition and reduce production to raise prices. And indeed, oil prices rose substantially. From......

Words: 1679 - Pages: 7

Free Essay

Doctor

...A well known link exist between oil price external reserves and exchange rate for oil exporting countries that relies on over 90% of her annual revenue crude oil sales. The link is such that an oil dependent economy relies on a robust foreign reserves to pay for her import demands. During periods of high and sustained crude oil price, the domestic currency (Naira) tends to appreciate in value because of sustained inflow of FDI and foreign capital. When oil price is declining, the revenue from crude oil sales falls exerting pressures on the foreign reserves. The result is fluctuation in exchange rate and a resultant rise in capital flight. It is this reason that breeds the so called “Dutch Disease” for a mono product economy. A well known link exist between oil price external reserves and exchange rate for oil exporting countries that relies on over 90% of her annual revenue crude oil sales. The link is such that an oil dependent economy relies on a robust foreign reserves to pay for her import demands. During periods of high and sustained crude oil price, the domestic currency (Naira) tends to appreciate in value because of sustained inflow of FDI and foreign capital. When oil price is declining, the revenue from crude oil sales falls exerting pressures on the foreign reserves. The result is fluctuation in exchange rate and a resultant rise in capital flight. It is this reason that breeds the so called “Dutch Disease” for a mono product...

Words: 251 - Pages: 2

Premium Essay

Exchange Rate Fluctuation and Home Made Goods

...country compared to the money of another country exchange rate movement is therefore the fluctuation in the value of a country’s currency when compared to another country at particular time period. The importance of foreign exchange rate on inflow of foreign private investment has been traced by Obadan (1994) who noted that its importance as the center pieces of the investment environment derives from the argument that a sustained exchange rate misalignment in terms of over-valuation or under-valuation is a major source of macro economics disequilibrium which spells danger for investment. A stable exchange rate encourages, foreign and local investor into such an economy. This is because, an over-valued exchange rate discourage export and negatively affect the foreign private investment Salako (2004). Further state that there is a long run equilibrium relationship between investment inflow to Nigeria and variables such as nominal effective exchange rate. A high foreign exchange rate increase the prices of goods and services and discourage exportation while at the sometime encourages importation of goods which are cheaper. This has negative effect on the investment and with such factors investors withdraw their money from such an economy (Solomon, 2012). It is therefore imperative to state that foreign exchange rate is a significant factor that determines investment in any economy with Nigeria inclusive. In recent years, exchange rate has fluctuated......

Words: 5088 - Pages: 21

Premium Essay

Economy

...look at oil prices in terms of inflation, we realize that this is one of the strongest components why the economy is collapsing and now we are on tipping end of a dangerous bout of deflation.  The problem of deflation is that it renders any and all debts dangerous and a country as indebted as the United States of America, simply cannot risk that outcome of it. The economy is affected by many factors that determine if it is strong enough or simply too weak. These factors have to do with buyers consuming goods and services and how often they do this. Do the goods and services that are consumed by people create wealth, jobs, and a better overall economy for a country? In this paper I will discuss how the oil practices affect the economy and to what extent. Throughout history we have seen evidence of some economies that have evolved faster and stronger than others. Policies that the government places on industry, technology and the environment can all affect the prosperity of an economy. Of the factors that affect economic growth the industry of oil and gas is one that holds a dominant spot in the world's and America's economy today. When evaluating the economic growth factor of economy and specifically oil and gas one must consider some factors such as: the relationship that it have with the whole economy, the way it affect economic growth, what it a cause or effect of economic growth, along with a few others. In respect to how economy is affected by oil and gas......

Words: 1653 - Pages: 7

Premium Essay

Describe the Trends' in Exchange Rate of Rupee Vis-a-Vis the Major Currencies over the Last One Year. How Has It Effected the Indian Economy?

...The exchange rate fluctuations in India has been a topic of apprehension for the policy makers and common public. The exchange rate system in India, known as managed float, has evolved through a long process of probing for an suitable policy system for India. in view of the fact that exchange rates are relative prices of two currencies it is generally exaggerated by the relative productivity differential and real wage rates in the long-run. However, the bubbles arising out of assumption plays a major role in influencing the exchange rates in the short-run. The present state of affairs about the exchange rate fluctuations in India has been caused to a large extent by the worsening current account balance and the unfavorable expectations related with it. On the other hand, the question of interference by the government in the exchange rate market should be decided on the foundation of the impact of such exchange rate fluctuations on the real effective exchange rate and the likely effects on the employment situation in the country. There are an array of factors affecting the exchange rate fluctuations like interest rate, balance of trade, money supply, economic growth, foreign debt, inflation etc. India has seen a huge breakdown of the Rupee because of the adverse affects of these factors on the Indian currency. Mentioned below are the various sectors being affected by the Rupee depreciation. Fuel Price: India imports most of its oil consumption. As a result of dwindling......

Words: 1030 - Pages: 5

Premium Essay

Management

...IN THIS CHAPTER YOU WILL . . . Learn three key facts about shor t-run economic fluctuations Consider how the economy in the shor t run dif fers from the economy in the long run A G G R E G AT E AND DEMAND S U P P LY Use the model of aggregate demand and aggregate supply to explain economic fluctuations A G G R E G AT E Economic activity fluctuates from year to year. In most years, the production of goods and services rises. Because of increases in the labor force, increases in the capital stock, and advances in technological knowledge, the economy can produce more and more over time. This growth allows everyone to enjoy a higher standard of living. On average over the past 50 years, the production of the U.S. economy as measured by real GDP has grown by about 3 percent per year. In some years, however, this normal growth does not occur. Firms find themselves unable to sell all of the goods and services they have to offer, so they cut back on production. Workers are laid off, unemployment rises, and factories are left idle. With the economy producing fewer goods and services, real GDP and other measures of income fall. Such a period of falling incomes and rising 413 See how shifts in aggregate demand or aggregate supply can cause booms and recessions 414 PA R T E I G H T S H O R T - R U N E C O N O M I C F L U C T U AT I O N S recession a period of declining real incomes and rising unemployment depression a severe recession unemployment......

Words: 16219 - Pages: 65

Premium Essay

Deprication of Indian Rupee

...The Indian Rupee Crisis Economics Essay-1 In this paper we are going to examine the cause and the impact of rupee depreciation on the Indian economy. Since last few months Indian rupee came under great stress as overseas investors are paring their exposure to Asia’s third-largest economy amid international uncertainty and mounting worries over the domestic economy. In 2009 – 2010 the exchange rate was hovering around the 43 – 45 rupees per US Dollar level. And now it is around 55 – 56 levels, the main reasons to examine are increase in import bill, higher inflation, fiscal mismanagement and all resulting in higher cost of borrowing. The rupee has lost more than 15% of its value this year, making it one of the worst performing currencies in Asia. This paper reviews the probable reasons for this depreciation of the rupee and the outlook for the same. It also reflects on the policy options to help prevent the depreciation of the Rupee. This paper will firstly discuss about the economy of currency to give an overview of the problem and the factors related to it. Afterwards it will be examining the causes of the Indian rupee depreciation with respect to the Indian economy and the global economy. And after that it will analyse the impact of the same on trade and business. Finally, recommending the policy actions in response of the falling currency. II. LITERATURE REVIEW: These papers include the work which have been used as a basis or reference for formulating the policies......

Words: 3340 - Pages: 14

Premium Essay

Accounting

...Review of Wall Street Journal Case 1 Article Name: Japanese Rush to Sell Gold as Price in Yen Jumps Article Address: http://online.wsj.com/article/SB10001424127887323820304578412283865306950.html?mod=WSJ_business_AsiaNewsBucket#articleTabs%3Darticle Review: The news shows when Japanese currency Yen is softening, the gold price is rising in Japan, which causes Japanese families rush to sell gold to gain more money. The phenomenon may indicate that the gold demand in Japan is slightly elastic in this period. As an abandoned currency, gold is not necessary for trading in modern life. People usually use gold for jewelries and investment. Hence, the normal demand of gold is even, and the purchase happens only when consumers have excess money for it. When Yen is declining, the price of gold in Japan increases. Higher gold price force the Japanese families reduce their needs for gold, and sell it to get more benefits. From this procedure, it is clear that when gold price is raised, demand of gold will be reduced, which proves the gold demand in Japan has small elasticity now. However, if the devaluation of Yen continues, the price of gold will keep soaring, which means the demand of gold in Japan may change into inelastic. In other words, Japanese families may start to buy gold in future, and the demand of gold will not be affected by the gold price. In conclusion, the gold demand in Japan is slightly elastic or sometimes inelastic. The reason for this situation might be......

Words: 547 - Pages: 3

Premium Essay

Finance

...---------------------------------------------------------------------------6 6. Reference ----------------------------------------------------------------------------10 Introduction Oil is an important source of energy in the world economy as a major component and raw materials in the millions of industries. Oil price suffer from high volatility and fluctuations as a traded commodity in global markets. Oil is a wealth non-renewable and it is distributed randomly all over in the ground. According to the Energy Information Administration (EIA), the world currently consumes 85.64 million barrels of crude oil daily [1]. It represents the largest proportion of the world's energy consumption compared to other sources [2]. We are going to predict oil prices and analyze various kinds of factors that influenced in oil price. The world had suffered from political in recent years instability wars and conflicts, especially in the Middle East oil-rich areas such as Tunisia, Libya, Egypt, and Syria with the acceleration of technological development. This had influences on the exchange rate in the oil market and volatile behavior of trading. So it is necessary to follow-up in oil prices and monitor prices and the forecast oil price movement. The primary purpose of this analysis is to provide a further contribution to analyze the correlation between oil prices and the main fundamental factors influenced them such as...

Words: 1746 - Pages: 7

Premium Essay

The Volatile Russian Ruble

...United States was more developed, with a more experienced market economy that accommodated a managed floating exchange rate for their currency. Russia’s emerging market economy lacked the structure needed to provide stability to the ruble’s exchange rate due to inadequate monetary policies put in place by an inferior government and an overdependence on crude oil export prices for sustained economic growth. These collective differences are what set the dollar apart as a stronger currency than the ruble during this time period. In 2005, resource rich Russia was experiencing rapid economic growth attributed to a booming demand for crude oil. During this expansionary period, overall unemployment decreased, real wages began rising, and the poverty rate and gap began decreasing. Their economy was on a positive, uphill trend as oil prices kept raising. The ruble, which had been soft pegged to the U.S. dollar since 1995, was becoming stronger as it appreciated against other nations’ currencies. The United States, on the other hand, was contracting their economy in the face of those rising oil prices, war related debts, and devastating natural disasters. With the dollar threatening to depreciate in the open market, Russia’s monetary policy had to revolve around trying to manage the ruble’s exchange rate against that depreciating dollar instead of focusing on other monetary issues such as the demand-pull inflation from crude oil that showed no sign of slowing down. Despite the......

Words: 928 - Pages: 4

Free Essay

Commodity Research

...billion, has an economy based on agriculture, precious metals and base metals. Thus, trading in commodities provides lucrative market opportunities for a wider section of participants of diverse interests like investors, arbitragers, hedgers, traders, manufacturers, planters, exporters and importers. But surprisingly it has an under developed commodity market. The commodity market in India is in very nascent stage of growth. It taps only .4% of the markets. Hence shows huge scope of growth in future. This projects aims to throw light upon into this potential market. To brief about the evolution of commodity markets there is a look into the past giving the overview of the commodity market in India. Various commodities exchanges MCX AND NCDEX work for developing commodity market in India. Major reforms have been initiated in commodity futures markets in India in the last few years along with the analysis about the present scenario of commodity market in India. These efficient risk management tools insulate buyers and sellers from unexpected changes in future price movements. Understanding role the participants of future markets - hedgers, speculators and arbitragers. The second phase of the project deals with the Energy sector of the commodity exchange viz. Crude oil and its determinants in particular for in depth analysis. It includes fundamental analysis for crude oil. How the behavior of crude oil price has significant impacts on different parts of the economy,......

Words: 310 - Pages: 2

Premium Essay

Unit 38 P5 M3

...business. Oil price fluctuations Crude oil is the worlds most traded commodity by value, it is vital for many industries e.g. transportations, polymers and energy production that are closely linked with oil production As you can see in the image above the price of oil has crashed within a few months which has drastically decreased the price of fuels, the cause of this crash was due to new production methods which allowed other people to produce oil rather than the just the few that could before, this new method is called fracking. Assessment of impacts for KI KI are not heavily reliant on oil, they only use fuel for their cars which their main consumption. The price of fuel does influence them though, the biggest benefit is the effect on the customers, the lowering of the price of fuel means that people will, in effect, have a small pay rise, this will help KI as this will increase their customer’s disposable income and increase their consumer confidence. KI will always have oil related costs linked to their business as they use energy that is produced from oil and resources that wouldn’t be possible without oil e.g. polymers. The lowering of the oil price will help KI to maximise profits as they will be spending less on things that are oil based. KI may see people coming from further afield as the customers may thing that this drop in fuel price will allow them to live further away from their jobs or travel further to work. When the oil prices fall this......

Words: 1220 - Pages: 5