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B01BECO107 Business Economics Assignment
The Business economics the demand and supply are the basic element which is effecting the price of the oil. According to the law of demand and supply if the demand is more for a product and supply is less than the price will increase and if the demand is less than the supply then price will be decreased. The price of oil was hovering around $100-$120 per barrel in many years. The reason behind this consistency was the equilibrium of demand and supply or there was a balance between demand and supply. But in the end of the year 2014 the price of oil started to fall continuously and by the march 2016 the price of oil has fallen to around $38 per barrel. We can assume that this big fall in the price of oil was affected by the demand and supply. The demand was less and supply was more which can be the reason for the fall in price. Or we can assume that there is a substitute effect on the price of oil.
Price Fall of oil
The price of any product falls when there is disequilibrium in the demand and supply. As in if the supply is surplus over demand then the price will be decrease. Or we can say that if the demand is low the price of the product will be decreased. But in the given situation the price of oil is continuously decreasing but the consumption is stable or we can say that the demand and supply has not decreased. The price of a product can also be effected by the price of the substitute product if the price of the substitute product is decreased then the demand for that substitute will be increased. To maintain the demand of the price of the product the price should be decreased. This will maintain the same consumption or demand of the product. The product oil falls in the industry which is oligopoly. Oligopoly is the market in which there are few players or industries and they have identical products. And they have the power to control that particular market (Flottau, 2014).
The price of oil will affect the countries which deal for oil and they will either gain profit or lose. Any country which is importing oil will gain benefit from the fall in price as in the importing countries such as China and India will import more quantity of oil and have to pay less comparing to earlier years. This will make a good impact on the economy of that country. The prices of oil in the importing country will fall down and it will be beneficial for the industries. The fallen price of oil will decrease the cost of production of products as in oil is the key product management and by this the profitability will be increase by which the economy will get more reserves. And the consumer spending will be increased. This will be beneficial for the economy of the country as the government spending will be increased and the productivity will be increase which will ultimately grow the GDP of the product. But also have bad impact on some industries most important refinery industry because the cost in the production will be higher than the market value of I barrel (World Bank, 2015).
Countries which are exporting oil gain a good profit by exporting oil but by this fall in the price of oil the exporting countries will be in loss. As the price of one barrel oil has fallen over 60% in two years the profitability is reduced but the demand also increased. Countries like Saudi Arabia and Iran are big exporter of oil and the economy of these countries are highly based on the revenues from oil industries. As the oil industry will be in loss by this great fall in oil price the stock market will be affected of these countries as in the oil industries are the big players of economy of these countries and the stock prices will fall down and which make a bad effect on the economy’s growth. So we can say that the fall in oil price will make bad effect on the exporting countries of oil (KRAMER, 2016).
Countries which have a huge amount of oil but they also consume it in huge amount like USA or Indonesia will be face dual situation. The fallen price of oil will affect the revenue of the government and the share market will be effected. But the industries and manufacturer will be able to increase the productivity. Inflation will be decreased as in the fall in the price. The purchasing power of the consumers and consumer spending will be increased. Country will decrease the export of oil to other countries or they can import the oil to expand their stock for future as in the country need a huge quantity (Reboredo, Lidon, Pessoa & Ramalho, 2016).
Benefits and winners
Oil is the key product for any industry so it plays crucial role in economy of every company. Different industries are affected by this fall in different manner.
The following industries will get benefit from the fall in oil price:-
Retail industry: - The fall in price of oil will ultimately increase the purchasing power of the consumers as in it can be taken as the decrease in the tax for the consumers. The retail industry will get this benefit which helps them to increase their productivity which ultimately increases the profitability. The fallen price will also decrease the cost of food production which leads to surplus of profitability over cost of production (REED, 2016).
Transportation industry: - Transportation is based on oil in every manner like crude oil, gas, petrol etc. Transportation industry will be in great benefit as the maximum cost in this industry come from oil. By this fall in price will grow this industry and investments will be increased in this industry (REED, 2016).
Auto vehicle industry: - By fall in the price of oil it will become easy to maintain a vehicle. And it will help the auto industries to sell their products. The price fall in the oil will be taken as the decrease in tax and increase in purchasing power of the consumers. Hence demand will be increase for the auto vehicles and ultimately the investment will grow the industry (Sultonov, 2015).
Travel industries: - The purchasing power of consumers will be increased by the less expense on oil and it make the consumer to spend. Transportation also become easy that helps to grow the travel industry. Travel industry is expending as the areas of tourist destination, lower fair of airlines, hotels, hospitality are growing (Sultonov, 2015).
Hospitality industries: - Lower cost of transportation and traveling enhance the growth of hospitality management . As there are increase in the purchasing power which increase the quality of living of people. They spend more on their luxury and make trend to eat in a good restaurant and spend on their entertainment which is growing this industry because the demand is high in this industry (Sultonov, 2015).
The following industries are bearing lose from fall in price of oil-
Refinery industries: - These industries works as to refine the crude oil in different products. The cost of production has a big part of fixed cost. And if the cost of production is more than the selling price of per barrel than there will be no profitability. The infrastructure cost high to establish these industries as there are expensive machinery so it become difficult to invest in these industry (SWARTZ, 2015).
Financial companies: - the big fall in the price of oil affect the financial companies. The stock market falls of the country as in the investments in the oil industry decreases because the investment in this industry becomes more expensive and the profitability is less. So the financial borrowings, issues, derivatives bear a great loss in this industry (SWARTZ, 2015).
As we have studied in the report that the price of the oil are determined by the demand and supply but the prices are fall down without effecting the demand of the product. This fall effect different countries with different manner. Now we can conclude that the economy of huge oil importing countries like India and China will grow but some industries will have bad impact of this fall. And economy of the exporting countries like Saudi Arabia and Iran will have bad impact. And the countries like USA and Indonesia will also have mixed impact as in some industries will grow and some industries will bear loss in the country. Although oil is the key product for every industries but still different industries have different impacts of this fall. Some industries like retail, transportation, travel, hospitality, auto industry etc. are beneficiaries of this fall of price in oil. But there are also some industries which are badly affected by this fall. Like refineries of crude oil, financial industries. The cost of production of oil has a surplus over profitability. Unemployment also increased by this fall in price of oil because industries prefer to get work from machineries in place of manpower as in the fuel is cheaper than the wages.
Flottau, J. 2014, As Oil Prices Fall, IATA Sees Steep Profit, Traffic Increases In 2015, Penton Media, Inc., Penton Business Media, Inc, Washington.
Group, W.B. & World Bank 2015, Kazakhstan Economic Update, Fall 2015: Adjusting to Lower Oil Prices--Challenging Times Ahead, .
KRAMER, A.E. 2016, Russian Economy Stumbles as Stocks and Oil Prices Fall, New York Times Company, New York.
Reboredo, F.H., Lidon, F., Pessoa, F. & Ramalho, J.C. 2016, "The Fall of Oil Prices and the Effects on Biofuels",Trends in biotechnology, vol. 34, no. 1, pp. 3.
REED, S. 2016, Oil Price Falls as Global Growth Anxiety Weighs on Markets, New York Times Company, New York.
Sultonov, M. 2015, "The Fall of Oil Prices and Changes in the Dynamic Relationship between Power and Authoritya and Kazakhstan", Journal of Reviews on Global Economics, vol. 4, pp. 147.
SWARTZ, M. 2015, As Oil Prices Fall, Houston Shudders, New York Times Company, New York.