The crude oil marketThe impact of fall in crude oil price on global economy

PRESENTED BY

Deepak Shinde 54

Pooja Singh 59

Shubham Singh 62

Deepak Todke 65

Shristhi Vaishnav 66

Monish Vaity 67

Tulsee Valacha 68

An overview

The crude oil market:

In recent months the price of crude oil has fallen 50%. This fall in

the price of oil has a significant impact in reducing transport and

other business costs. 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.

Spot price of Brent Crude, updated on January 23, 2015

Key reasons for drop in the crude oil prices

Demand is low

Iraq’s production outputs are touching record levels

America has become the world’s largest oil producer

The Saudis and their Gulf allies have decided not to sacrifice

their own market share to restore the price

Macro economic impact of falling oil

prices

Lower inflation

Higher output

This diagram shows that a fall in oil prices (and a fall in firms costs) will shift Short Run Aggregate Supply (SRAS) to the right, causing lower inflation and

higher real GDP. (Some economists say a 10% fall in oil prices leads to a

0.1% increase in GDP)

Impact on World Economy

The world economy was set on a rollercoaster and almost came to a point of collapse.

The current situation though is a bit different from the 1973 one, yet the impact can be said to be similar- challenging the US might and sending a tremor in the world economy.

Reduced profitability for alternative energy sources. Part of the fall in oil prices is due to OPEC countries like Saudi Arabia wanting to protect their oil markets and not lose market share to ‘fracking’ and other energy sources.

Falling oil prices could delay investment into alternative ‘greener’ forms of energy, such as electric cars.

Falling oil prices could reverse the recent decline in car use, leading to a steady increase in traffic congestion and environmental costs of petrol use.

Impact on share market

As the oil price decline has continued, investors have

increasingly seen it as a bad omen for the global economy.

The drop may point to lower demand for oil and lower

economic activity.

And the decline suggests that policymakers have not managed

to deal with the threat of deflation, or falling prices.

Though the market is influenced by numerous factors, in

isolation, the impact of oil price decline will have a positive

impact in the short run but will turn bearish if the prices keep on

declining.

Impact on Industries

Industries such as

petrochemical and

fertilizers, which use crude

oil or its derivatives as

feedstock will inevitably

benefit from the declining

oil prices. On the

contrary, it will prove

detrimental to industries—

biofuels, alternative

energy, etc.—that usually

benefit from high crude

oil prices.

Impact on oil consumers

Lower oil prices help to reduce the cost of living.

Oil related transport costs will directly fall, leading to lower

cost of living and a lower inflation rate.

Falling oil prices is one reason behind the recent fall in UK

inflation to 1.2%.

With stagnant real wages, this fall in the cost of living is

important for giving Western consumers more discretionary

income (more income to spend).

A fall in oil prices is effectively like a free tax cut.

In theory, the fall in oil prices could lead to higher spending

on other goods and services and add to real GDP.

Thank You!