Effects of the Drop of Global Oil Prices - Assignment Example

Effects of the drop of global oil prices Currently, the world has experienced a drop of oil prices due to various microeconomic and macro economic factors of the world. The drop of crude oil prices has made the dollar to strengthen. However, in other economies like Russia, the drop is not good for its economy. This paper is going to discuss on the microeconomic and macroeconomic tools that have led to this. Micro economics is concerned with particular segments of the economy and it looks at issues like consumer behavior while macro economics looks at the whole economy by use of factors like inflation, international trade and globalization. In addition, monetary and fiscal policies will have an effect on the interest rates of the whole economy. Higher oil prices affect the global economy in a number of ways. Some of the factors include the transfer; when consumers buy oil, they transfer their wealth to oil producers. In our case, the decrease of oil prices makes the US dollar to be strong and causes repatriation of money to the Federal Reserve. The forces of demand and supply have affected the global prices. The laws of demand and supply state that as the price of a commodity increases, its demand decrease with the exception of a few while the law of supply states that as the supply of commodities decreases, its price increases. In the international oil prices the law of demand and supply applies. The diagram below demonstrates on the law of demand and supply for crude oil up to 2015. The supply of oil since last year has been increasing steadily than the actual demand which led to the decrease of oil prices as shown above. The supply was caused by stockpiling of unused oil. The chat above is used courtesy of International Energy Agency. However, in countries like Russia and Venezuela, its bad news. The oil producing and exporting company would not pass a resolution on this trend. Of a great interest is Saudi Arabia which has been blamed for not curbing its production thus leading to a high supply of crude oil and gas in the world. As a result, the prices went down by half which led to their economy to decline unlike in the US which has stored oil in barrels in their reserves. Another effect is that this causes price discrimination among various states especially the emerging economies. Countries like India and China compared to the US have greater price disparities due to oil prices fluctuation. The US in a way enjoy monopoly because of the strong currency and emerging economies currency continue to depreciate Hanke (2014). This is what causes price disparities in those economies. For instance, from September last year, the economy of America keeps son surging forward and tremendous growth has been witnessed in the recent months. The effect of the changes in oil prices have also an impact on the stock market. A case example is China in which we look at the macroeconomic variable whereby we discuss the market and the Gross Domestic Product of the country. The economic growth witnessed is as a result of the drop of the oil prices . The gross domestic product was averaged by a more than five percent. However, a great potion of the money got was kept in the US Federal Reserve which makes the US dollar stronger. Macro-economic factors like unemployment are also affected by international oil prices. The drop in crude oil prices makes oil companies to have less disposable income. This has an effect on employment as the companies will have to lay off some of the staff to curb with the situation. Oil companies in Russia have been forced to lay off due to this effect. Russia economy declines because Russia depends majorly on oil and gas on its economy. Hence, this causes increase in international debt by Russia thus decline in its economy. The case is the same in Venezuela where unemployment levels increase with the decrease in oil prices. In lieu of the above, unemployment increases as most companies are interested in reducing cost thus forced to reduce the number of their staff members. In most cases, more advanced economies enjoy the effect because of the improved technologies. Due to unemployment, micro economic factors like the disposable income to consume by consumers decrease hence bringing about low economic growth. The low economic growth affects economic development of the country. Unemployment brings about adverse economic effect of the country as in most cases, the emerging economies will depend on aid which have got strings attached. The fall also have an effect on exchange rates. The exchange rate fluctuations have been witnessed in various currencies in relation to the US dollar. In Venezuela, the value of its currency has decreased in relation to the US dollar. The effect is that the economy continues to be weak while that of the America continues to grow. The Oil Producing and Exporting Companies which are basically countries in the Middle East that have joined a pact on discussing on various issues have been unable to come up with a concreate solution. They have always been arguing among themselves and of great concern is the US reserve of big barrels of oil and why they continue exporting up to now. Consequently, no meaningful solution has been found because of the conflict of interest among member countries. The US thus enjoys high economic growth as others suffer. In conclusion, the fall of oil prices have been in favor of the US which has witnessed high economic growth and economic development. Besides, the US unemployment level has decreased remarkably while it has increased in emerging economies like India. The US stock market is also experiencing a boom. The Oil producing and exporting countries have been faced with a crisis because of the drop and they have been unable to come up with measures to curb this. The worst hit countries have been Russia and Venezuela because they depend on oil and gas as there major economic activities and this has led to an increase of the foreign currency. Hence, the drop of oil prices has a negative effect on major emerging economies of the world. However, in a more advanced economies like the US, it has a great positive impact as it makes the dollar to grow strong and strong. In addition, it has the advantage of foreign exchange because of its federal reserve and a positive reputation that it has developed over the years. Therefore, this has increased foreign investment and low inflation. Work Cited Steve, Hanke “on strong dollar and emerging markets and Eswar Prasad on India”. Online video clip.YouTube. Dec 24, 2014 Read More