Impact Of Fall In Oil Prices On Economic Growth: Case Study Russia

Fall in the oil prices

a) Identify the nature of resource cost structure and the practical significance of different costs;

b) Explain the factors influencing optimum size and the significance of demand and supply relationships;

c) Demonstrate an understanding of the relevance and limitations of economic theory to management decisions.?

The main aim of the study is to analyze that how the oil prices have an impact on the aggregate supply of an economy. Here, Russia has been taken into consideration. The fast and the steady increase of the prices of the oil in between the years 2002-2008 and a large fall of the prices have a great impact on the energy prices. Al-mulali and Che Sab (2012) puts forward since the last two periods, the prices of the oil have increased at a higher rate.

The rapid decrease in the prices of the oil benefits the oil importing nations and on the other hand, is disadvantageous for the exporters of the oil. The Russian economy is literally dependent on crude oil ranging between $100-115/barrel which leads to engage into severe problems. But the prices of crude oil have dropped below $80 in the past few years which seems to have typically impacted on Russian economy. The lower level of the energy prices reduces the cost of the production and ultimately causes an increase in the aggregate supply.  This shows that the change in the energy price will ultimately have an impact on the business sectors regarding the production and the supply in the short run.

The shocks in the oil prices have been caused due to two factors like:

OPEC’s Decision to control the output

The wars

As per the economic theory, the decrease in the prices of the oil causes the aggregate supply to shift in an upward direction that is to the left. This shows that the aggregate supply will increase and there will be a reduction in the price level (Alom, 2015).

At the same time, Alom, (2015) has mentioned that technical fracking is also a considerable approach that estimates in creating trouble in rendering the fall in the oil price. Apart from fuel, petroleum is also used as a medium of energy in several countries. But it is needed to be mentioned with increase in the use of renewable energy in the different countries, demand is oil is slowing down (Azar, 2013).

War in most of the Middle East countries has also enabled the oil price to be dropped seriously. It has a cohesive effect on a judgmental factor that analyzes better prodigality in this matter. If the oil price of one of the exporting country falls, then it will lead to the profit of the importing countries as they can be able to procure oil with the lesser amount of foreign currency.

Impact of Decreasing Oil Price on Russian Economy

The main reason for the fall in the oil prices is that the Russia as it wants to protect their domestic production of the oil. At the same time, it has also wants to safeguard their economy form the foreign attacks. The fall in the price level hampers the investment on the greener pattern of the energy like the cars. On the other hand, the fall in the oil price levels ultimately increases the cost of the environment (Nwosa, 2014).

The research studies show that the crude oil prices have been decreased by 50% in the recent periods. The fall in the oil prices, have a huge impact in reducing the cost of transport and the cost of the business.

(Source: Latosov, Volkova and Siirde, 2011, p.140)

To analyze through the economic theory, with the dwindling price of oil shifting of to downwards is essential. Along with the other countries Russia exports oil to Italy. Once the price of the oil drops, it becomes critical for the importing countries to handle this approach. Foreign currencies are not as in an esteemed factor that puts its effect on procuring the price. During the recent years, according to the study of Enders and Jones (2015), there has been a drop as much as 50% in the price of the crude oil.

The cost of living of the customers declines due to the lower prices of the oil. At the same time Enders and Jones (2015) highlighted that, it will also reduce the transportation cost and in this case, the inflation rate will be lower. This is one of the reason for which the rate of inflation in UK have been decreased to 1.2%. If the real wages is fixed and constant, then the customers have the higher level of income in their hands to spend. This will help the customers to spend more amount of their income on the other products. As per the words of Ben Sita and Abosedra (2013), it is just like the tax cut, which will ultimately increase the value of GDP.

The fall in the crude oil prices, have also some of the impacts on the macroeconomics. This will have the two impacts on the economy. Firstly, it will lower the inflation rate in the economy, but on the other hand it will also help in the generation of the higher output within the economy.

Discussing AS and fall of Oil Price from Russian Economic Viewpoint

(Source: Designed by researcher)

The above diagram highlights that the reduction in the oil prices and the cost of the firms shifts the aggregate supply in the rightward direction, which lowers the rate of the inflation and increasing the GDP. Some of the economists like Freedenberg et al. (2014) have shown that the fall of the prices of the oil is ultimately leading to the increase of GDP by 0.1%.

OX in the previous design stands for GDP whereas OY is the price level. SRAS1 and SRAS2 = average supply curve appears to be delineated from the short run point of view. Shift from the aggregate supply towards the right projects inflation and hike in GDP Russia. Price level is the most outrageous approach that help in determining exporting nations generating better revenue. Tax revenue funded for a project is also detrimental in this approach that states the revenue the government is spending is funded.

The fall in the prices of the oil had very bad impact on the exporters and in this case, the oil exporters funded the government spending. For example, it has been observed that Russia has gained the tax revenue of around 70%. The fall in the prices of the oil, will ultimately leads to the deficit in the budget of the government or it will require the higher rate of the taxes or the cuts in the government spending. Gayfullina and Nizamova (2015) have shown that the other oil exporting countries like Venezuela now days are dependent on the revenues that have been generated by the process of oil production so that the social expenses can be funded properly.

Other oil exporting countries like Saudi Arabia and UAE have been building the adequate amount of the foreign exchange reserves so that they can be able to afford the fall in the oil prices in order to generate the revenues. This is the reason for which Saudi Arabia have not responded due to the cut of the output.

The fall in the prices of the crude oil weakens the global economy and at the same time reduces the demand. Komijani, Naderi and Gandali Alikhani (2014) critically analyzed the weakness of the global economy, which ultimately hampers the recovery of the economy.

(Source: Nwosa, 2014, p.70)

Latosov, Volkova and Siirde (2011) have shown that fall in the oil prices relieve the consumers to some extent who have the higher amount of flexible income. However, if the deflation is given and if the confidence of the consumers is low then in that case, the customers will save rather than spending the amount on the goods and the services. The main problem is that if the Eurozone made an entry in the deflation, then in that case, it will ultimately lead to the long-term constant growth and it will be bad, as it will ultimately reduce the GDP debt ratios (Nazlioglu and Soytas, 2011).

The fall in the prices of the crude oil, have ultimately leads to the fall taken together price level within the economy (deflation). This ultimately leads to the different macroeconomic problems. The problems are the less expenditure on the goods and the services and investment by the consumer. At the same time, it also creates the other problems like increasing the burden of the debt, for the Eurozone economies.

(Source: Nazlioglu and Soytas, 2011, p.494)

In many cases, it has been observed that the customers of UK have welcomed the low prices of the crude oil, as it will ultimately increase their disposable income. At the same time, it will also helps in the strengthening of the economy. For this reason, the Consumer Price Index have been reduced and thus for this reason, the Bank of England delayed their rise in the interest rate (Frydenberg et al. 2014).

Russia depends on income that has been generated by exporting the crude oil to the other countries. The research studies shows that around $825 US billion dollars have been generated by the Russia and as the price rate of the oils have been continuously decreasing, the market share of the oil exporting countries have also been reducing at a faster rate. For this reason, the Russia has been suffering from different kinds of the internal problems and in many cases; they are struggling hard in order to satisfy the members (Nazlioglu and Soytas, 2011).

Conclusion

From the entire chapter, it can be seen that in future there will be an upward pressure on the price of the oil. On the other hand, there will be problem for the transportation. Therefore, in that case, the vehicles need to be fueled by the other sources of the energy that is the renewable sources of energy other than the crude oil. Therefore, it is to be recommended that the energy efficient policies need to be incorporated for the efficient purposes. In the future, the importing countries will be benefited due to the falling oil prices and in this case, the demand will rise. As demand rise, the supplier will increase the oil prices due to shortage of oil. This increase in the price of the oil will contribute to stagflation.

Reference List

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Al-mulali, U. and Che Sab, C. (2012). Oil prices and the real exchange rate in oil-exporting countries.OPEC Energy Review, 36(4), pp.375-382.

Alom, F. (2015). Do crude oil prices spillover food prices? Evidence for Asia and Pacific countries.IJETP, 11(1), p.68.

Azar, S. (2013). Oil prices, US inflation, US money supply and the US dollar. OPEC Energy Review, 37(4), pp.387-415.

Ben Sita, B. and Abosedra, S. (2013). Causality-in-variance of prices of oil products. OPEC Energy Review, 37(4), pp.373-386.

Enders, W. and Jones, P. (2015). Grain prices, oil prices, and multiple smooth breaks in a VAR. Studies in Nonlinear Dynamics & Econometrics, 0(0).

Frydenberg, S., Onochie, J., Westgaard, S., Midtsund, N. and Ueland, H. (2014). Long-term relationships between electricity and oil, gas and coal future prices-evidence from Nordic countries, Continental Europe and the United Kingdom. OPEC Energy Review, 38(2), pp.216-242.

Gayfullina, M. and Nizamova, G. (2015). PROBLEMS AND PROSPECTS OF SUSTAINABLE ECONOMIC DEVELOPMENT OF MEMBER COUNTRIES OF OPEC. OGBUS, (2), pp.339-356.

Komijani, A., Naderi, E. and Gandali Alikhani, N. (2014). A hybrid approach for forecasting of oil prices volatility. OPEC Energy Review, 38(3), pp.323-340.

Latõšov, E., VOLKOVA, A. and SIIRDE, A. (2011). THE IMPACT OF SUBSIDY MECHANISMS ON BIOMASS AND OIL SHALE BASED ELECTRICITY COST PRICES. Oil Shale, 28(1S), p.140.

Nazlioglu, S. and Soytas, U. (2011). World oil prices and agricultural commodity prices: Evidence from an emerging market. Energy Economics, 33(3), pp.488-496.

Nwosa, P. (2014). Oil prices and stock market price in Nigeria. OPEC Energy Review, 38(1), pp.59-74.