Optimal Oil Production And The World Supply Of Oil

Question: Describe about How Low Oil Prices Affect The Ad And As of an Economy? Answer: Introduction: A vital energy source for the world is oil. It continues to be important from the time immemorial. Oil affects the entire functioning of the economy. Everything depends on the availability of petroleum. Petroleum is rock oil. This is formed by organic matters that are present deep inside the surface of the earth. The development of petroleum significantly affects the producers and the consumers alike. Statistics has shown that oil provided about 34 percentages of the global oil needs. It is expected that in future the oil demand would increase to a massive extent. It has been projected by the International Energy Agency that oil would provide the 30 percentages of the energy demands by the year 2030. Saudi Arabia holds huge reserves of oil (Aleksandrov, Espinoza and Gyurko , 2012). About 18 percentages of the world oil are possessed by Saudi Arabia. It ranks among the largest exporters of oil in the country. The countrys 50 percentages of GDP is accounted from the oil and gas indu stry. It also holds other resources like the gold, iron ore copper, and natural gas. Factors that lead to the determination of oil prices: The oil prices are governed by some factors they are basically how the global market performs and the demand and supply that occurs in the world market. It is seen that the following factors are very crucial to the oil price determination: 1. The economy of China: China is seen as a large consumer of oil after the United States. Due to this increase there is a question as to how much increase is likely in the coming years. It is expected that Chine would increase its consumption of oil by more the 3 million barrels in coming 2020. There was a slight fall in the growth in the first quarter but the Chinas economy will continue to affect the oil prices in 2015 (Asia Dept, 2013). 2. The Elasticity of Demand: The countries that have regulated prices of oil have low prices in the retail market. The countries like Indonesia are no longer offering any subsidies on petroleum products and, as a result, this will be considered as a disadvantage for the consumers. The gasoline prices of the United States are below 2.4 dollars per gallon. This has led to more gas consumption (Farndon, 2012). With low prices of oil, there could be higher demand of the product that as a result would send the process up high. 3. OPECs Move: The credit to the low oil prices can be given to the body of OPEC. Saudi Arabia has taken a stand to cut no more the quotas of production. The oil price has crushed by the meeting by the cartel in November 2014 (Fund, 2011). 4. Geopolitical difference: The political unrest in the Iraq and Syria has caused the global prices of oil to shot up (Haerens, 2010). Libya violences during the year 2014 had blocked the exports of oil. The geo-political crisis plays a very important role in the effect the prices of for a short interval. Global low oil price and its effects: A low price has both advantages and disadvantages to it. With low oil prices, the importing country can enjoy increased consumption of oil. The overall prices in the economy are also lowered with fall in oil prices (Jain and Ghosh, 2013). This eventually lowers the inflation also. This has a very short term effect. As the resources like oil that is limited in supply may result in shortage due to increased consumption. On the other hand, the oil exporting country is at the loss (Moosa, 2015). Much of the resources are utilized for the exploration and drilling and the owners they dont get the proper price so that they can continue to be in business. The people engaged in the oil industry also face threat to their jobs because many oil industries face a shutdown. The unemployment rate in the economy is also seen to increase. Effect Of Low Oil Price On The Saudi Arabian Economy: Saudi Arabia as the largest exporting and producing countries: Saudi Arabia is the largest states in the Arab in the Western Asia when compared to the area of land size. It occupies the large part of the Arabian Peninsula. It is the only nation that is bordered by the Red Sea as well as the Persian Gulf (Nakaya, 2006). It has a huge carbon reserve making it a tore House of oil reserves. The command economy of Saudi Arabia is petroleum based. The oil reserves of Saudi Arabia accounts for about 260 billion barrels. This means that the country holds about one-fifth of the total oil reserves of the world. During the 1990s, the oil revenues of Saudi Arabia fell and to top the growth of population was also very high. The per capita income also fell to a remarkable level. Saudi Arabia is among the OPEC members. The OPEC has limited its members based on the production of their proven reserves (Once again the global recovery is threatened by rising oil prices, 2012). Current Trend of the Saudi Arabian Oil Market: The following chart shows the trend in the crude oil production for the year 2015 from the month of January to June. Saudi Arabia Crude Oil Production Months Jan, 2015 February,2015 March, 2015 April,2015 May, 2015 June, 2015 Crude Oil Production: 9680 9636 10294 10308 10333 10564 The above bar diagram shows that how the production of crude oil has increased in the country Saudi Arabia from January, 2015 to June, 2015 the crude oil production was low in the month of January and February with about 9680 and 9636 billion barrels respectively. Low Oil Price and its Effect in the Saudi Arabia Economy: Saudi Arabia is one of the influential members of the OPEC. With the global oil prices falling, the only thing that it can do is to cut back on its production as much as possible. This sign, on the other hand, is not revealed by the countrys oil owners. This could be due to two reasons to introduce discipline in the members of the OPEC or to pressurize the United States shale oil and gas industry. The country needs oil prices to be around 85 dollars in the long term. Due to its large reserve funds it was able to stand the low prices (Saudi Arabia may be about to revive stalled gas programme, 2006). The production of oil began to pose a challenge to the United States oil production. Due to large reserves of foreign exchanges by the country the country would be able to survive the low oil prices. The Saudi Arabias long interest rate may serve as a way for the cheaper oil prices. Public spending has raised less as compared to the rise in the foreign reserves (Speight, 2013). The assets were quantifies 2.8 trillion riyals in August 2014. The reason for the country to survive the oil prices was the saving that it incurred when the barrel cost was just 100 dollars. In this economy, it is very difficult to cut on the government schemes and spending. The low oil prices will lead to affecting the social and economic chaos in the Gulf countries that would have a ripple effect on the economy of Saudi Arabia. To cut on the public expenditure is very difficult for the economy. The main strategy of the country is to maintain the market share and sacrifice on the price to put pressure on the United States, who are increasing their production of sales (Survey: Saudi Arabia: outlook for the oil industry, 2011). Effects of low global prices of oil on the aggregate demand and aggregate supply of oil in the Saudi Arabia Economy Diagrammatic View. Oil prices play a major role in influencing the overall prices in any economy. Reduced oil prices have led to the availability of cheaper goods in the economy. We see the effect of AD and AS due to the low global oil prices in the Saudi Arabia economy. By aggregate demand, we mean the total of all the demand in the economy at a given point of time. While, aggregate supply means the total of the supply of goods and services in the economy. The aggregate supply curve in the short run is upward rising while the aggregate demand curve is downward sloping. The figure shows that the economy is at equilibrium A initially. The AD1 shows the aggregate demand while AS1 shows the aggregate supply curve. Due to the fall in global oil prices the aggregate supply curve shifts from AS1 to AS2 downward. Correspondingly the level of prices falls from P1 to P2. The aggregate demand curve is also seen to fall. This leads to the fall in the AD1 to AD2. The output as a result increases for the economy. With the lowering of the prices in the global market the Saudi Arabia economy would not face a negative impact. Conclusion: The abrupt fall in the oil prices will be beneficial for the countries that are into importing and would affect drastically the exporting countries. As Saudi Arabia country is into exporting of oil and much of the countrys GDP also depends on it so a low global oil prices would affect the economy in the long run scenario. The initial low oil prices may be beneficial for the country but it would show its gruesome face at a later point of time. References Aleksandrov, N., Espinoza, R. and Gyurko , L. (2012).Optimal oil production and the world supply of oil. [Washington, D.C.]: International Monetary Fund. Asia Dept, I. (2013).Saudi Arabia. Washington: International Monetary Fund. Farndon, J. (2012).Oil. New York: DK Pub. Fund, I. (2011).Will Natural Gas Prices Decouple from Oil Prices across the Pond?. Washington: International Monetary Fund. Haerens, M. (2010).Oil. Farmington Hills, Mich.: Greenhaven Press/Gale, Cengage Learning. Jain, A. and Ghosh, S. (2013). 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