Oil prices have declined very rapidly in the last 7 months, with some companies
reducing their prices by 50%. Many people think this is a good thing as they no
longer have to pay as much for the fuel to run their cars, but in fact it may
have a much bigger impact in the long run on the economy. This will be worse
for everyone, even the people benefitting from it in the short run.
Saudi Arabia have vast oil reserves, with huge amounts yet to be drilled. They have recently drastically increased the volume of oil produced with the aim of reducing America’s natural gas reserves (a major competitor to Saudi oil) economic viability. This plan was devised to allow Saudi Arabia to seize more control over the global energy supply. However, American energy companies have not responded as the Saudis had hoped. American companies have not decreased their production, which, combined with a sudden increase in oil production from Iran, has meant that global energy production has rapidly risen. Iran, who has recently been allowed to trade their oil, following a lifted ban, has, like Saudi Arabia, got vast reserves. This sudden increase in oil production has led to an excess of supply, which will cause supply to shift outwards on a supply-demand diagram (as below) causing the price level to fall from P to P1.
Saudi Arabia have vast oil reserves, with huge amounts yet to be drilled. They have recently drastically increased the volume of oil produced with the aim of reducing America’s natural gas reserves (a major competitor to Saudi oil) economic viability. This plan was devised to allow Saudi Arabia to seize more control over the global energy supply. However, American energy companies have not responded as the Saudis had hoped. American companies have not decreased their production, which, combined with a sudden increase in oil production from Iran, has meant that global energy production has rapidly risen. Iran, who has recently been allowed to trade their oil, following a lifted ban, has, like Saudi Arabia, got vast reserves. This sudden increase in oil production has led to an excess of supply, which will cause supply to shift outwards on a supply-demand diagram (as below) causing the price level to fall from P to P1.
As the global economy has a broad dependency on oil trading, any large change in price will cause large impacts worldwide. This large reduction in price will 'rock' the economy, causing severe consequences. For example the UK's production of oil will decrease due to cheaper resources available from overseas, this could lead to the closure of oil rigs in the North Sea and consequently an increase in unemployment due to a lack of business. Also if the value of imports increases, due to a reduction in price levels, since imports are a negative component of aggregate demand then this could decrease aggregate demand and cause a fall in the level of GDP and real national output. These consequences could cause very severe impacts on many countries' economies globally and could have the real potential to create another recession like in 2008.
In summary, the reduction of oil price is not necessarily a good thing in the long run, as it will cause significant consequences internationally and ultimately could worsen the global economy as a whole.
