Prices of crude oil have tumbled more than 60% in last 9 months, mostly due to a slowdown in 3 largest oil importing countries- The US, China & India. This has been a great macroeconomic activity for most of the economies in the world. This is a good news for all oil-importing countries but it has a similar but opposite impact on oil exporting countries.
Impact on oil importers: (Countries)
Low oil prices result in reduced oil bill which reduces countries current account deficit (CAD). Due to reduced oil prices, the cost of transportation goes down which leads to a fallen cost of living and lower inflation. Lower inflation and reduced CAD appreciates the currency of oil importers. Although the relationship between GDP-Oil prices is nonlinear; every $10 fall in crude oil price leads to an approximate increase on 0.5% in GDP. (Oil prices were approx. $70 nine months back, hence with $40 fall in oil price; it has helped to grow India’s GDP by 2%).
Impact on oil exporters: (Countries)
Revenue for most of the oil exporting countries comes from the tax on oil production. As oil prices go down, revenue of oil producing countries goes down. Also, due to reduced revenue and falling forex reserves, these countries are witnessing depreciation of the currency, recession and job cuts.
Impact on oil importers: (Corporates)
Due to reduced oil prices, oil importing and refining companies are getting benefitted as it has helped to increase net margins and profits.
Impact on oil exporters: (Corporates)
Reduced oil prices have forced oil producing giants like BP, Shell to lay off the employees and enforce strict cost cutting norms.
Global Economy:
As the fall in oil prices since the summer is deemed largely to be due to an increased supply of oil, it is assumed it will have positive effects on the development of the global economy as a whole. However, the effects will vary greatly from country to country, depending on whether these are net importers or net exporters of oil. As most of the countries in the world are net importers of oil, falling oil prices will help to increase the global GDP.
Fall in crude oil prices has caused great volatility in currency markets, commodity markets and equity markets of emerging countries as well as developed countries.
Environment:
Reduced oil prices attracts greater demand which leads to a decline in the demand of less polluting energy sources like nuclear and renewable energy due to a significant difference in costs. This may lead to an increase in emission of greenhouse gases.
International Relations:
Low oil prices complicate Iraq's military campaign against ISIS. In terms of Iraq's challenging effort to turn back IS, less cash impedes Baghdad's ability to buy military equipment, pay its security forces, and rebuild cities that have been wrested from IS fighters.
Oil is one of the main sources of revenue for the extremist group, by producing and smuggling Syrian and Iraqi oil. Lower oil prices will yield lower cash to these extremist groups, which will yield to increase in smuggling of narcotics and human trafficking.
Crude oil being an essential commodity, fluctuation in its prices will impact the global economy- positively and negatively. Exporters need to export to keep their economy going while importers need the crude oil being an essential commodity to them. It is impossible to predict till what level crude oil will fall and when will it bounce back, it is certainly helping the global economy to shift the money which is saved due to fallen oil price to better resources like healthcare, education, defence and infrastructure building which will put global recovery on a faster track.
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Chinmay Madgulkar is an Electronics & Telecommunication engineer from the University of Pune. He has completed his MBA in Finance from Xavier Institute of Management & Research and is a Management Trainee - Equity at Taurus Mutual Fund. He is also a Mutual Fund advisor.
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