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How Decreasing Oil Prices Affecting Global Economy

Reasons Behind the Decreasing Price of Oil:

It is the first half of the twenty-twenties (2020) and the whole world is trying to survive physically and financially. We are fighting the corona virus on the global front with 197 countries around the world, including China, Italy, France and the US, as well as the oil fight between oil producing countries. We have seen oil prices decline. We can say that this is partly due to the corona virus situation. Oil importing countries, including China, are busy dealing with corona virus infected patients. The virus has affected their economy to a great extent so one reason for the decline in oil prices is the low demand for oil worldwide. Now we come to the main problem. The war between Russia and Saudi Arabia and its effects on the global economy. Russia and Saudi Arabia are the world’s biggest oil producers making the bet that they are better placed and more to bear the brunt of the crude oil war. The price of oil is an important determinant of global economic activity. The rise in oil prices leads to the transfer of foreign income through foreign exchange.

Read also: Oil War Between Russia and Saudi Arabia and Economy of the World

OPEC and Non-OPEC countries Agreement to Control Oil Prices Globally:

Actually What is the History behind this scene? Riyadh and Moscow in December 2016 signed an agreement called the Vienna Agreement between OPEC and Non-OPEC countries. There are 15 countries and the main purpose of this company is to fix oil production and prices globally. At that time it was only a 6-month contract, but due to its positive results, the deal was extended several times, not once. Then it became OPEC +, a Permanent Forum. Members of the union signed its own charter in July 2019. The main purpose of their members is to coordinate with each other and manage oil production and pricing policies. Examining these results in December 2019, it extended to 2020 (April) and aims to continue into 2020 and later. Unfortunately, latter a dispute arose between Saudi Arabia and Russia. In view of the whole scenario (the fall in oil prices), the Saudi Arabian proposed an idea that oil producing countries should cut their oil production so that prices can stabilize. There are 2 reasons. On one hand Russia wanted to defame the American oil industry (shale) on the global front, and on other hand Russia seemed unsuitable for its economy. Russia has tried to destroy the American economy, but in response to this refusal, Saudi Arabia has started producing more and more oil and has filled the market with crude oil. This led to a 30% great drop in the price of oil globally, comparable to the 1991 Gulf-War. Both countries Saudi Arabia and Russia are in pain but have not addressed the major problem. And its impact can be seen worldwide.

Decreasing Oil Prices and US President Donald Trump:

Trump is also under pressure as the conflict has a negative impact on emerging economies, including the US. This situation will also help him in the upcoming November elections. Decreasing Oil price would also reduce the price of gas. Gas is very important in the American economy. There is a great chance of his selection .Trump, on the other hand, wants to be part of this war .In a press conference on Thursday, Trump said, “until we become a leading producer, I was the driver of a car filling a petrol tank … if (prices) were too high, I was always raising hell with OPEC”.   On Friday, officials suggested that it was better not to be a part of the war. One must try to solve this problem because oil is of common importance to all these countries. “Our relations with Saudi Arabia are good and no one should interfere,” said Dmitry Peskov at the conference.

Frank Maciernia said, “This is a very difficult time for us and we provide to the (free market) capitalist  world and the leader of the OPEC group of oil-exporting countries, they are proposing to cut production. A drop in global oil prices. Due to the global outbreak, the oil markets are up Suffer from alum. Meetings in Vienna last week, with OPEC (countries) Russia was also invited but as an oil  producing country not as an OPEC member. Leaders of OPEC group of oil-exporting countries purposed they cut the production in order to deal with global falls of oil prices. Something that Damaging their state revenue. Russia hope to see Rival US shale oil producer come under financial pressure. As a response Saudi Arabia reduced costs and increased their own oil production. It seems that  fall in oil price will put pressure on the Russian economy. It also has impacts on the Saudi economy, but Riyadh seems to be counting on them to be able to deal with these effects compared to Russia. Now some analysts say the price of oil could go as low as $ 20 per barrel.

Read also: Worldwide Corona Updates

Benefits of cheap oil:

The fall in oil prices appears to be greater in the redistribution of revenue, from retailers to consumers.

The fall in oil prices means they have more to spend on other goods and services. It also reduces the cost of the business that uses oil products, refers to the shipping and petrochemical industry (plastic, fertilizers, synthetic fibers) and much more using the crude materials found in refined oil.

  • Low prices help farmers like the Eurozone. Two years ago before the fall in oil price there was contraction in regional economy but from last year it is expending and same is the condition this year.
  • Pakistan has now had the opportunity to establish a separate savings account for the construction of oil storagein the country. These reservations can be used in emergencies. Pakistan should achieve maximum profitability in these cases by following other countries like the US and India. Experts say that the current government should take immediate action in this regard for maximum benefit.
  • Lower oil prices will reduce travel costs and will increase the profitability especially for farmers who will easily move their goods.
  • It will also help to reduce inflation. It will help developing countries import more oil to boost their economy. There is a combined effect of low price. More energy consumption and lower cost of business help us to grow GDP.
  • Oil price fluctuations will be moved by Shift-SRAS to the right.This will boost double profits, lower prices and greater placement.
  • fiscal policy;with cheap oil, central banks can boost trade. Low oil prices help to reduce inflation, interest rates on central banks will be lower without the risk of higher oil prices.
  • There are many other countries that are good oil importers. For China, the decline is the same as the rate of economic growth but this economic decline is due to the effects of the coronavirus outbreak.
  • At present Japan is almost entirely dependent on imported oil.

Read also: Oil war Between the Russia and Saudi Arabia

Downsides of cheap oil:

The cheapest oil price seems right for the public at first. We can save dollars and can act as a contributor to the economy and make exchanges cheaper to stimulate the economy. But there are also things that fall back on.

  • Economic model reforms; we have entered a period of low oil prices which is ongoing for the first time. There is a growing mistrust of oil. Low growth, high unemployment, inflation. Not surprisingly, changes in oil prices have been viewed as an important source of economic fluctuations.
  • If lower oil prices are expected to last longer, the economy will be severely affected then if inflation is expected to be temporary as companies and consumers react strongly to the lowest price.
  • The decline in oil prices will have a significant impact on inflation in countries where oil production comes from a large part of the CPI basket.
  • When inflation is below the target, the central bank’s tolerance for other negative impacts may be low.

Read also:

Taxation and Paying Capacity of People

Conclusion:

short, oil producers such as Venezuela and Russia will face economic pressure and tax will be high.The reality is that oil price fluctuations can be useful in normal economic conditions. But because the global economy is already weak, oil prices are threatening further. Western buyers benefit from lower oil prices (a reduction in gasoline prices is lower than a drop in oil prices). However there is a risk that the global economy may be wiped out by savings companies, the loss of banks and the collapse of global confidence.

Written by: Sana Tariq, itzsanatariq@gmail.com

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