THE KEY CONCEPTS IN ECONOMICS.
The article discusses the economics behind the recent shocking slump in Oil prices in the U.S and worldwide. Investments have been mentioned on the industry that used to record massive profits in the past few years as investments enabled massive production and exploration activities. Supply and demand forces have been heavily attributed to the impacts that currently affect the oil industry. Market equilibrium has fluctuated over recent times with economic experts attributing this to the increase of production markets of oil. As indicated Investments have formed a major basis as to the reason for the rapid changes in the market. Job cuts are also some of the issues arising due to the changes occasioned in the market. The cost of production has fallen with a combined hold of $380billion worldwide that had been earmarked for production activities as stated by Krauss, (2016). The aforementioned are some of the key issues mentioned in the article that have affected the U.S economy from the article.
Supply has been a major driver of the falling oil prices as indicated by Yang et.al (2002). Prices have lowered due to increased supply of oil as demand has slightly reduced or remained stagnant. Doubling of supply of oil products in the United States over a short period of time has been attributed to the malaise of the industry. As prices skyrocketed between 2007-2008 and 2009-2011 exploration of efforts by the USA led to increased oil supply thus stabilising prices between 2013 and 2014 according to Krauss, (2016). Consequentially world producers in the oil industry have increased the rate of oil exploration. The increase in oil reserves in the USA has led to the proliferation of oil imports into other markets. Price drops have been necessitated as exporters compete for markets in Asia with Nigeria, Saudi Arabia and Algeria all converging in one market as they formerly exported to the USA according to Krauss (2016). Undeterred by the economic slump in value for oil countries such Canada, Russia, Iraq continue with their drilling efforts.
Determinants of supply that have resulted in the change of oil prices include: - the price of raw materials i.e. crude oil, which has significantly dropped. Increase in number of product sellers as discussed earlier is also a determinant that has caused a change in number of sellers. Technology has played an important role in the increase of supply for oil with technological advancement leading to more oil exploration through the use of shale exploration techniques. As indicated by Yang et.al (2002) Dynamics of supply that affect the market equilibrium of oil have resulted in changes in the price of oil. Equilibrium price is affected through changes in demand and supply. Demand of oil has not changed especially with renewed efforts to increase more energy efficient cars thus an unresponsive change in the demand curve as the curve remains constant. However the shift in supply patterns in the oil industries with increased influx has led to a downward shift in the supply curve. The shift in the supply curve with constant demand has led to the setting of a new price equilibrium at a lower price currently witnessed in the market.
The impact of oil on the U.S have a direct relationship on the currency of the United States as the economies are dependent on energy and oil prices. As currency outflows increase in the U.S the currency gets weaker but since the U.S is a big importer of oil, purchases have resulted in reduced cases of outflows. Currency traders have benefited massively from the changes in currency outflows and inflows as imports have been as high as 40% of foreign deficits.
The economic downturn of the economy has led to changes in the economy. There has been a large strain on the recovery of the use as this change in supply has led to massive job cuts. The oil industry indicates that a lot of jobs have been lost as prices drop to below $30 a year. The energy industry has witnessed the drop in employment opportunities by over 6.6% in the last year. Statistics indicate that there have been losses of more than 104,514 jobs in the last one year an increase from 4137 in the year 2014(FXCM, 2015). As more as six states have witnessed negative downturns in the oil sector. The states affected include Texas, Oklahoma and North Dakota as indicated by Krauss, (2016).
The transmission of oil in the USA coupled with the fall in oil prices has seen the agricultural industry experience a massive boost. Most agricultural products as close to 30% of all agricultural products are as a direct relation to energy inputs as this affects the cost of food according to FXCM, (2015). Other sectors that have directly benefited from the fall in prices include the aviation industry and the transportation sector. The country’s gross domestic product was affected by as much as 4% in 2014 while general trends indicate that a usual 10% increase in the prices of oil usually translates to an average of 1.4% drop in the Gross Domestic Product according to FXCM, (2015). Oil prices also directly affect inflation in the economy especially on bond yields. Inflation of oil driven prices is hugely affected by the forces of demand and supply.
References.
Krauss, C. (2016). Oil Prices: What’s Behind the Drop? Simple Economics. Nytimes.com. Retrieved 27 February 2016, from http://www.nytimes.com/interactive/2016/business/energy-environment/oil-prices.html?_r=0
FXCM, H. (2015). How Does The Price Of Oil Affect The U.S. Economy? - FXCM. FXCM Insights. Retrieved 27 February 2016, from https://fxcm/insights/how-does-the-price-of-oil-affect-the-u-s-economy/
Yang, C. W., Hwang, M. J., & Huang, B. N. (2002). An analysis of factors affecting price volatility of the US oil market. Energy Economics, 24(2), 107-119.
