Introduction
The Petrochemical industry in the ministry of energy has been focusing on the oil prices change and how it influences the economy. The oil demand comes from the petrochemical industry whereby energy generation helps in manufacturing and production industries. These industries help in economic transformation through improving country’s GDP. As the source of energy, oil in the petrochemical industry has been influenced by inflation and unemployment, interest rates and exchange rate. These factors influence the government spending, hence affecting the importation of oil from the producing countries such as Saudi Arabia. The oil prices as a result of inflation and unemployment influence GDP negatively as the oil revenue declines. This slows the rate at which money and credit growth are slowing; decline the government spending and deficit in the balance of payment. The major consideration is how inflation and unemployment narrow surplus due to decline in real GDP. The industrial sector depending on the oil related energy and petrochemical industries such as transportation experiences low returns due to oil prices increase. Therefore, the study seeks to focus on the macroeconomic theory mainly on the inflation and unemployment and relating their influence in the Saudi Arabia oil production. Furthermore, this will relate to the global market perspective whereby Saudi Arabia as the main oil producer would also influence the global oil pricing.
Economic Analysis: Inflation and Unemployment macroeconomic factors
The impact of inflation and unemployment would influence the government budgeting, especially in the ministry of energy and other related sectors, depending on oil products such as transportation. Increased oil prices affect the government spending indirectly, whereby the budgeting focuses on essential sector that supports GDP growth. The government tends to focus on other avenue to generate revenues to compensate on the spending. If the economy was operating at a full capacity, the oil prices impacts would be realized but a minimal margin. The inflation effect would have impacts in the unemployment, wage rising and hence the influencing the full economy.
The oil prices affect the real GDP whereby the inflation causes recessions and hence influencing unemployment rate. Both downward of Philips curves and upward sloping aggregate supply curve slopes are equal in the short run, hence analyzing the oil industrial cycle changes (Grant, 2010 p.271 ). In general, aggregate demand increases the price level, and real GDP tend to have unexpected rise. In increasing real GDP, the lower unemployment rate and unexpected higher price level translate to higher inflation level in the economy. Therefore, short-run Philips curve gives a clear indication of how unemployment rate relates to the inflation.
Figure 1: Philips Curve. Copyright 2006 by Hubbard and O'Brien
As in figure 1, inflation and unemployment rates relationship.
Philips curve proves the relationship that exists between the inflation and unemployment factors in the macroeconomic model. The long run shows the relationship is expressed under the condition of actual inflation being equivalent to the expected inflation. It is in the long run, where both higher or lower inflation rate do not pose any effect on the rate of unemployment (Baumol & Blinder, 2009 p. 182). Relating to the aggregate demand and aggregate supply economic model, in the long run, the changes experienced in the price level has no impact on the GDP and hence having full employment in the economy.
Figure 2: Aggregate demand and supply shifts. Copyright 2009 by Baumol and Blinder
As in figure 2, the shifts in aggregate demand and aggregate supply and impact in the price level and real GDP in the economy.
The increase in the natural unemployment rate for both short run and long run Philips curves tend to shift rightward to an estimated increase to the natural unemployment rate (Hubbard & O'Brien, 2006 p. 334). The decrease in the natural unemployment rate leads to a leftward shift of both short run and long run Philips curve with the same magnitude.
The theory of Philips curves changes can be related to the economic condition whereby the expected inflation and natural unemployment rates dictates inflation level. The short-run Philips curve shifts have been experienced over time and hence providing a great relationship between the unemployment and inflation levels.
Causes of inflation
There are different approaches under the macroeconomic schools of thought regarding the factors contributing to inflation. The major theory categories that cause inflation are the quantity and quality. The quality theory focuses on the expectation of the buyer whereby they accept currency and exchange it for quantifiable and desirable goods on a later date. The quantity theory of inflation is developed by money supply, the velocity and the exchange rate (Baumol & Blinder, 2009 p. 281). Therefore, values of the money production are well explained depending on how they relate to quantity and quality inflation perspectives.
The Keynesian theory indicates money provides the real forces that are experienced through pressuring the economy through pricing. The types of inflation include;
Demand-pull inflation: this inflation is contributed to the high demand of products and services and low unemployment rate.
Cost-push inflation: the sudden decrease of the product would contribute price increase. The decrease in the oil supply tends to increase the oil prices whereby the producers and distributors of oil pass or push the costs to the end consumers (Hubbard & O'Brien, 2006 p.206).
Built-in inflation; the price-wage spiral or relationship tends to introduce adaptive expectation. The workers try to stay in their wage up with the level of prices; the employer induces the high costs to the consumers as explained in a vicious circle. Inflation is realized in the past events hence built-in inflation.
The demand-pull theory focused on the money supply and connected to inflation through the increased money demand in the economy. The increase in money quantity in the circulation through excessive money printing affects the ability of the economy to supply its potential production. This is known as hyperinflation as the prices tend to rise extremely higher. Another approach to the inflation is observed when there is a rapid decline in money demand in the economy.
Problems associated with inflation
If the economy experiences high inflation, it experiences three core problems. These problems are;
Economy experiences high prices and hence people earning fixed income will be worse off. They will shift from purchasing products they used and reduced in their spending (Hubbard & O'Brien, 2006 p. 211). Therefore, their purchasing power of their earning or income will reduce automatically in order to fit in the new economic standard after inflation.
Trade union demanding higher wages as rising inflation causes wage spiral. This may lead to economic unrest as important industries in the economy such as oil refineries workers may strike and hence leading to decreased productivity. The key sector that contributes to the economy wellbeing of the country may face challenges offering high competitive wages (Baumol & Blinder, 2009 p. 207). In a comparative advantage sector in the country, the economy would suffer from the unrest and hence affect the country’s economy to a greater extent.
If the inflation tends to be relatively higher in one country, the exported products will tend to be more expensive in the importing country. This creates a deficit on the current accounts of the importing countries as it tries to standardize the prices and production costs. In oil producing countries experience inflation the cost of production is passed to other countries importing oil. Therefore, it causes a chain of inflation over different countries that depend on oil as a source of energy.
Organization Impact: Petrochemical Industry and Oil in Saudi Arabia
Lower oil prices have an impact in the petrochemical industry by directly affecting the Saudi Arabian government in budgeting on spending. The economy gets into recession as the rate of production is low and cost of production would be higher. The international market enjoys a comparative advantage over the Saudi Arabia petrochemical industry, especially the time of low oil prices. The international market obtains oil at relatively lower prices from Saudi Arabia and hence having more oil importation comparing during high oil prices. The real GDP would affect negatively as the revenue obtained from the petrochemical industry reduces as the oil prices lower.
The oil price is the key factor influencing Saudi Arabia government spending real GDP and hence the through cutting off the budget. The low oil prices cause a reduction in the government spending as oil revenue in Saudi Arabia contributes about 90% of the central government fiscal revenue. Furthermore, it covers about 40% of the overall GDP in the country over depends on the oil production as their exports. The revenue helps in correlating with other sectors, which are non-oil in order to support the government spending. Therefore, the oil sector is the key factor in influencing the economy of Saudi Arabia. The oil price is faced by uncertainties and hence considered as a major challenge facing the country (Abusaaq, Alfi, & Algahtani, 2015).
The government spending would be expected to change according to the oil prices and the rate at which oil in being exported. High oil prices would increase the government revenue and hence contributing largely in the budget allocation. This would support development projects and hence will shift the demand curve from AD1 to AD2 rightward and the equilibrium will shift from (P1, Y0) to (P2, Y2) intersection with AS1 as show in figure 2. This will improve the Saudi Arabian real GDP to pass the potential GDP and cause the inflation situation in the short run. As the market has reached its full employment capacity, the high demand will cause the wage to increase and as the result, the short-run aggregate supply curve will shift leftward from AS1 to AS2 curve. The market will come to new equilibrium at AD2 and AS2 intersection at point (P3, Y0) setting the market back to its potential GDP where the LRAS line intersects with the real GDP. However, low oil prices would cut off the state spending leading to decline in the real GDP growth to cause a rescissions or stagflation. The oil prices are determinant of the country performance, and hence directly affected sectors and industries such as transportation and petrochemical industries would be affected. This translates to the unemployment rate, whereby the wages would decline or even reducing the number o workforce. Reuters (2015) has reported that Saudi construction firms have started laying off their employees as a measure to counter government slashing spending on projects in “an effort to curb a budget deficit that totaled nearly $100 billion last year."
In sharp reduction of oil production, the global demand would increase leading to prices increase. The OPEC members considered pushing on the alternative approaches to ensuring the current account balances with other fiscal macroeconomic factors such as employment, production and inflation among others (Taher & Hajjar, 2014 p. 41). The countries that do not produce oil, their economy showed gradual development and GDP growth. This continued until the global financial crisis whereby the exports and fiscal revenues reduced.
The increased oil production might be caused by improvement in demand and high-energy requirement in the developing countries. Saudi Arabia increased in its production and hence higher revenue (Taher & Hajjar, 2014 p. 165). This supported GDP growth and improved in the government spending. The higher demand for oil globally contributed to increased oil prices in the producing countries. This translated to a free market whereby the aggregate demand was equivalent to aggregate supply. In the case of the imbalance in the demand and supply, the oil prices change depending on the forces of the market.
Inflation impacts on oil in Saudi Arabia
Unemployment and inflation have a direct impact on petrochemical industry production and hence influencing the economic growth. The economic growth would be across the import and export chain, whereby the countries are importing and exporting would be affected by inflation. High inflation reduces the purchasing power and hence reducing the quantity of the purchased products. Therefore, inflation chain would have an impact or shock in the free market as the forces of demand and supply would be influenced negatively causing imbalance. The Saudi Arabia real GDP falls as a result of a drop in oil prices does not have a direct impact on the inflation as the domestic oil and energy prices are fixed. The rate of inflation is low as common demand, and supply is regulated by the fixed domestic energy prices.
Conclusion
The low oil prices affect the petrochemical industry as the issues such as unemployment, wage rate, and inflation are experienced in the economy. The impacts are direct to the government spending, interest rates, and exchange rate. The Saudi Arabian government experiences unstable balance of payment as oil exportation would be highly affected by aggregate demand in international market and aggregate supply. The impact of low oil prices changes to the Saudi Arabian economy is subjected to the inflation and unemployment rate. This does not only affect the government spending but also all the sectors and industries using oil as the source of energy. The exchange rates and the wages are some of the factors that are adversely affected in the inflation and unemployment rate and hence impacts in the real GDP. The Short Run Philips Curve expresses the inflation and employment as the results from the imbalance of prices and wages in the economy. The major impacts of the oil price and employment wage are well formulated through inflation approach. The output impact in Saudi Arabia in terms of oil production helps in assessing the economic development through the GDP analysis. The sharp oil prices increase in the importing country focuses on the demand of oil being experienced and supply shorted as a result of low production. The price inflation affects production, exchange rate, and consumption. The global oil prices depend on with the production that is aggregate supply and consumers indicating aggregate demand. Therefore, the imbalance in the importation and exportation influences greatly on the chain of inflation from one country to another.
If Saudi Arabia being the largest oil producing country increases the oil prices, the developing countries would incur high cost in oil importation as an impact of inflation. This would affect the developing countries economic development as they would focus on increasing their oil purchasing budget. Furthermore, the high cost incurred would be directed to the final consumers. This would affect the economic development, as a consumer would either reduce in oil utilization to cut down their expenditure or seeking alternative sources of energy.
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References
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