What Are the Effects of Oil Price Reduction to People Across the World?

The market price of oil has decreased by more than 20% over the recent months. By the beginning of September 2014, the cost of fuel had reduced to $94 per barrel. Decrease in fuel prices has two possible explanations: the supply of oil is too high, or the demand for oil is too low. Lower demand for oil can be caused by the invention of other sources of energy. Weak demand can also be supported by flat oil consumption in the United States, slower economic growth in China, and stagnant economies in Europe (Committe, 2008). It is estimated that the world demand for gasoline will grow only by 15% in the year 2014.

“The fall in oil price has a significant impact on reducing transportation cost and other business costs” (Committe, 2008). The falling of crude oil prices is welcomed by the oil importing nations, such as China, Japan, Western Europe, and some parts of Africa. On the other hand, it is a bad news for the crude oil exporters, such as the United Arab Emirates, Nigeria, Kuwait, and Venezuela just to mention a few.

 

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The paper will discuss the impact of the low oil prices on people. Lower oil prices have both negative and positive influence on the nations. Lower gasoline prices will reduce the cost of living to those people living in the oil importing countries. Production cost will reduce leading to the lower inflation rate. A good example of a country, where lower oil prices have a great impact on inflation, is Ukraine. The inflation rate in Ukraine has reduced to 1.2%. Hence, people living in this country have a higher purchasing power. As a result, the quantity of goods and services that are purchased by these people is expected to increase.

Lower oil prices have two macro-economic impacts on the oil importing countries, which are higher output and lower inflation. People will tend to invest more, because of the lower inflation. Lower inflation means that people have extra income to invest into the different projects (World Bank, 2009). Investment increases the overall output of the country.

Lower inflation is the second macro-economic effect of the low oil prices on the oil importing nations. Prices of goods and services are expected to go down due to the lower production costs. The countries that import oil mostly use it in transporting of the raw materials and finished goods to the consumers. Therefore, oil has a greater impact on the total cost of production. In some instances, oil contributes to more than 40% of the cost of production. Therefore, as the oil prices decrease, the production costs will decrease as well. Low production costs mean cheaper goods for people. Consumer will, therefore, enjoy the final product at a lower price.

Oil importers will also have a favorable balance of payments. The benefits will be from the decreasing oil costs that make their imports lower. A good example of such a trend is India, where 75 % of the imports is crude oil. Therefore, they will lower their current account deficit. Lower cost of imports means that there will be more money to invest to the different sectors in the country. The money can be used in order to improve infrastructure, education, and health facilities just to mention a few. Therefore, the standard of living of people will improve as well.

On the other hand, for the oil exporters the fall in price of oil has a negative impact in their balance of payments. The export income will reduce; thus, causing lower trading surplus in their country (World Bank, 2009). For those people, who are living in the countries that export oil, the fall in the oil prices is not favorable for the economy. These countries rely on the revenue collected from the oil production in order to fund their government expenditures. Most of them get more than 50% of the revenue collected from gas and oil production. Lower prices of oil will lead to the budget deficit. Therefore, the government may impose higher taxes or cut its spending to people.

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Lower government expenditures and higher taxes mean that the amount of money that is available to people will reduce (Nadine Pahl, 2013). This, in turn, will lower their level of expenditures. Lower expenditures mean that the quantity of goods and services that they purchase will decrease. In addition, low income means that people will save less money in banks and other financial institutions. Lower savings result to lower investment. If the rate of investment reduces in a country, there will be lower production; hence, lower outputs. Lower outputs mean that the goods that are available to people are not enough. As a result, the demand for these goods will increase causing inflation. Therefore, people from the oil exporting nations will buy less at a higher price. That is why lower oil price is not good news to those people, who are living in the oil exporting countries.

Usually, decrease in oil prices is welcomed by those people, who are living in the oil importing countries. “Nevertheless, many people are living in fear about the prospects of global and European economy”. The reason is that the decrease in oil prices is the reflection of the weak world demand. Weak economy means that the world economy is experiencing low growth.

To sum it all up, low oil prices have both negative and positive impacts on people. Those people, who are living in the oil importing countries, will benefit, because the cost of goods and services will decrease due to the lower production costs. Therefore, they may end up making savings, buying more goods, and so on just to mention a few. On the other hand, low oil price to the people living in the oil exporting countries is not good news. The government may impose higher taxes in order to collect enough money to cater for its expenditures. Hence, they will have low disposable income that may reduce their spending habit. For those people, who are living in the countries that do not import or export oil, less or nothing will change. Their spending habit may likely be the same during this period. Their production may also slightly increase or remain on the same level.