Impact of fall in crude oil prices

1. The crude oil market
The impact of fall in crude oil price on global economy

2. PRESENTED BY
 Deepak Shinde 54
 Pooja Singh 59
 Shubham Singh 62
 Deepak Todke 65
 Shristhi Vaishnav 66
 Monish Vaity 67
 Tulsee Valacha 68

3. An overview
The crude oil market:
 In recent months the price of crude oil has fallen 50%. This fall in
the price of oil has a significant impact in reducing transport and
other business costs. Falling oil prices is good news for oil
importers, such as Western Europe, China, India and Japan;
however, it is bad news for oil exporters, such as Venezuela,
Kuwait, Iraq and Nigeria.

4. Spot price of Brent Crude, updated on January 23, 2015

5. Key reasons for drop in the crude oil prices
 Demand is low
 Iraq’s production outputs are touching record levels
 America has become the world’s largest oil producer
 The Saudis and their Gulf allies have decided not to sacrifice
their own market share to restore the price

6. Macro economic impact of falling oil
prices
 Lower inflation
 Higher output
This diagram shows that a fall in oil prices (and a fall in firms costs) will shift
Short Run Aggregate Supply (SRAS) to the right, causing lower inflation and
higher real GDP. (Some economists say a 10% fall in oil prices leads to a
0.1% increase in GDP)

7. Impact on World Economy
 The world economy was set on a rollercoaster and almost
came to a point of collapse.
 The current situation though is a bit different from the 1973
one, yet the impact can be said to be similar- challenging the
US might and sending a tremor in the world economy.
 Reduced profitability for alternative energy sources. Part of
the fall in oil prices is due to OPEC countries like Saudi Arabia
wanting to protect their oil markets and not lose market share
to ‘fracking’ and other energy sources.
 Falling oil prices could delay investment into alternative
‘greener’ forms of energy, such as electric cars.
 Falling oil prices could reverse the recent decline in car use,
leading to a steady increase in traffic congestion and
environmental costs of petrol use.

8. Impact on share market
 As the oil price decline has continued, investors have
increasingly seen it as a bad omen for the global economy.
 The drop may point to lower demand for oil and lower
economic activity.
 And the decline suggests that policymakers have not managed
to deal with the threat of deflation, or falling prices.
 Though the market is influenced by numerous factors, in
isolation, the impact of oil price decline will have a positive
impact in the short run but will turn bearish if the prices keep on
declining.

9. Impact on Industries
 Industries such as
petrochemical and
fertilizers, which use crude
oil or its derivatives as
feedstock will inevitably
benefit from the declining
oil prices. On the
contrary, it will prove
detrimental to industries—
biofuels, alternative
energy, etc.—that usually
benefit from high crude
oil prices.

10. Impact on oil consumers
 Lower oil prices help to reduce the cost of living.
 Oil related transport costs will directly fall, leading to lower
cost of living and a lower inflation rate.
 Falling oil prices is one reason behind the recent fall in UK
inflation to 1.2%.
 With stagnant real wages, this fall in the cost of living is
important for giving Western consumers more discretionary
income (more income to spend).
 A fall in oil prices is effectively like a free tax cut.
 In theory, the fall in oil prices could lead to higher spending
on other goods and services and add to real GDP.

11. Thank You!