Oil Price and the Economy

Oil Price History
Similar to other goods’ prices, crude oil prices undergo major fluctuations during surfeit or dearth of crude oil. This particular product’s price cycle can span over many years, reacting to both demand variations and non- OPEC (Organization of the Petroleum Exporting Countries) and OPEC supply. Through most of the course of the last century, American petroleum rates were governed largely by price or manufacturing controls.  The period following the Second World War saw wellhead oil rates averaging 28.52 dollars for every barrel (when adjusted to $2010 for inflation). Without any price control in place, American oil rates would have ended up tracking the global average of approximately 30.54 dollars. In this very age, the median adjusted global and domestic crude oil rate stood at 20.53 dollars in 2010 rates. After adjustment for inflation, oil rates only surpassed 20.53 dollars a barrel half the time between 1947 and 2010 (Williams, 2011).
The tumultuous 155- year history of oil prices (Holodny, 2016)
Relation between Oil Price and US Dollar Price
Increase in dollar strength largely contributes to decreased oil rates. As the oil market traditionally operates in dollars, oil rates will most probably drop with increased dollar strength. Therefore, oil sector firms have been furnishing the present decade’s worst outcomes because of plummeting oil rates. Several factors are known to impact dollar strength; further, successively, dollar strength influences numerous economic elements as well, chiefly oil prices. Given the oil trade’s traditional currency is the dollar, increased dollar strength will compel a drop in product rates, especially oil. Increased dollar strength, accompanied by the slackening international economy, have proved to be among the causes for the currently witnessed oil price declines. With the majority of goods being traded in dollars internationally, dollar price shifts major repercussions. Decreased dollar strength is typically considered beneficial by crude oil producing firms while the opposite is typically regarded as detrimental (Donahue, 2016).
The Role of OPEC
The OPEC was instituted for two purposes: 1) uniting petroleum exporters; and 2) balancing and developing oil market consistency, for securing steady, successful, economic petroleum supply to clients, besides a reliable income with reasonable returns, to producing companies (How the Strengthening U.S. Dollar is Impacting Crude Oil Prices). This impacts the rates of crude oil, since OPEC can effectively lower or increase the worldwide manufacture of crude oil. In summer 2014, oil underwent a drastic drop to less than forty- five dollars a barrel, from roughly a hundred dollars a barrel, a phenomenon ascribed to soaring American oil manufacture, oil pouring in from OPEC countries, and the growth in demand proving insufficient when it came to absorbing the oil surge. Increased dollar strength is negatively correlated to oil rates but this doesn’t imply the absence of other factors. Indeed, 5 discrete factors governing crude oil rates have been discovered: slackening economic development, less- than- anticipated demand, geopolitical tension, increasing international supply, and OPEC sanctions. The above aspects, together with a strengthening American dollar may place appreciable downward force on oil rates (Donahue, 2016).
Oil Price Changes and Economic Impacts
Shifts in oil rates and volatility remain a well- debated subject in academic circles. An external shock may be described as a great unforeseen transformation in global economic circumstances, affecting a given country’s economy. These shocks manifest themselves in various forms (e.g., trade shifts, slackened growth of global export demands, increased interest rates stipulated in the global financial marketplace, etc.). A majority of economies are wary of oil shocks owing to the fact that unexpected price hikes end in global output drops. Oil shocks may also be described as a great increase in oil’s relative global price. In other words, it represents an internal crude oil supply curve modification activated by political occurrences external to the macro economy and oil marketplace (Nwanna & Eyedahi, 2016).
Variations in oil rates may prove significant in economic performance ascertainment. Kun Sek, Nee Wong, and Qi Teo (2015) compared the impacts such variations had on local inflation among high and low dependency clusters. Their research work aimed at scrutinizing the relative impact oil prices had on other kinds of shock (for instance, real exchange rates, manufacturing costs of exporters, and domestic yield). Shifts in oil rates were found to directly influence national inflation among low dependency countries, though indirectly among high dependency ones. Greater oil rates imply increased manufacturing expenses to exporters. Increased manufacturing expense subsequently passes through into the national- level prices, playing the part of an indirect factor in exacerbating domestic inflation. Considering other shocks’ relative impacts, this study’s outcomes revealed other shocks had greater impacts on national- level inflation as compared with oil rate shocks (Kun Sek, & Nee Wong, 2015).
Furthermore, Kun Sek and coworkers’ (2015) research outcomes revealed exporter manufacturing expenses and domestic output were the chief national inflation factors for low oil dependent nations while exporter manufacturing expenses and real exchange rates were the key factors in case of high oil dependent countries. Moreover, economic convergence rate towards equilibrium in the long term was swifter among high oil dependent nations as opposed to low dependency nations. To conclude, policymakers ought to focus on the impacts exporter manufacturing expenses, oil rates and real exchange rates have on national- level inflation, since these form the key factors influencing financial market and price stability. Several research scholars suggest fiscal policy might be a sound instrument in controlling such shocks’ impacts on national- level inflation.


References
Donahue, C. (2016). Oil Prices and a Stronger Dollar: Causation or Correlation? Merrimack Honors Program ScholarlyWorks.
Holodny, E. (2016, December 20). The tumultuous 155-year history of oil prices. Retrieved from Business Insider: http://www.businessinsider.in/TIMELINE-The-tumultuous-155-year-history-of-oil-prices/articleshow/56088176.cms
Kun Sek, S., Qi Teo, X., & Nee Wong, Y. (2015). A Comparative Study on the Effects of Oil Price Changes on Inflation. 4th World Conference on Business, Economics and Management, WCBEM (pp. 630 - 636). Malaysia: Procedia & El Sevier.
Nwanna, I., & Eyedahi, A. (2016). Impact of Crude Oil Price Volatility on Economic Growth. IOSR Journal of Business and Management (IOSR-JBM), 10 - 19.
Williams, J. (2011). Oil Price History and Analysis. Retrieved from WTRG: http://www.wtrg.com/prices.htm