Low Crude Oil Prices Impacts Very Negatively on World Economy

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Thesis: Low Crude Oil Prices Impacts Very Negatively on World Economy

Main Point: When oil prices fall the amount of finances being channeled towards “energy exploration, production and development,” drops by a significant margin. The decline in investment spending due to fall in crude oil prices in the United States is estimated at $ 1 trillion. This involves cancellation or deferral of arctic oil, deep water, shale projects, and tar sands together with additional investments in mature fields such as Sea Projects in the North that require huge investments in order to be economically viable (Nandha & Faff, 2008).

Main Point: Low crude oil prices make oil producing and exporting countries to be fiscally profligate, whereby using strong oil revenues in financing heavily subsidize domestic energy costs or other ambitious public spending projects or programs. Low crude oil prices forces these nations to curtail programs and increase or subsidies debts that negatively impacts on economic growth.

Main Point: Crude oil, after being refined is used as a source of energy for various sectors of the economy. When the prices of crude oil drops drastically, it means the country must adjust other sources of income in order to raise revenue. This would simply lead to high prices of foodstuffs and other basic commodities that the citizens require on a daily basis (Trostle, 2010).

Main Point: A rise in oil prices causes a significant increase in food and also the cost of making other manufactured goods. Thus, an increase in oil prices causes inflation. If oil prices drop, the economy experiences a deflation. Nations that experience deflation end up having problems with debt defaults since workers will find it more difficult to repay their loans if there is a downward drift in wages (He, Wang & Lai, 2010).

Reference

Nandha, M., & Faff, R. (2008). Does oil move equity prices? A global view. Energy Economics, 30(3), 986-997.

Trostle, R. (2010). Global Agricultural Supply and Demand: Factors Contributing to the Recent Increase in Food Commodity Prices (rev. DIANE Publishing.

He, Y., Wang, S., & Lai, K. K. (2010). Global economic activity and crude oil prices: A cointegration analysis. Energy Economics, 32(4), 868-876.