Impact of Changing Oil Prices on Demand and Supply: Managerial Economics

This report analyzes the impact of changing oil prices on demand and supply in the oil industry. It discusses the effects of higher oil prices on fiscal deficit, rupee, and current account deficit. It also explains the factors that can shift the world demand for oil and the factors that affect the supply of crude oil. The report suggests plausible factors that could have an impact on the demand and supply of oil in the near term. It shows how the identified effects had an impact on demand for or supply of oil.

MANAGEMENT
ECONOMICS- 2

Table of Contents
INTRODUCTION...........................................................................................................................1
CONCLUSION ...............................................................................................................................1
REFERENCES................................................................................................................................1

INTRODUCTION
With the changing time the prices of oil has also been considered very important as the
are rising day by day and in this respective report there is the descriptive analysis of
change in oil prices over different phases of time. The price of crude oil is generally
called the spot price of barrel and the price of oil is identified by the international
demand instead of any country's domestic productivity stage. The planetary price of
crude oil was the same in the nineteenth century and early twentieth century and the
prices were hanged in 1970s with slight rise in the cost of oil internationally. There have
been some of the drivers of the variations in the prices involving the oil supply, demand
and storage shocks. It came to the urgent notice that due to immediate high prices of oil
is making people feel insecure about their other expenses as they are dealing with the
high charges(Carrillo Arciniega, 2021).
Effects of higher oil prices
It is essential to consider all the impacts of the high prices of the oil in the oil industry
and some of the major impacts are as follows:
 Higher prices have adverse effect on fiscal deficit: India imports 1.5 billion barrels of
crude oil per year. This amounts to over 86 percent of the country's annual crude oil
needs. As a result, rising crude oil prices may increase India's spending, reducing the
country's fiscal deficit (the difference between total revenue and total spending). The
amount of money borrowed by the government to cover its expenses is known as the
fiscal deficit. An increase in the fiscal deficit could be harmful to the economy and
financial markets.
 Impact on rupee: The rise in crude oil prices has visibly impacted the Indian rupee. On
May 24, 2018, the rupee was valued at 68.34 against the US dollar. The rupee is
approaching an 18-month low, according to a Livemint story, and is only 0.6 percent
away from its all-time low of 68.825. In addition, if crude oil prices remain high, the
rupee is expected to fall even further by the end of the year. The rupee's devaluation has
an impact on the Indian economy and even the stock market.
 Impact on current account deficit: India's dependency on crude oil imports has only
increased in recent years. From 77.3 percent in FY2014 to 83.7 percent in FY2018, the
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percentage of persons who are reliant has increased. Increases in crude oil prices have a
considerable impact on India's current account deficit (CAD). The value of imported
products and services surpasses the value of exported goods and services, as measured by
the CAD(Cotter, 2021).
Explanation of four factors which can shift the world demand for oil, indicating clearly the
direction of the shift
There are some of the factors which are responsible for the change in demand and they are as
follows:
 Price: It is important that price is determined so that the consumers can decide whether
they need to avail that service or not. It means that the demand and the price have inverse
relationship with each other, as when prices are high demand is low and when price is
low the demand is high.
 Income: It is important that the income is justified of a consumer so that he can analyse
where he is in a situation to buy the product or not. It is simply means that when the
income of the customer will be high, he will be more inclined to buy the crude oil and
when his income will be low then he will be not in a situation where he can't buy crude
oil.
 Price of related goods: It is clear that there are some of the things that are related with
each other and the related good of crude oil is gasoline. And when the price of gasoline
will increase automatically the price of crude oil and when the price of gasoline will
decrease then the price of crude oil will also fall(Kalyanara and et. al., 2022).
Some of the factors that affect the supply of the crude oil is follows:
There are some of the factors that are influencing the price of crude oil and they are as follows:
 Oil is the most valuable commodity on the planet, with applications ranging from plastics to
asphalt to fuel. The oil industry is a major economic force, and variations in oil prices are
closely monitored by governments, firms, investors, and traders alike.
 Oil is a finite and rapidly depleting fossil resource, and it has been a constant source of
concern for more than 50 years. During the first decade of the twenty-first century, a rising
number of experts expected a near-term peak in global conventional oil production, followed
by a terminal decline—so-called "peak oil." Alternative energy sources were anticipated to
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be unable to 'fill the gap' at an acceptable cost within the time frame required, causing major
and long-term disruption to the global economy(Obłój and et. al., 2022).
 The significant rise in demand in developing countries is being driven by high rates of
population and economic growth, as well as growing urbanisation and an expanding middle
class.
Carry out research on actual economic developments which have led to the observed change in
price during the specified period.
Some of the impacts hat are there on the demand due to the crude oil prices and they are
discussed below:
 An oil crisis is defined as a sharp spike in the price of oil that is typically accompanied by a
decline in supply. An oil crisis might imperil global economic and political stability because
oil is the principal source of energy for industrialised industrial economies. In the post-
World War II period, there were two major oil crises. The first was in 1973, when OPEC
(Organization of Petroleum Exporting Countries) Arab members voted to quadruple oil
prices to roughly $12 per barrel (see Arab oil embargo). Exports of oil to the United States,
Japan, and Western Europe, which consume more than half of the world's energy, were also
halted.
Suggest plausible factors which could have an impact on the demand and supply of oil in the
near term.
It may be claimed that the economic element is straightforward. In theory and practise, a
constant rise in per capita income, as usually measured, is unquestionably an anchor. It's odd to
consider falling per capita income as a sign of development. Increased per capita income is
important, but it is far from sufficient for development, let alone economic success. The
distribution of this additional money throughout the population is a proper issue of economic
development. Inequality and poverty are two of the most important aspects of income
distribution. If average income rises but income disparity rises, an egalitarian view of economic
progress would regard the latter to be a negative factor(Salehi and Alkhyyoon, 2021). When
poverty, defined as a population with an income below a socially acceptable level, rises at the
same time as average income, this is another another negative mark against rising average
income when evaluating economic development. In the end, the mix of average income and
inequality, as well as which of the two forces empirically dominates, will decide the actual
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impact on poverty. Individual inequality isn't the only factor that influences distribution. Another
major factor is inequity between clearly defined groups. Gender disparity stifles economic
progress by limiting the potential of half of the population. As a result, improvements in gender
inequality indicators should be pursued not only for their own sake, but also for the contributions
they make to economic growth and inequality reduction. Inequalities between ethnic and
regional groups, however, exacerbate social tensions and, as a result, impact the atmosphere for
investment and, as a result, economic growth. It's tough to tell the difference between these
supposedly non-economic features and the strictly economic ones. As a result, economic
development is also about development in general. A tight focus on measured market revenue
overlooks the usage of resources that are undervalued in the market. The environment is the most
significant of these, especially in light of greenhouse gas emissions and climate change. In the
case of climate change, rising national wealth does not account for the loss of irreplaceable
environmental resources at the national level, nor for irreversible moves toward catastrophic
dangers for the world we live on(Salehi, Arianpoor and Naghshbandi, 2021).
Show how the identified effects had an impact on demand for or supply of oil.
The current jump in oil prices has been attributed to rising demand for commodities by
emerging nations, mainly China and India, but also the Middle East and Latin America. While
commodities prices have been trending upward for a long time,reflects increasing demand, short-
term price rises are frequently driven by supply changes.The macroeconomic consequences of a
demand-driven oil price shock differ significantly from those of an oil supply disruption. Almost
all of the nations in our sample experience long-run inflationary pressures and a short-run boost
in real output after an oil demand shock. Given that the oil price surge is thought to be generated
endogenously by a shift in global economic activity, this conclusion is unsurprising. Output
might rise as a result of the country's own growth or as a result of commerce with the rest of the
globe. Our findings suggest that the underlying cause of the oil price shock is critical in
predicting its macroeconomic impact on oil-importing countries and major commodity exporters.
When assessing the macroeconomic impacts of a supply-driven oil price shock, the distinction
between a net energy importer and a net oil exporter is particularly crucial. While a supply-
driven increase in oil prices frequently leads to a long-term decline in economic activity for oil
importers, it has a positive impact on energy-exporting countries with large proven oil/gas
reserves. Cross-country discrepancies in the global crude oil market's demand, on the other hand,
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are non-existent. In response to a disruption in oil demand, almost every country in our sample
sees a short-term increase in actual output.
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CONCLUSION
In this respective report it has been concluded that with the changes in the price of the
crude oil the demand among the people changes and these variations are due to the high prices of
the crude oil that is very important to be considered by the people who are there to demand the
crude oil.
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REFERENCES
Books and Journals
Carrillo Arciniega, L., 2021. Selling diversity to white men: How disentangling economics from
morality is a racial and gendered performance. Organization, 28(2), pp.228-246.
Cotter, T.S., 2021 Engineering Managerial Economic Decision and Risk Analysis.
Kalyanaram, G. and et. al., 2022. Behavioral response to online pricing: empirical and
managerial insights. Journal of Indian Business Research.
Obłój, K. and et. al., 2022, February. Taming discontinuity: evolution of managerial perceptions,
emotions and actions in the pandemic environment. Evidence from Poland.
In Challenges of Management in the COVID-19 Reality (pp. 91-106). Nomos
Verlagsgesellschaft mbH & Co. KG.
Salehi, M. and Alkhyyoon, H., 2021. The relationship between managerial entrenchment, social
responsibility, and firm’s risk-taking and shareholders’ activity. Social Responsibility
Journal.
Salehi, M., Arianpoor, A. and Naghshbandi, N., 2021. The relationship between managerial
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Torres-Rojo, J.M., Guevara-Sanginés, A. and Bray, D.B., 2021. The managerial economics of
sustainable community forestry in Mexico: a case study of El Balcón, Técpan, Guerrero.
In The Community Forests of Mexico (pp. 273-302). University of Texas Press.
Whitford, A.B. and Anderson, D., 2021. Governance landscapes for emerging technologies: The
case of cryptocurrencies. Regulation & Governance, 15(4), pp.1053-1070.
Xiong, Y. and Jiang, X., 2022. Economic consequences of managerial compensation contract
disclosure. Journal of Accounting and Economics, p.101489.
Zhang, Y. and Liu, Y., 2022. The effect of managerial ownership on corporate value.
In Economic and Business Management (pp. 66-72). CRC Press.
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