Impact of Oil Crisis on World Economy: Price and Alternatives

This project proposal outlines a research study examining the impact of oil crises on the world economy. The study will utilize a simple oil market macroeconomic model, incorporating factors such as oil extraction, supply chain, demand, and substitution to analyze the effects of price fluctuations. The research aims to assess how the oil crisis affects oil prices and evaluate the impact of alternative energy sources. The methodology involves using nonlinear Bayesian techniques with annual data from IEA and IMF databases. Expected findings include analyzing the effects of demand or supply shocks and the impact of lags in price changes. This research is crucial for understanding and predicting the dynamics of the oil market, helping companies make informed decisions about investments and future market trends.

Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
IMPACT OF OIL CRISIS ON THE WORLD ECONOMY CONSIDERING THE PRICE
AND
OTHER ALTERNATES TO RUN THE WORLD
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Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
Statement of the problem and objectives
Global oil markets face perennial low demand and supply elasticities that are susceptible to slight
disturbances, always resulting in sharp fluctuations in price on either side (Arezki, 2017). During
the recent oil decline of 2015, global crude oil prices have reduced by more than half to about 28
dollars a barrel in 2018. Unfavorable revisions to economic prospects cause reduced global
demand while supply is affected by many reasons including; terrorism and armed conflict,
alternative energy, foreign policy and changes in the system of the Organization of the Petroleum
Exporting Countries (OPEC) (Heffron & Little, 2016). Disturbances in the oil market are
amplified by overdependence on oil as the sole source of energy, in the recent past, however,
investment in alternative energy is likely to mitigate this situation (Arezki, 2017). The proposed
study aims to use a simple oil market macroeconomic model to assess the impact of the oil crisis
on the world economy considering the price and other alternates to run the world. Objectives of
the proposed study are to investigate how the oil crisis will affect the price of oil in the world
economy and to assess the impact of alternative energy sources and technologies on global
economies.
Methodology
The study proposes to use simple oil market macroeconomic model because it has the power to
project long behavior of oil prices (Thomas, 2018). This model incorporates the four market
drivers into a simple model focused on the basics of demand and supply. These drivers are oil
extraction, oil supply chain, demand factors and oil substitution and conservation (Arezki, 2017).
Simple oil market macroeconomic model assumes that, in the short run, the technology used to
extract oil can constrain its supply, in the medium to long term, innovations in oil exploration
and extraction technologies may cause a rise in supply and prices (Arezki, 2017). Growth in
global GDP, business cycles and other demand factors can lead increase in demand and prices of
oil while decisions aimed at oil conservation and substitution significantly influence market of
oil. Lastly, this model assumes that oil prices automatically and continuously adjust to clear the
market (Arezki, 2017).
The equations of the Model are presented below;

Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
i. Oil Supply
Where; 𝑞𝑡 is yearly oil production;
𝑄t is cumulative oil production; 𝑝𝑡 is the actual price; and
𝜀𝑡𝑠 is temporary supply disturbances while 𝛽 is time
ii. Oil Demand
Where; 𝛾 is demand growth 𝛾1, 2, 𝑡−1 and 𝑡−10 represent Short term price elasticity of demand,
while the sum of 𝛾2 and 𝛾 represent the long-run.
iii. World GDP
Where: Y
𝑡 is the actual output, and Y
𝑡 is trend output while 𝑦 is the gap in world output.
Model Estimation
The proposed model will be estimated using nonlinear Bayesian techniques with annual data on
oil production retrieved from the IEA’s Oil Market Report database. Information on real oil
prices will be sourced from the IEA’s import prices of oil after deflation. Data on real-world
GDP will be retrieved from the IMF Economic Outlook real GDP.
Expected findings
The expected findings of this study include detection of small shocks in demand or supply of oil
and prediction their effects over time, analysis of the impact of lags between oil price changes
and responses in supply. Accurate and timely information may reduce uncertainty in medium-
term investments and help oil-prospecting companies to make better decisions concerning initial
capital investment and expected oil market prices.

Running head: IMPACT OF OIL CRISIS ON THE WORLD ECONOMY
CONSIDERING THE PRICE AND OTHER ALTERNATES TO RUN THE WORLD
References
Arezki, R. M. (2017). Global Economy and Oil Prices. Washington, DC: International monetary
fund (IMF).
Armaroli, N., & Balzani, V. (2017). Energy for a sustainable world: moving from the oil age to
a sun-powered future. Weinheim, Germany: Wiley
Heffron, R. J., & Little, G. F. (2016). Delivering of energy law and policy in the EU and the US:
a reade. Edinburgh: Edinburgh University Press.
Thomas, A. R. (2018). Energy and the global economy: business and geopolitical implications
of the fracking revolution. Cham, Switzerland: Springer.