Type of paper: Essay

Topic: Oil, Politics, Economics, Supply, Economy, Countries, United States, Finance

Pages: 3

Words: 825

Published: 2020/11/24

Almost every sector of the economy is affected by changes in oil prices. This paper discusses the impact of reduction in oil prices caused by increase in supply. The paper also suggests policy recommendations that can help regulate prices so as to achieve a stable economy.

The outline of my argument is:

Low oil prices
i. Change in demand and supply
ii. Reduced revenue by producing organization
iii. Reduced consumer and producer surplus

Closure of key organizations

Lead to unemployment
Loss of tax by the government
Social crimes
Domestic violence
Loss of direct foreign investment
Low investment by other countries
Loss of foreign exchange
Reduced exports
Loss of capital gains
Loss of foreign expertise
Loss of imported technology
_________ My paper is single-spaced with double spacing between paragraphs.
_________ I have proofread my paper.
_________ I can identify the subject and verb of each sentence in my paper.
_________ I have provided appropriate documentation for sources and quotes.

Oil prices

High oil production rates are recorded daily and some institutions and analysts project that the United States shall be the largest oil producers in the world. All other thing held constant, high oil production has led to lower crude oil prices which in turn impacts on oil and gas prices overall. Changes in prices affect demand, supply and competition (Wessels 79). Since United States is not the only oil producer, oil price changes can affect an economy especially if the economy depends on oil. This further lead to job losses, low foreign inflow, loss of foreign direct investment, low exports and can even lead to closure or acquisition of small branches which are not able to support its operations. Therefore, changes in oil and gas prices can significantly affect an economies growth significantly.
First, changes in oil prices lead to changes in demand and supply. High oil production leads to low oil prices and this lead to change in the equilibrium price and quantity of an economy.

Demand and supply curve of oil prices

Price S1
P1 S2

Q1 Q2 Quantity

P and Q are prices and quantity respectively. From the graph it can be seen that an increase in supply of oil lead to lower price and a high quantity. The law of demand and supply says that a low price attracts many buyers of a product while high prices lead to high production of a product. The equilibrium price and quantity is depicted by P1 and Q1. Increase in supply of oil lead to a change in equilibrium price and quantity to P2 and Q2. Changes in price also lead to a change in consumer and producer surplus. Low oil price lead to increased consumer surplus and decrease producer surplus. The dead weight loss will also change. High prices lead to large deadweight losses and low price lead to small deadweight loss. Deadweight loss is that part which is neither consumed by the customer nor sold by the producer. When oil prices reduce, it means that the producer’s revenue decreases and the company may not be able to cover all its operating costs. Supply and demand for oil prices is price elastic meaning that a small change in price can impact greatly the amount of oil produced and demanded. Additionally, the elasticity of prices also impacts on deadweight loss. If the price is elastic, it means that larger weight losses will be experienced (Wessels 109). However, if the price is inelastic the deadweight loss can be smaller. A government can tax more for goods whose price elasticity of demand is inelastic. This is because in this case, a small change in price leads to a small change in quantity demanded.
Moreover, changes in oil prices could lead to stiff competition especially if the prices have a downward trend. Other countries like Iraq and other Middle East countries produce oil in very large quantities which could in turn affect adversely the prices of oil in the United States. Stiff competition lead may lead to some of the oil branches closed especially if the government does not intervene by providing subsidy to the affected company (Kishtainy 82). Low prices will lead to low capital inflow because of low exportation of oil to other countries because many countries are producing and exporting the same product. The foreign exchange reserve is also affected because low exports means less foreign inflow.
Furthermore, if stiff competition may lead to closure of some oil branches, this directly impacts on employment. Closure of key companies or branches in an economy may affect the economy adversely through unemployment (Wessels, 91). High unemployment leads to social problems like crime and psychological problems. High crime rates affect a countries reputation and many countries will ban their residents from travelling to those countries especially the tourists. Psychological problems may lead to low self-esteem which may further translate to suicides.
Reduced oil prices may also give a signal to other countries that a particular country is not doing well. This may lead to reduced direct foreign investment. Reduction in direct foreign investment may lead to further unemployment, loss of innovative knowledge about a particular area in business, loss of foreign exchange, loss of productive machinery and loss of expertise that could be of great importance to the existing labour (Kishtainy 74).
In conclusion, oil prices are an important economic factor that should be carefully guarded if the economy is to grow in the future. The rising production of oil prices in the United States is a major concern given that it is not the only oil producing country. In order to survive in the economy, larger markets are crucial in order to survive the stiff competition in the rest of the world (Kishtainy 112). Having a large market is an implication that all the oil produced in the United States shall be sold which means high revenue, foreign capital inflow, high employment, high direct foreign investment and larger exports. Since United Nations do not solely depend on oil production, there is still more time for formulation and implementation of structures which can keep and lead to growth of the oil industry. The demand and supply can be regulated to reduce high changes. The policy analysts can provide useful insights on how the United States can survive in the market and how the government can increase its support to oil producing companies. Analysts can study countries which have failed in the past due to oversupply and recommend policy solutions of the same problem if it arises in the United States. They may also improve on the existing policies in order to save United States from future crisis. Greater ties can also be of great importance to any economy in order to create larger markets (Wessels 69). The government can consider the existing tax policies in the United States and revise them in order to give the oil producing companies a chance to grow.

Works cited

Wessels, Walter J. Economics. Hauppauge, NY: Barron's, 2000. Print.
Kishtainy, Niall. The Economics Book. London: Dorling Kindersley, 2012. Print.
Article: http://openmarkets.cmegroup.com/7584/why-u-s-oil-markets-reflect-supply-demand

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