Oil Price Reduction

Based on sources from Reuters, crude oil prices have declined by 4%. Barani Krishnan, in an article on www.in.reuters.com, 4^th October 2012, stated that U.S. posted that the drop in crude oil was at its all time low in four months. It has been a pressing issue that oil prices in the global economy have been falling. In addition to this, the recession in the European economy could contribute to the fall in oil prices. However, it is not just oil prices that will be affected in this case as all raw materials are affected as well. The European crisis could very well be threatening to the global economy as a whole. Commodities such as raw sugar and Arabica coffee are facing a decline in price as well. All this is due to the same economic condition, which is the recession faced by the European economy.

            Similar to the oil prices, retail sales have been dropping as well, according to the same article in Reuters. As the recession takes place, people would have less to spend on as they will want to save their income for necessities rather than luxuries. With the presence of public transport, citizens would rather save money on oil and take public transport. During a recession, demand for items like Arabica coffee, precious metals like silver, gold and copper would be less. As the quantity demanded for such items reduces, the quantity supplied would be less too. With this, the prices of those items are then reduced to encourage consumers to purchase those items.

            The recession causes people to give up a lot in terms of monetary items. When recession occurs, income earned by consumers is reduced. With that, income elasticity of demand will be less. When income is reduced, demand for inferior goods will skyrocket. This means that income elasticity of demand is negative. Inferior goods such as instant noodles will be in higher demand as consumers have a need to spend less into the economy. They will be fine in consuming less luxury goods. However, demand for necessities will not differ. This is due to the fact that consumers need items such as basic food, water, basic clothing and rent. Without the said items, they would not be able to continue their livelihood. The quantity demanded for such items will not differ; hence the quantity supplied would be the same too. As that happens, the prices of those goods will not be affected.

            In addition to that, producers who are producing necessities would not lose out. In fact, they will gain in the recession. These producers know that such items are needed by the public. In extreme cases, such producers will increase the price of necessity goods drastically. In a recession, such producers are affected too and they see this as an opportunity for them to receive higher revenue. However, this issue can be dealt with the implementation of the price cap by the government. A price cap helps to make sure that the prices set by producers are not too extreme. Not only that, it helps to prevent producers from taking advantage in situations like during the recession. By setting a price cap, producers have a guideline as to how much to charge for certain products. They will be able to gauge as to what is too much to charge. This will be beneficial to the consumers undergoing the recession.

            Beside the recession in Europe, the drop in commodities importing in China caused the prices of oil to decline drastically. China is a major importer of commodities according to an article in www.bbcnews.co.uk. Compliment that with the recession in Europe, there is sure to be an over-supply of oil in the global economy. Demand is reduced drastically which leads to an excess. It is a clear worry that producers are facing. China could be experiencing a cut in their economy. That can be seen through the fact that they are reducing their imports. It is obvious that they are trying to cut costs. Whatever the reason, it is not stated. This slowdown in exchanges between economies could lead to something bigger than what we already know. If not dealt with urgently, it could lead to disastrous results.

            Due to the drop in oil consumption, it is evident that retail sales are also affected. This is actually common sense, if you think about it. When people spend less on oil, they will have more to spend on retail items. However, as they purchase less oil, transportation will be an issue. This phenomenon will indirectly lead to them not wanting to go out and spend their income there. With that being said, there are also other substitute ways to increase retail sales. The younger generation is more prone to participate in online shopping. It is easier, faster and more convenient as they would not have to leave the comfort of their own homes.

            The fall in oil prices have led to producers gaining more than losing out. When oil prices are cheaper, they will have to spend less on transportation costs. Hence, production costs will be less. Consumers will then benefit from this fact. They will have to pay less to purchase goods. In other words, this would mean that quantity demanded of a good will be more and quantity supplied will also be increased. Then again, it depends on how much of the demand and supply is and whether or not one is more than the other or it is at an optimum level.

            Oil consumption that has fallen causes many other factors to be affected. An entire country’s economy can and will be affected by one very important factor. A recession, on the other hand, will also cause a major disruption in the global economy and has to be dealt with as fast and efficiently as possible. If not, there would be apocalyptic effects and will cause the global economy to worsen. Balance is very important in the world’s economy.