This essay will review how the rising fuel prices affect the different macroeconomic variables such as inflation, rising production cost, unequal economic conditions between oil exporting and oil importing nations. It will also examine the influence on airline industry, holiday companies, shipping industry and rising unemployment rates because of the higher energy prices. There will also be a review on car sales in India. This essay will also evaluate the rising demand for alternative energy sources. There will also be review about the effect of increasing fuel on agriculture sector and their influence on consumer behaviour.
The Impact of Rising Fuel Prices on Business
The fuel prices are a significant determinant of worldwide economic performance. The oil price rise results in a transfer of income from oil importing to oil exporting countries according to a shift in terms of trade. Gas prices increase has an influence on oil price increase. When there is a higher oil price rise and the higher prices are maintained, it will have significant macroeconomic influence on economy. According to the net-oil exporting nations, a price rise increases their real national income due to the higher export earnings. The part of this earning will be offset by losses from lesser demand for exports because of the economic downturn suffered by trading partners. By contrast, the rise in fuel prices has negative impact on oil importing countries while these countries must produce goods and services. As a result of this, oil importing countries needs more energy to run their local economy. The cost of production has risen because of the increase in fuel prices, and the producers of many products charge consumers a greater price. As a consequence, the inflation increases that makes life tougher for consumers around the globe. Moreover, it has devastating effect on emerging economies where the wages are flat and the spending is rising at a rapid pace. In this case, the gap between rich and poor is increasing. The poverty figures have increased for last 3 years. Emerging economies have insufficient funds to offer the entrepreneurs in the shape of subsidy due to this expanded gap. Therefore, it becomes advantageous to a entrepreneurs who run the manufacturing level of his country.
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The increase in fuel prices has also devastating influence on Pakistan, Ethiopia. The higher cost of manufacturing will result in inflation. The producer will sell at greater prices when the income is not raising relative to the consumption the consumer would purchase small amount of goods, and the other stocks will change in to idle. As a result, the corporate sector will be worse-off. Producers will sell the stock at lesser price again to cover the cost that result in deflation. Hence, it discourages investors and investment will decline.
The rising oil prices since 1999, leaded to the global economic crisis in 2000-2001. As a result, the world GDP growth experienced a decrease from 1999-2004. Due to the expectations that is related to OPEC supply cuts, political tensions in Venezuela and strict stocks increased international crude oil and good prices in March 2004, market conditions are more volatile than usual, United States were trying to increase crude oil prices. Greater fuel prices lead to higher unemployment rates and compounding budget deficit issues in many OECD and other oil importing nations. (Charles, 2008)
The negative economic influence of higher oil prices on oil importing poor nations is more dangerous than for OECD countries. These economies extremely need imported oil , and the energy is utilised ineffectively. Developing nations find it difficult to adjust the financial turmoil damaged by higher oil import costs. India spent $15 billion, equal to 3 percent of its GDP, on oil imports in 2003. Moreover, the sub Saharan African countries lost over 3% of GDP.( http://hubpages.com/hub/rising-fuel-costs-world-economics)
World GDP would be half of one percent less ($255billion) in 2004 because of the fuel price rise. This is due to the economic process yielded by greater oil export earnings in OPEC and other exporting nations would be more than outweighed by the negative impact of higher prices on economy in the oil importing nations. There was a transfer income from oil importing nations to oil exporting nations in 2005, the price rise would approximately $150 billion.(Terasa , 2008)
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Company's big losses, lack of consumer confidence, wrong policy reactions and greater gas prices will strengthen these economic impacts in the medium term. If the fuel prices remain higher, the economic situation of fuel importing nations will be at risk.
Due to the past oil price shocks , the total macroeconomic damage occurred, the profits from the 1986 price decline to the economies of oil importing nations keep changing significantly. However, there were crucial impacts: economic growth declined significantly in most oil importing nations in the 2 years following the price increases of 1973-1974 and 1979-1980. Most of the big economic recessions in the United States, Europe and the Pacific since 1970's have been occurred before sudden rises in the price of crude oil even though other factors were important in some situations.(Richard , 2006)
According to the UK National Statistics, UK factory gate prices increased at their highest rate for 9 months in November 2009 because of the higher fuel prices. Inflation accelerated from November to January because of the rising fuel prices, and increase in value added tax to 17.5% in February. Less productive capacity left more idle due to the recession than the Bank of England predicted which means that inflationary pressures might occur again quickly. The government reduce value added tax to 15% in December while short-term measure to increase spending. This is one of the monetary policies that the government conducted to increase demand and stimulate the economic growth. (Terasa , 2008)
According to the OPEC, the price will increase from $80 to $90 in the first quarter of 2010. In June 2009, US carried on borrowing excessively from China to pay for deficit spending and two US car manufacturers, GM and Chrysler, went bankrupt. Unemployment is increasing in US. As a result, US is trying to develop renewable local bio fuels to reduce their dependency on the fuel.
The higher fuel prices result in inflation, risen input costs, and reduced investment in oil-importing states. The tax revenues decline and the budget deficit rises because of the rigidities in government spending that increases interest rates. An oil price increase results in upward pressure on nominal wage levels due to resistance to real decreases in wages. Wage pressures and declined demand cause higher unemployment rates in the short run. Moreover, lower consumer spending affect all business, especially small business are in bad position due to the declined consumer spending.
Higher interest rates decline the disposable income of consumers due to the higher debt service costs. While consumers increase their expenditure on servicing debt, they do not have enough money to purchase other products.(Richard, 2006)
Net oil importing countries encounter a deterioration in their balance of payments, and reduces exchange rates. As a consequence, oil importing countries imports will be more expensive whereas exports are less priceless, resulting in a decline in real national income. If there is no change in central bank and government monetary policies, the dollar might increase while oil-producing nations demand for dollar denominated multinational reserve asset increase.
The economic reaction to greater inflation, higher unemployment, less exchange rates, less real output also affects the overall influence on the economy for the long-term.
Rising fuel prices lead to high shipping costs. As a result, shipping costs indicates higher taxes that make them more expensive for foods. For valuable and less weight products such as electronics shipping costs are tolerable. By contrast, for less valuable and heavy-weight products, shipping cost might higher than the value of the products. If oil prices were to carry on increasing, it would become unprofitable for China to carry on importing iron ore from foreign countries.
Shipping firms are damaged by higher fuel prices. Firms such as Fed Ex, TNT, Conway Trucking, Teekay Shipping are protected from changes in diesel fuel prices, while the industry often passes on oil price charges to its consumers such as Wal Mart Stores. Aircraft firms like Air castle are damaged by increasing oil prices.
The retail industry is damaged by increasing oil prices because shipping firms charge greater prices, it become harder for retailers to obtain their goods to market and put pressure on them to increase prices. Discount retailers such as Family Dollar Stores, Dollar Tree Stores and Wal Mart are left vulnerable while their customers have fewer incomes, making them more sensible to increasing energy prices. Online retailers which fund the cost of shipping such as Amazon.com and Overstock.com have to pay part of the shipping price rises, resulting in decreases in their profits.
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Higher transportation costs encourage producers to relocate production facilities closer to suppliers or markets according to the transportation volume such as input materials and the final product shipments. These factors are affecting changes in global trade flows because of the increasing fuel costs. The big increase in the world trade has contributed to decrease the difference in wage rates and returns on capital among nations. As a result, factor price equalization occurs in the world markets today. This makes export producing unprofitable in developing nations. As more products are manufactured at locations which are near the end markets, world trade growth might reduce if some production reverts to local manufacturing.
Currencies will alter to changes in trade balances. Greater fuel prices will result in an increase in the value of the dollar, therefore, oil exporters invest their windfall earnings in US dollar controlled assets and transactions demand for dollar rises. A stronger dollar will increase the cost of servicing the external debt of oil-importing poor nations, while this debt is denominated in dollars, compounding the economic hit caused by greater fuel prices. It will also strengthen the affect of higher oil prices increases the oil-import bill in the short-run, with the low price elasticity of oil demand. Oil shocks that world has experienced, provoked debt-management crisis in many poor nations. (Richard, 2006)
The increase in the price of oil has raised the cost of fertilizers which need petroleum or natural gas to manufacture. Natural gas has its own supply issues as oil. Natural gas might substitute for petroleum in some cases, rising pricing for petroleum lead to rising prices for natural gas, therefore, for fertilizer. Costs of fertilizer raw materials have been rising while rose production of staples raises demand. Farmers are constrained to the old means of ploughing due to the higher oil prices. It makes expensive delivering and shifting their stocks to the market. The high oil prices have negative impact on farmers that makes difficult for them to grow season crops because fertilizers are soaring due to expensive fuel. There is a strong correlation between food and fuel prices and can be tackled if people could control the fuel consumption and provide the agriculture industry the sources they needed to produce more.
The large firms such as airlines, holiday firms and shipping industry will increase their prices due to the greater fuel prices. However, consumers are not likely to utilise the services as they did before which means that firms will suffer big losses. Moreover, companies will cut their staff to balance their current accounts. Transportation costs will increase and the corporate and the farming sector will experience losses. The cost of delivering products to different locations will become more expensive than before. Unemployment will rise that has negative impact on shrinking economies. It also leads to rise in poverty. During the job losses, governments must take action to support those who have become redundant with controlling their household. Therefore, governments will utilise taxpayer's money which will increase the burden on tax payers.(Charles, 2008)
According to the Teresa Ter-Minassion(2008)"The British Airlines is flying with 25% empty seats because of the rise in fuel prices "There is a debate that is related to selling the British Airlines to another company due to the rising fuel prices. During the difficult economic climate in the world, firms are merging with another firm to survive in the market.
British airways suffered biggest loss since the firm was privatised in 1987. According to the British Airways, the firm faced loss before tax of £401m on 31st of March 2009 due to the weak pound and higher fuel costs. Fuel costs increased 44.5% after the price of oil rose last year. Even though revenues risen to approximately £9 billion, the BA suffered almost £3 billion fuel bill. As a result, more than 2500 workers were laid off since the last summer by British Airways. (http://news.bbc.co.uk/1/hi/business/8062844/stm)
Several inputs affect the global economy like the price of oil. Oil power cars, trucks, boats, air planes and power plants are vital for the world economy. While oil prices increase, costs rise for transportation firms, put pressure on their profits and forcing them to increase prices, influencing all the other firms that rely on transporting goods and people. However, most energy firms take advantage of high oil prices; these firms make more profits than usual due to the rose demand for substitute energy sources like natural gas and ethanol. 2008 was great year for many energy firms, future prices increased sharply, reached a peak at 145.85 on July 3rd 2008. Then future prices declined to $50 per barrel by early December due to the economic downturn caused by the 2008 Crisis and 2007 Credit Crunch. The huge volatility of this crucial economic input has made a sensation interest in problems like peak oil, and the increasing global demand is resulting in higher investment in renewable energy.(Clerides , 2008)
According to the Nathon (2008), there are lots of alternative energies such as wind, solar, bio fuels, geothermal and all experience rises in demand due to the increasing price of oil. Coal firms such as Arch Coal, Peobody Energy and Masses Energy encounter sales growth while increasing oil prices lead to consumers to demand more domestic sources of energy.
Hybrid car producers such as Toyota, Honda, GM and Nissan take advantage of greater oil prices because higher oil prices result in greater gas prices, encouraging customers to find out ways to decrease the amount of gasoline that they utilise. Auto manufacturers have decided to manufacture electric cars and they might make more profits if oil prices will rise in the future. These firms contain Renault, Toyota and General Motors. Moreover, the strategic alliance of BMW, Daimler, Chrysler and General Motors will create and produce full hybrid cars and it will enhance penetration rates of these cars. As a result, while some European car producers commercialise hybrid solutions, the market will probably experience rose demand for hybrid cars.(Clerides , 2008)
The oil prices are vital macroeconomic variable: higher oil prices might still lead to significant damage on the economies of oil importing nations and on the world economy. Many nations face higher inflation rates due to the rising oil prices in the world. As a consequence, the higher inflation rates have devastating impact on both production and consumers that leads to big difference between oil importing and oil exporting nations.
The fuel has become a scarce resource that forces many countries to develop alternative energies to maintain their economic activities without having any problem. It is obvious that, there is a strong correlation between energy demand and economic prosperity. Development of millions of people living standards depend on our existing energy infrastructure. To maintain economic progress on the whole world, economic experts should reinvent the ways in which they create, distribute and utilise energy.
To overcome this technological difficulty, experts should invest in invention in energy generation. Even while people struggle to make breakthroughs in solar, wind, geothermal and related energy sources, they should reinvent their traditional sources to utilise these sources more efficiently.
Alternative energies might contribute the economies to decrease their dependency on fuel as the key energy source. Especially, oil importing countries extremely need to use other means of energy that might contribute them to deal with big economic crisis. As a result, it will accelerate overall GDP growth in the world which means that companies will be able to increase their production levels even if oil prices continue to rise and it will lead to decrease in unemployment rates.