Positive and Negative Impacts of a Reduction in Global Oil Price Paper Example

Introduction

Price of oil has registered a significant fall in price over the past two years. This has led to one of the most serious, sharp and dramatic falls in the cost of oil globally. This collapse in the price of oil has triggered a lot of literature and discussions on the general global impacts, both to ordinary investors, countries, and consumers. The fall in oil prices can be caused by factors such as excess supply, competition in the oil market or political reasons of both oil-producing countries and consuming countries where the oil is being transported or supplied to (Kilian, 2013). The consuming states are the target nations that buy the oil product for manufacturing, transport and other important activities. This indicates that the fall in oil prices always have a significant effect on the operations in all sectors that depend on oil for operation or existence. The recession in oil prices, therefore, might cause recess in production or increase in production both at long term or short term levels.

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The main objective of this research, therefore, is to determine how falling in global oil prices affects ordinary investor in both long and short terms. The paper analyzes both short and long-term effects of the reduction in oil prices across the globe in all sectors that might be affected. That is all the sectors which rely on oil for production, distribution or just normal daily operation. This analyzes different articles and research work which has been published to provide the impacts of reducing global prices of oil on investments. In order to achieve this, the paper is divided into four parts, which is an introduction, literature review, discussion, and conclusion where introduction provides that background information, problem statement significance of the study and methodology. Literature review analyzes publications or available research which has been done in the topic, the discussion provides a discussion of findings from the literature review while the last part, conclusion summarizes the findings of the paper.

Problem Statement and significance of the research

The decline in the global price of oil has raised a lot of questions, literature, and discussions on its impact on the global economy more so to the ordinary investors. This due to the fact that the plunge has affected demand, consumption, and policies of OPEC on oil pricing (Kilian, 2013). Researches have however been carried out to determine the impacts of reducing oil price in ordinary investors in both long-term and short-term duration. Scholars have not gained much interest in determining the consequences of reducing the cost of oil in both long and term on investors. The condition has made it difficult to understand the economic impact of reducing the price of oil which can be through excess supply or reduction in global demand of oil. This makes it difficult for huge oil importing countries like Japan, China among others to estimate the consequences or importance of reducing oil prices on ordinary investments.

The study is important in shedding light on the looming both positive and negative impacts of a reduction in global oil price. This targets ordinary investors and the government to help determine important remedies of curbing the negative impacts of reducing the price of oil and also encouraging the positive ones. It also helps ordinary investors to be ready and prepare for the looming impacts on general commodity price fluctuations and effect on the performance of companies or investors that depend on oil. It does not only affects the performance of ordinary investors but the entire performance of the economy. Therefore, the study is important in shedding more light on the most likely long-term and short-term effects of the falling price of oil on the economy specifically on ordinary investors.

Methodology

The study employs a descriptive research design and approach where it looks at the quantitative aspect of the consequences and importance of falling prices of oil on ordinary investors. The research philosophy is positivism that helps in developing a hypothesis from available or existing theories, research work, and documents. This help in determining the specific design and data collection method to help develop a hypothesis of the effect of falling global oil price on ordinary investors. It is meant to gather specific information that describes and demonstrates what the expected consequences are. The target information is based on past researchers which describe what recent or past fall in oil prices led to in different companies and countries across the world. That is looking at the consequences of falling oil prices on the normal or ordinary investor due to change on the prices of all logistics that relies or depends on oil.

Data collection method is on secondary sources. These are documents or research papers which had been carried out to determine the impacts of falling global oil price on the ordinary investor. It targets various documents to help determine the specific effects. Information received is subjected to a comparison with other sources so as to determine what other researchers, scholars, authors think about both long term and short term impacts of falling oil prices on the ordinary investors. The information received is used to provide a description of what is expected when the price of global oil falls. It, therefore, lays much emphasis on the information received for ordinary investors, their efficiency of performance for instance distribution and operation, affordability, and availability of the oil at the fallen price.

Literature review

Transmission Mechanism Theory

Mork (1989) explains the economic impacts of changing oil prices. It outlines that oil prices changes have impacts on the normal growth of the country through investments and operation which require oil (Mork, 1989). It links the rate of oil prices to macroeconomic factors like interest rates, and inflation to take an example of them. It stated that a significant decrease in oil prices encourages the development of a country by making it easier to decrease in short-term the price of services and commodities that rely on oil. Research carried out by Narayan, found out that fluctuation or uncertainties in the oil prices of oil. He outlined that consumers lose consumption confidence when there is uncertainty in the changing price of oil which leads to developing more saving than spending power. Narayam outlined that this might affect investment positively in short-term but later affects it negatively in long run (Narayan, 2010). His sentiments are reflected by Hamilton who argued that business will always boom when a decrease in the prices of oil but get used to when and resumes to normal or fails to purchase commodities due to developed savings power (Hamilton, 2015).

Bernanke argued that due to the reduction in the cost of oil, production cost might reduce which might lead to a reduction in the price of commodities and services encouraging consumers to purchase more (Bernanke, 2009). But on the long run, Bernanke argues that decrease in price I likely to affect supply and availability of oil as oil consumers shall be stocked in large quantities causing a shortage in oil supply. He then argues that in long-term it might affect efficiency and production of commodities or provision of services that rely on the cost of oil. Hamilton, though his research found out that reduction in the global price of oil positively affects fast moving goods (Hamilton, 2015). This is due to how first their prices respond to the market changes. This indicates that in short-term first moving consumer goods shall attract lower prices which might lead to a rise in consumption and sales hence increasing investors' sales. However, he outlines that in case oil products experience a shortage, then first moving consumer goods producers shall not be able to produce enough and supply to the market hence leading to a loss on the side of the investor. This theory, therefore, helps determine the relationship between microeconomic factors and how they are affected by the change in oil product price.

Equity Pricing Theory

This theory links the inflation and interest rate to the cost of all discountable resources in the cash flow. The discount in the cash flow is relevant in affecting the price of oil in one way or the other. At the same time, the price of oil is likely to affect the interest rates. For instance a steady decrease in the price of oil; results in a decrease in the energy cost in many firms that uses oil generated energy (Mork, 1989). The theory views that stock evaluation and predictions chances of increase in the value of security stock depend on the rising chances of the price of oil. If there is an opportunity of rising in the prices of oil, then there is an opportunity of reduced value or returns on the value of the stock (Geetha, 2011). This explains possible changes in the cost of security in the stock exchange market. According to the theory, the cost of stock market relies on the probability of change in the price of oil for companies which depend on oil to operate, deliver services or produce commodities. However, the availability of oil in the market must also be looked at by investors' analysts to determine how productive the companies shall be in the future.

Determining Stock Market Performance

Research carried out by Menike, revealed that security stock performance depends on different factors like interest rates, inflation, and real output which depends on the cost of oil in the market (Menike Kim, 2016). In research, he determined that change in the price of oil affects the interest rates and the cost of products which leads to inflation. Geetha further supported the view by narrowing down to the effects of inflation on the stock market. He further relates inflation to the rise in the cost of oil (Geetha, 2011). In the research, he found out that the decrease in the price of oil leads to short-term deflation but in long run it causes inflation. This leads to a substantial increase in the price of commodities which might affect the business negatively.

Moradi supported the claims by adding that inflation always has diverse effects on the economy, this can either be positive or negative depending on how it is handled and the cause (Moradi, 2010). In ark shell, he claims that deflation might lead to an increase in real value of the currency thereby attracting several investors to the market. This, therefore, indicates that the change in the prices of oil makes it complicated to determine future exchange rate in the stock market as it is difficult to determine the future performance of companies. Therefore a decrease in deflation leads to a valuation of company securities which attracts more investors. But in long run, a decrease in price might cause a shortage in the supply of oil products thereby affecting the performance and profitability of the company. In such cases, when there possibility of determining a looming shortage of oil due to excessive consumption, devaluation of stock companies might occur and investors might be discouraged or ordinary investors might run a loss in long run. In the research, it found out that the reduction in oil prices have a positive impact on the short-term valuation of company shares or stock but in long run, it will negatively affect company operation and performance.

Empirical Review

Arouri studied the relationship between change in the...