EFFECTS A SUSTAINED FALL IN OIL PRICE ON ECONOMIC GROWTH.
Oil is an important product in the economy because of its importance in the production process. The UK economy has recorded a significant sustained overall price of oil since 2014. A decrease in the price of oil generally results in a reduction in the overall cost of production. Manufacturing industries which mainly depend on oil in their production of goods have greatly benefited from the fall of price oil. In contrast, the oil and gas extraction companies have been hurt by a sustained fall in the market price of oil.
The economic impact of a fall in the price of oil can be clearly explained using computable general equilibrium models. A fall in price results in an increase in the economic activities which leads to economic growth. The real household increases with a fall in oil prices. Consumers can save part of their income and consequently, there is an increase in the real income. An increase in real income will lead to an increase in the level of economic spending. An increase in the economic activity will, in the long run, result in significant economic growth.
The United Kingdom economy has grown as a result of the sustained fall in the price of oil. The overall cost of production in the economy has been decreased resulting in a reduction of prices for goods and services. There has been an increase in the employment level in the economy as a result of a decrease in the price of goods and services. The Gross domestic product of the economy is positively affected by the fall in the price of oil. A reduction in the prices of goods and services leads to growth in the economy’s aggregate demand.
An increase in the aggregate demand of the economy increases the money supply. Businesses and companies can easily access lending from financial institutions and finance. The investment level of the economy will grow and economic growth will be achieved. The transport sector is the major beneficiary of a fall in the price of oil. Businesses will bear a reduced Supply and distribution cost.
The economy consumption level increases when the prices of oil experience a sustained decline. Consumers will significantly benefit from a decline in the energy cost enabling them to save part of the income. The economic impact of an increase in the income of the consumer is a rise in their consumption of goods and services. An increase in consumption will also increase the aggregate demand and the supply sector will rise their downstream purchases.
The overall impact of a sustained decrease in the price of oil in an economy is an improvement in the efficiency of production. Due to a reduction in the cost of production, manufacturing companies produce better products. The output of the production of these companies expand and the economy becomes self-sufficient. A reduction in the price of oil results in an increase in the production level.
The United Kingdom economy import level has reduced significantly in recent years due to the sustained decline in the oil price. A temporary decrease in the price of oil cannot affect the import level of an economy due to the uncertainty of the future. An increase in the production level forces the economy to increase the export level leading to a rise in the national income. Growth in the national income will strengthen the local currency against foreign currencies.
In the transport sector, many companies have benefited from the drop in oil price. The sector is quite an oil intensive and changes in the prices can be sensitive. Impacts of reduction of oil prices are felt across the sector affecting other related industries. The supply chain sector has a close relationship directly being interdependent. Suppliers depend on the transport sector to deliver the goods o the final consumer in various locations of the country. A decrease in the energy cost will cause the transport sector to reduce logistics charges and the suppliers will enjoy greater sales and profit levels.
The financial sector is positively impacted by a sustained fall in the price of oil. Consumers save extra money from a lower cost of energy in commercial banks. The commercial banks level of deposit increases due to an increase in the savings level of the economy. Consequently, the banks increase the lending levels resulting in higher interest income. However, the long-run effect of an increase in the commercial banks’ deposit is a reduction of the prevailing market interest rate. A reduction in the interest rate will discourage lending and savings and increase the consumption level of the economy.
The United Kingdom’s economy has significantly grown as a result of the sustained decline of oil price. The UK is one of the largest producers of gas and oil in the world and it has a competitive edge in the production of oil. It has a wider global market making it benefit from exporting oil. There is a significant difference in the domestic price of oil and the global price and this has enabled the economy to take advantage of the discrepancy. The level of economic activity has grown leading to an expanded domestic market in the United Kingdom’s economy.
In conclusion, the United Kingdom economy has benefitted from the sustained decline in the price of oil. The aggregate demand has relatively expanded due to an increase in the consumers’ real wage. Oil prices tend to significantly affect the economy’s level of production hence impacting the level of economic activity. Being a leading global oil producer, the UK economy has benefited from a reduction of oil prices. The economy can now produce goods and services at a lower cost compared to other economies across the world giving it a competitive edge.
REASONS FOR THE SLOW RECOVERY OF THE UK ECONOMY FROM THE FINANCIAL CRISIS 2007-2009
The United Kingdom economy was severely affected by the financial crisis in the period between 2007 and 2009. The crisis was as a result of banks over lending on real estate resulting mortgage default. Public confidence in financial institutions such as commercial banks was shuttered resulting in lack of savings in the economy. The commercial banks lacked customer deposits and could not offer the companies and businesses financial credit to finance their investment activities leading to a financial crisis in the economy.
The government was forced to come up with policies that will solve the economic problem and reduce the impact of the financial crisis on the economy. However, the policies took time before having an impact in solving the financial crisis with many reasons behind the slower recovery of the economy. The United Kingdom government had to pump some money in the economy to increase the money supply. At that time of the crisis, the economy was at a recession and something had to be done to improve the level of economic activity.
The government gave a large amount of money from the national reserve to the commercial banks to facilitate borrowing. These commercial banks had huge deficits in their balance sheet due to mortgage default by borrowers. Instead of using the money to enhance money supply in the economy by lending businesses and companies, these commercial banks used the money to address their balance sheet deficit. The process of recovering the economy was consequently slowed.
To repair the public confidence, these commercial banks decided to pay the customer deposits that was lost through bad debts. In the long run, the public started to save in the commercial banks and the bank deposit level was increasing but it took a lot of time. The financial crisis continued to affect the economy as the level of money supply in the economy was still very low. The investment level in the economy was rising but not so fast and the result was a slow recovery of the economy.
Another reason that caused a slow recovery of the economy is the lack of annual production growth. The economy was not growing in terms of the production level creating a shortage of goods and a disequilibrium of demand. The input per employee was almost close to zero leading to an economic imbalance as a result of the shortage in production. In the following year, the economy started to slowly recover in terms of production and this as simply down to the fact that many people were willing to work. An increase in employment rate in the economy was not steady leading to a slow recovery.
Another major reason for the slow recovery was the austerity nature of the government policies to combat the financial crisis. The policies resulted in suppressed government spending causing a slower response of the money supply in the economy. The overall level of economic spending is also suppressed with a reduction in consumer spending and business spending. Consequently, the tax revenues reduced and benefits spending was growing. The government focused on increasing the money supply in the economy by using quantitate easing to raise capital reserves of the commercial banks expecting them to lend businesses and companies and boost business spending. However, the financial regulators pressured the commercial banks to hold larger capital reserves and reduce lending so the commercial banks can improve their market share price.
The ideal solution for the government in the context of the financial crisis was to compensate the customer for the lost savings. It would have quickly boosted the public confidence and increase the money supply in the economy. Spending in the consumer level would have significantly increased leading to an increase in the level of economic activities. Quick recovery of the economy would have been enabled if the government focused on consumer consumption instead of an investment. By paying off the customer savings, the real income of the consumer would have increased pushing an increase in the aggregate demand of the economy.
By pumping funds in the financial institutions, the government enabled selfish bankers who were responsible for the financial crisis to address their financial defects and grow the value of their shares. The government was supposed to bring the bankers into account for their failures and crimes. Instead, the bankers were able to further benefit from the crisis by increasing the market value of their shares. Mortgage default resulted in the loss of customer deposit and the savers were not compensated for their losses.
Another reason for the slow recovery of the UK economy was the lack of policy to deal with the rising rates of unemployment during the financial crisis period. The government was supposed to deal with unemployment head on to save the economy from the crisis but instead, the focus was on saving the financial institution. By creating job opportunities for the people, the government would increase the production level and consequently increase the economic activities.
An increase in the level of production due to an increase in employment could have overseen a quick recovery of the economy. The aggregate consumption would have increased corresponding with the increase in the aggregate demand. An increase in the aggregate consumption would have resulted in an increase in money supply in the economy. The slow nature of the recovery of the economy was due to misguided priorities.
In conclusion, the government of the United Kingdom could have reacted better and solve the financial crisis quickly if there was a proper analysis of the situation. The focus of the government should have to save the consumers in the economy. Financial institutions have a means of solving deficiency in their capital reserve. The lack of money in the economy was brought by the incompetent bankers’ decision of over-lending mortgage leading to loan defaults.