EFFECTS A SUSTAINED FALL IN OIL PRICE ON ECONOMIC GROWTH IN UK.
Oil is a crucial 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 fall 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 (Sarwar, Chen & Waheed, 2017, 9-18). The economic impact of a reduction in the price of oil can be clearly explained using computable general equilibrium models. A decrease 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 (Aminu, 2019, 487-497). 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 a rise 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 (Bohi, 2017). 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 reduced Supply and distribution cost (Bohi, 2017).
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 (Ftiti, Guesmi, Teulon & Chouachi, 2016, 11-22).
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 (Aminu, 2019, 487-497). 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 (Vătavu, Lobonț, Para & Pelin, 2018, 13(6)). 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 (Ftiti, Guesmi, Teulon & Chouachi, 2016, 11-22). The supply chain sector has a close relationship directly being interdependent. Suppliers depend on the transport sector to deliver the goods of 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 (Sarwar, Chen & Waheed, 2017, 9-18).
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 (Bohi, 2017). 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.
References
Aminu, N., 2019. Energy prices volatility and the United Kingdom: Evidence from a dynamic stochastic general equilibrium model. Energy, 172, pp.487-497.
Bohi, D.R., 2017. Energy price shocks and macroeconomic performance. Routledge.
Ftiti, Z., Guesmi, K., Teulon, F. and Chouachi, S., 2016. Relationship between crude oil prices and economic growth in selected OPEC countries. Journal of Applied Business Research (JABR), 32(1), pp.11-22.
Sarwar, S., Chen, W. and Waheed, R., 2017. Electricity consumption, oil price and economic growth: Global perspective. Renewable and Sustainable Energy Reviews, 76, pp.9-18.
Vătavu, S., Lobonț, O.R., Para, I. and Pelin, A., 2018. Addressing oil price changes through business profitability in oil and gas industry in the United Kingdom. PloS one, 13(6).