2. Relevant Literatures and Hypothesis Development Empirical studies on the relationship between crude oil prices and stock market returns date all the way back to the early 1970’s. Jones and Kaul (1996) have found a negative relationship between the oil prices and stock market returns. (Nandha and Faff, 2008; Sadorsky, 2001) Supports the fact that oil price changes also have been seen to have a positive effect on oil and gas industry returns. There have been many variables affecting the way in which this correlation is looked upon. Narayan and Sharma (2011) have studied the relationship between stock return and the oil price shocks based on firm sizes. Tsai (2015) has studied U.S how U.S stock returns respond differently to oil price shocks pre-crisis, within the financial crisis, and post financial crisis. However, based on the specific time period Kilian and Park (2009) found that the effect of the stimulus package dominated the effect of oil price shocks and provided evidence that the U.S stock market was still thriving, representing a positive relationship between crude oil prices and stock market returns. An economy with higher oil prices, increase the discounted value of cash flows of oil firms, assuming these prices are able to be passed onto customers. It has been documented that a change in crude oil prices can lead to an economic depression, which could in turn weaken asset prices. Weaker asset prices will lead to devaluation in a company, which will lead to a
The consumption of the oil cause changes in the supply and demand. The United States produces 11 million barrels of oil every day. We are one of the biggest countries to have a big influence on the production and prices of the oil. The basic supply and demand theory explains that the if a product is produced more, the cheaper it should sell. If a country were to double the output of oil day, prices would fall and the Production is high, but the distribution of oil isn’t keeping up with the market. The United States builds an average of one oil refinery per 10 years. This is a net loss due to the fact construction has slowed down since 1970s. Since 1970s, the United States has 8 less oil refineries today. The reason why we are not oversupplied with cheap oil is because of the other countries’ higher net margin and the only operate at 62% of their capacity. Excess capacity is only there to meet future demand. With demand moving accordingly, oil prices will continue to be set mostly by the market — despite external players’ best efforts. (McFarlane)
Exxon and Chevron are no doubt some of the leading incorporated oil companies on the globe. Exxon Corp. is the second largest oil firm after Royal Dutch Shell, it is respected for getting the biggest revenue return in 2008 which no company in the U.S. have ever reported before. According to Wilson (2009) Chevron has managed to show a lot of profitability in the market despite the decease in its oil production. It graded as one of firms which made a billion dollars profit within a week in the period of July to September 2008. Regardless of profitability trends set by the two oil firms in the U.S. market, they have been facing financial decline like the rest of the companies in other industries. The two firms are like two sailing ships which are taking longer time to sink. In the last few years, the production capacity of Chevron and Exxon has decreased and their listings on the stock market have become weak. The continuation of construction and drilling which requires billions of dollars in expense of oil production might make them experience a bigger financial crisis (Wilson, 2009).
With the current spike in oil prices, many American consumers have asked, 'what is going on?' In order to fully understand the current situation and how it is affecting the economy one must look at a variety of factors including: the history of oil crisis in the United States, causes of the current situation, and possible outcomes for the future. It is only after meticulous research in these topics that one is prepared to answer the question, 'what is the best possible solution to the oil crisis?'
As it may be grasped from the graph, crude oil price reached its maximum in 2008 and constituted as much as $91.48 per barrel (IBP Oil, 2011:1). The period from 2002 to 2008 was marked by the gradual rise in crude oil prices. In 2009, the indicator was equal to $53.56, and oil prices started growing again (IBP Oil, 2011:1). It may be argued that fluctuations in crude oil prices are also the result of economic influences. It is obvious from the graph
A collapse in demand for oil resulting from sharply declining global economic activity could cause oil prices to fall, as happened in late 2008. Indeed, this is a fairly likely possibility. But while it would make oil cheaper, it would not make fuel more affordable to most people. It is theoretically possible for the world to curb oil demand through policies that limit consumption, and it is also conceivable that some unexpected technological breakthrough could rapidly result in a cheap, effective alternative to petroleum. However, these latter two developments are rather improbable. Thus there is no likely scenario in which the services provided by oil will become more affordable within the context of a stable global economy at any time in the foreseeable future.
Using an Auto Regressive model based on Pindyck (1999) on data from 1885 – 1968, taken from the BP statistical review, we can attempt to explain the price of oil through its own lagged price. We report an R-squared value of 0.82 (suggesting 82% of the data is explained in the model), whilst the drawbacks of reporting R-sqaured values are well established this is still a useful proxy for determining the success of the model. It should be noted that all data values are logged to detrend the data
A considerable amount of economic literature have analyzed the impact of oil price on the GDP in developed countries. Such as Jimenez and Sanchez (2004) have studied links between oil price and macro-economy in several industrial OECD countries. They found that oil price fluctuations have considerable effects on economic activities. We do not know the interaction between the crude oil price and economy in China. China is interesting in this content because it has large population which affects the demand for crude oil. Also, China’s GDP is growing rapidly, and the dependence on imported oil have increased in China, but only a few studies have focused on China.
This paper explorers a few of the possibilities of the reasons behind the increase and/or decrease in the price of oil, and the effects these prices have on the economy. It introduces some key players in the oil business itself and helps to break down the logic of how oil is the singular contributor of revenue to many economies worldwide. This research examines, through many resources, the different roles that the U.S. and foreign governments play in determining the price of oil, whether from an import or export standpoint. Also, many articles show how the stock market
The currently high price of crude oil amounting to almost US-$ 70 per barrel (May 2006) definitely has a significant impact on the global economy. But the high oil price does not influence every economy by the same degree. Industrialised nations for instance experience a less severe impact than developing countries do. This is because developing countries are generally more dependent on imported oil and because they are not able to use energy as efficiently as industrialised nations. The cause for their lower efficiency and therefore higher dependence is often a lack of availability of advanced and expensive technologies such as efficient fuel powered vehicles, and expensive oil dependent energy production. On average, developing countries need more than twice the amount of oil to produce the same economic output as industrialised countries do. The impacts described in the following part are valid for both ¬- industrialised and developing countries - but for the latter the impacts on the economy are usually much
Just as any market experiences it’s fair share of ups and downs, the oil industry is currently running down a slippery slope. From coast to coast across the United States, the price of gasoline has plummeted to levels were last seen during the recession of 2009 (Krauss). Although prices have somewhat improved at various points throughout 2015, average prices have remained low and are expected to stay that way for the next several years. Many people are simply overjoyed that their wallet seems a little less empty and it now takes only half the cost to fill up their gas tank, however, in the greater scheme of economics this is definitely not the best for the economy
In his book, Black Gold: The story of Oil in our lives, Albert Marrin said, “By the fall of 1918, it was clear that a nation’s prosperity, even its very survival depended on securing a safe, abundant supply of cheap oil.” Crude oil is one of, if not the most important commodity in the world. And it has become something that is highly tied to the global economy as a result. The rise and fall of oil prices are used as indicators of what’s to come and how to prepare for it. The very prosperity of some nations is directly indeed directly tied to oil production or procurement. In this paper, I will be discussing the effects of oil surplus and shortage on the economy as well as the effect of oil prices as well. I will also be looking at the effect of recent development, new technology and oil substitutes on the industry and the economy by extension.
In the short run, both global demand and supply of oil are relatively inelastic because it is difficult for them to make large adjustments to price changes in a short period of time. When oil price rises, oil consumers, such as manufacturing firms and households, may not be able to reduce their demand for oil immediately. For example, individuals still need to drive to work and manufacturing firms with long-term contracts still need to run machinery to meet target output. Similarly, an increase in oil price would not stimulate oil supply in the short run. Additional supply generally requires the exploration of new reserves and construction of new infrastructure for delivery which require substantial
In the United States, one of the biggest impacts on its economy and its people are the businesses that reside in the country. These companies all have an influence on how much people pay for everyday necessities in their lifetimes. One of the most important things being oil and gas. Oil and gas companies have a big impact on society in the way of supplying people with fuel and oil for their vehicles. However, prices constantly fluctuate throughout the industry, and at times, they hit all time lows affecting the companies, employees, and Americans. Most Americans do not realize the effects of these companies on the planet such as emissions, and the effects on their wallets, even though it is an everyday problem. However, it can easily be solved by the government and its people coming up with compromises. Usually when gas and oil companies are doing well, it has a negative impact on the people, and when they are doing bad, it has a positive impact on the people. The relationship between the oil companies in America has a negative correlation because of the drastic change that directly affects the other.
Crude oil is still a driving force of the world economy today. Changes in the price of oil have significant effects on economic growth, development and welfare in countries. Oil price volatility has had its ups and downs in the past year as well as the past decade. Oil prices fluctuate for a number of reasons. One reason why oil prices fluctuated is because of rising global economic activity. It can increase demand and push prices higher, while rising production can cause prices to decline. During the last financial crisis there was a grueling time for oil prices as they had fallen about 50% during that time. (Moors, 2011) Many studies have shown that economic effects of oil price can increase or decrease and they typically show that for oil importing developed economics (Moors, 2011). This paper that I have written thoroughly investigates the role of oil price volatility. My paper also focuses on the variability of positive and negative oil price shocks as seen in Germany, Japan and United sates.
This article covers the effects of the rise and fall of the oil prices in the global markets today. Crude oil is defined as a nonrenewable resource which occurs naturally. It is an unrefined petroleum product composed of hydrocarbon deposits and other organic materials. Crude oil can be refined to produce usable products such as gasoline, diesel and various forms of petrochemicals hence it plays a very crucial role in any economy.