Question

What effect Oil have in the world Market: Discuss the issue in develop world and non-develop world? You can use GDP and stock market graphs and other information.

Answer 1

Oil (also known as Petroleum) is and has been an integral part of every economy in the developed and under-developed world for the last 150 years.

Ever since the industrial revolution of the 19th century and advances in transport and industries, demand for petroleum as a source of energy has always been high. The hallmark of a developed country is the predominance of industries as the major contributor to the economy and GDP of that country. Industries require petroleum and petroleum products to operate the machinery and also a key ingredient in the manufacture of chemical products. Advances in modern transport in automobiles and heavy vehicles and also farm machinery and equipment has ensured that demand for oil and diesel are high.

Given this importance of petroleum globally, it is natural that movements in petroleum prices will have a significant impact on the world market, stock markets and GDPs of countries. Oil, despite several benchmarks like Brent and WTI, is traded on stock exchanges, like any other commodity. Fluctuations in oil prices affect the GDP. Lower oil price is good news for an economy especially developed economies as their demand for oil as a source of energy is higher in comparison to non-developed economies.

As one can see from the graph below:

that the world oil consumption has always been a significant percentage of the world GDP (barring a few years). Oil prices had peaked in 2008. But after the GFC, the oil prices have significantly declined and as a result, the world GDP has declined and so has the consumption of oil.

The group of countries that produce and export and determine oil prices is the oil cartel known as OPEC (Organization of Petroleum Exporting Countries). The countries are Saudi Arabia (world's largest exporter of oil), Qatar, UAE, Kuwait, Libya, Algeria, Nigeria, Iran, Iraq, Gabon, Indonesia, Venezuela, and Ecuador.

Oil prices are determined in U.S dollars, so the relative strength of dollar also impacts the price of oil. Majority of the demand for oil in developed nations is from the 35-member OECD (Organization for the Economic Co-operation and Development) nations.

To get an idea of the consumption oil by the OECD countries vis-a-vis the prices, we can consider the below graph

As we can see in the graph on the left, the major consumer of oil is the United States. The graph on the right shows the oil consumption of OECD countries, which at one stage was higher than the crude oil prices but have gone significantly with the fall in crude oil prices.

Among the non-OECD countries, China, India, and Saudi Arabia are the largest petroleum consuming countries. Rapid economic growth in these countries has led to a rapid increase in the demand for petroleum.

As can be seen from the graph below:

Unlike OECD (developed countries), in spite of price fluctuations, the developing countries have continued to have a high demand for petroleum. A greater share of oil consumption along with the fact that oil prices are pegged to U.S dollars has a strong and negative impact on developing nation's GDP. Lower oil prices in recent years have actually benefitted the GDPs of developing countries in a positive manner.