Some economists expect the oil prices to decline due to slowdown in the world economy. Discuss...

Some economists expect the oil prices to decline due to slowdown in the world economy. Discuss the short and medium run effects of such a decline.

Expert Solution

Answer)

Covid 19 pandemic has brought drastic plunge in the growth of world economy. Due to lockdown, there has been a shortfall in consumption of petrol and diesel due to which a decline in crude oil prices has been witnessed.

Short term effects and Medium term effects of decline in crude oil prices can be summarized as follows:

1) In short term, it is likely to benefit the consumers, if the decline in prices is passed on to them by government.

But in case of India, this is not likely so. Since, the declining prices have not been passed to consumers. Rather there is an increase in taxes from the government side, ie. Increase in Central exercise duty and VAT by State Government.

2) In medium term, the declining oil prices are likely to benefit the Government Exchequer, since the import bill will likely to be reduced by huge amount. This will also result in decline in Fiscal Deficit and Current Account Deficit.

3) Also, the Government will be saving its enough of revenues, which it would have spent on import. This revenue could be well utilized on the improvement of social infrastructure of the country.

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Rahul Sunny answered 2 years ago

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