Question

In: Economics

Major consequences for oil producing countries across the globe and their response to the price crash....

Major consequences for oil producing countries across the globe and their response to the price crash. How did these countries respond and what risks do the fall in oil prices withhold for these economies?

Solutions

Expert Solution

Major consequences for the oil producing countries across the globe are the increased production costs as compared to the price of oil. Ability to stay as competitive as possible and reduce the dependence on revenue generated via oil sales, as there is an increasing trend towards going green all over the world. They had to reduce the production scale and keep some of their capacities redundant as there was limited room to store oil in light of drastic fall in demand.

The countries reduced the supply of oil in response to the price crash as they did not want to suffer further losses and keep aggregate supply greater than aggregate demand. Their only way out of the turmoil was to reduce the supply of oil and thus keep the prices as stable as possible.

As the global economy is in distress, these economies will further face distress in terms of their government revenue base as majority of their income comes for oil sales. With lower oil sales and lower prices, their revenue base would be significantly impacted, leading to rising fiscal deficit as the government will have to spend in order to provide stimulus to the domestic economy. Thus their borrowings might increase, leading to greater level of insecurity and higher interests rates on bonds as investors would find such countries increasingly under stress. Thus lower economic growth and a rise in debt-burden, reduction in reserves and earning capacity and increased reliance on other means of revenue generation.


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