Impact of Oil in world economy

Adarsha Subedi / Kathmandu: Oil is one of the most important commodities in the world. With all the countries focusing on growth and development, oil can be regarded as the key resource.

Oil can be transformed into various sources of energy to benefit the modeling of infrastructures and tools for develop-ment. Oil extraction and production make up for a large part of the global economy. Other al-ternate sources are emerging in the energy market but it will be a long time before they re-place oil. The oil production is expected to reach 100 million barrels per day from current 85 million barrels per day indicating the importance of oil in the economy.

When we talk about oil we have to talk about OPEC, which is the umbrella organization of oil-exporting countries mainly with a similar level of output. The member countries include Algeria, Angola, Equatorial Guinea, Gabon, Iran, Kuwait, Libya, Nigeria, Republic of Congo, Saudi Arabia, UAE, Venezuela. Almost 44% of global oil production comes from OPEC and 81.5% of world proven reserves lie within their territory. They basically control the oil busi-ness of the world. There are other countries like Russia, Mexico, Malaysia who have been called OPEC+ but they run independently and not as an organization.

Impact on economy

Now, as a great economic production, how does oil affect the economy? Oil may be a single component/product but it is used in vast areas. Oil is used by huge industrial plants to the households of common people, so, we cannot ignore the importance and impact of oil in any regard. We have established that oil is rooted deep in many aspects, what impact does an in-crease in the price of oil has? As mentioned above oil is used in big industries and manufacturing sectors. The price increase will surge the price of manufacturing products for the firms. It costs more to produce the same goods they were producing before. The increase in manufacturing costs will cause an increase in the price of commodities. The goods cost more to cover the increased costs of production by the spike in the price of oil. This all accumulates in the increase in inflation in the economy and a decrease in the purchasing power of individuals. People’s standard of living takes a hit too. If there is a rise in the price of oil in the world, countries like China, India, Japan whose economy is boosted by manufacturing suffer more. Their basis for economic development is the manufacturing sector and higher oil prices push back their growth. But for oil-producing countries, higher prices may bring in higher profits (depending on the scale).

When the prices are high it heightens the price of commodities. But when the price is decreasing it shows some opposite traits. With the lower oil price, the cost of producing goods drops for the manufacturing firms. They can supply us goods at a lower price and according to the law of demand decrease in price, increases demand, and vice-versa. People’s purchasing power is back up. Falling oil prices are a major boost for developing and manufacturing countries. Fall in oil prices can be a business tactic for oil-producing countries to increase their profits by selling more. But sometimes low prices can hurt the oil producer. We can see this in the ongoing price war between Saudi Arabia and Russia. A little background, due to COVID-19 and decreasing demand Saudi Arabia wanted to cut production which was disagreed by Russia which resulted in Saudi Arabia slashing oil prices by 50% to undercut Russian prices with intentions to increase production. The main goal is here to loosen one country’s grip on the oil industry while relying on the sustainability of its own economy. With this move, the oil business is taking a hit as other countries cannot compete with Saudi’s price. But Saudi Arabia is hurting in their own way as their economy cannot sustain for a longer time with this decision. The fiscal policy of Saudi Arabia needs to maintain the price of oil at $78.50 per barrel to maintain their economy but the real prices are less than half of the expected number. The USA, the world’s largest energy-producing country is also hurting with this decision. However, countries like China, India, and Japan will benefit more during these price cuts.

Decreased oil prices may have negative consequence in the economy in other ways like in the current situation of COVID-19. The pandemic has shut down most of the world. There is no/minimum amount of production going on. The oil demand is going down than up. In this case, the low price generates low revenue for oil businesses and hamper the economy.

Nepal imports its oil form India as being a landlocked country Nepal does not have direct ac-cess to other countries in terms of trade. Nepal mostly imports petrol, diesel, kerosene, and gasoline. Oil imports are mainly for the purposes of energy, manufacturing, cooking for households, and more. The import of petrol and diesel in Nepal is only permitted through Ne-pal Oil Corporation (NOC) where the Nepalese government has 99.46% of total shares. The NOC can store 71558 kiloliters of oil, approximately 450086 barrels. In the past Nepal im-ported a lot of oil which has changed in the recent few years. In the first two quarters of 2019, the oil import was down by 6%. Thanks to the regular supply of electricity. The other reason is the decrease in the number of constructions due to monsoon. The import increases as soon as the monsoon season was over. The increase in imports has been helped by the decline in world oil prices. The government has implemented an automatic pricing mechanism that regu-lates the prices of fuel and protects the revenue. Since then the prices of petrol and diesel have declined by 20.36% and 19.37% respectively. The NOC is expected to make 5 billion rupees due to reducing prices. Because of this the government has been able to focus the budget on other development projects across countries. As mentioned above Nepal has only one channel for supply of oil products, India. Having one medium for oil import has unfavor-able effects to Nepal. The economic blockade imposed by India during 2015 shows the detri-mental repercussions in Nepal. Alongside that political problem detriment of the roads from south will have heavy effects on the supply of oil too. So, Nepal also needs an alternative to that hassle.

Oil in recent years is getting substituted by various alternatives with the concerns of it being extinct and also for the protection of the environment. Many alternatives are cheaper than oil too. But it will take a lot of years and research work before the oil is replaced. Thus, the oil will remain the main economic factor for a long time.

(Editor’s Note: Mr. Adarsha Subedi is undergraduate student at Kathmandu University School of Arts. Mr. Subedi has keen interest on economics, finances and policy making. Nepalekhabar has been promoting creative ideas and write up of young people. How do you find this article, please share your comment at : info@nepalekhabar.com)