The Impact of Oil Prices in World Economy - Assignment Example

TABLE OF CONTENTS INRODUCTION 2. THE IMPACT OF OIL PRICE IN WORLD ECONOMY 3. THE IMPACT OF OIL PRICE IN UK ECONOMY 4. THE IMPACT OF OIL PRICE IN AIRLINE INDUSTRY 5. PERFECT COMPETITION 6. HUMAN RIGHTS – ITS IMPACT IN BUSINESS 7. APPENDIX 8. BIBILIOGRAPHY BUSINESS AND FINANCIAL ENVIRONMENT Introduction: ‘Business’ means what keeps one busy and occupied. It is the human activities which involve production or purchase of goods with the object of selling them at a profit. The environment of the business is dynamic. Organization works within the framework provided by the various elements of society. “Environment consists of atoms and molecules, agglomeration of things in motion, alive, of men and emotions, of physical and social law, social ideas, norms of actions, of forces and resistance. Their number is infinite and they are always present; they are always changing”(Chester I Barnard, The Functions of Executives, Cambridge, Mass: Harvard University Press, 1968). A proper estimate of the objectives of business can, therefore, be made only after an understanding of the environment in which a business firm functions. “Business Environment refers to a set of external factors – such as economic factors, socio-cultural factors, government and legal factors, demographic factors, geophysical factors, which are uncontrollable in nature and effects the business decisions of a firm or company”. (Business Environment, Rosy Joshi, Sangam Kapoor, Page No. 6, Kalyani Publishers, 2003). The Environment of the business is affected with lot of changes and uncertainties. The impact of global or international environment is essential due to liberalization, mobilization of resources etc. so management is analyzing the competitors counter measure strategy and adopt various corrective actions to survive the business. The impact of Oil Prices in World Economy: The world price of Oil has reached its peak in the year 1979, to more that US dollar 80 a barrel. The Oil prices is been rising in the present years. This is because of the large scale use in production. The rise in Oil price has also lead to inflation in the Global Economy. The consequences of Oil price shocks for inflation and output depend largely on the monetary policy adopted in response to them. In the world economy it is seen that oil is consumed mainly for manufacturing and transporting. The highest consumption is done by Japan and the least by China. The year 2004 has witnessed a wide demand for petroleum products in the Global Economy. This was due to the economic recovery in many parts of the world. Over the past years the Oil supply has shown an expansion of about 1% per annum. If we take the demand and supply factor the economy witnessed a structural change in Oil demand. The changes in supply is not affecting the price of Oil and it is not fluctuating inversely with changes in amount demanded. The Oil price changes have different effects in different countries. The most effected nation is US, mainly due to greater responsiveness of expected inflation to Oil price increases. In future the world economy is expected to a dramatically change in oil market and crude oil prices due to the above factors. The International Oil Market is affected by the future development of global economies and world energy market. The global oil demand will be likely to increase in the coming year. The Impact of Oil Prices and its implication in the UK Economy: Europe relay about 40% of their energy needs on Oil and it is stable over the past several decades. Presently it is seen that there is a tremendous decrease in Oil dependent for their energy consumption needs. The Oil price rise have depressed the trend output and the economy has little spare capacity. The higher oil prices together with slower increases in the workforce have reduced trend growth. The unit cost of production had an increase. The inflation has remained above the target. The higher oil price are also raising tax revenues but there is only a slow economy on the government spending. Over the last three years there was a reduction in the medium supply potential of the UK Economy by over 1% due to hike in Oil price. The import by oil producers are now very high compared to oil revenues. “Despite rising capital costs brought by higher inflation and rising interest rates, higher oil prices causes fixed investment to rise by stimulating business investments in energy explorations”. (The Impact of Energy Price Shocks of the UK Economy – A Report to the Department of Trade and Industry, Page 8, May 18, 2006). The higher oil prices are having a negative effect on the global economy by showing down the economic growth of many countries. The demand for the goods and services of UK will be reduced in the Global Market. The rise in price of Oil had a small negative impact on GDP. The UK Economy is insulated from an oil price increase. The Oil price hike has led to oil price inflation, by averaging it to 26% in 1975 and 22% in 1980. The income is transferred from oil consumers to oil producers leading to a net reduction in global trade. “Higher oil prices also subdue activity, which can have a downward impact on inflationary pressures in the longer term. Rising petrol and heating oil prices reduce household real incomes and, as a result, consumer spending is squeezed” (The Economic Impact of High Oil Prices, Group Economics, The Royal Bank of Scotland Group, Page 4, http://www.rbs.com/content/economic/downloads/insight/oil_prices.pdf). There will be also a considerable increase in energy tax when the oil price rises. The size of impact of oil price hike differs from Industry to Industry. The effect of Oil price will be more effected on utilities, transport services and agriculture. When household spending slows it will effect various sectors like electronics, automotive and travel services. The labour market will also be effected when employees demand for wage increase. The rise in oil prices will reduce consumption, investment as well as exports. Impact of Oil Prices on Airline Industry The rising oil prices have led to airline industry to increase their fares. The Airline travellers because of the fare hike have shifted to high-speed rail. The current hike in oil prices have caused a difficult situation for the airline industries. The Industry has to take further step in reducing oil consumption especially in the ground transportation sector, where more oil is consumed. The Industry as a whole have started measures to increase its fuel efficiency. It is through a combination of technology, improved air traffic control and better practices. The industry should take measures to affect the market in helping to reduce oil prices. The airline industry should take measures in stopping operating empty flights. The Airline Industry has taken various steps to increase fuel efficiency through design changes, taxiing on a single engine, balancing the load etc. The industry has also taken certain measures in the improvement in air traffic management. Measures were taken to reduce idling time before takeoff and after landing. Latest technologies are adopted such as aviation communication, navigation etc by enabling planes to calculate the most efficient routes. There is also measures taken for a shift to non-petroleum jet fuel. Certain alternative energy resources are been considered as replacements for traditional petroleum products. Example synthetic jet fuel from coal and natural gas. “Paul Charles, Director of Communication, Eurostar, said :”More travellers are choosing Eurostar in a climate where higher oil prices have led to higher airline fares. Once they’ve experienced high-speed rail, and the greater convenience and punctuality we offer, travellers stay with us which is why we’re continuing to see strong year-on-year growth” (Eurostar Gains Travellers as high Oil Price Hits Airlines, http://www.eurostar.com/UK/uk/leisure/about_eurostar/press_release/press_archive_2005/19_07_05.jsp) Perfect Competition: “Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes”.(Economics Basics : Monopolies, Oligopolies and Perfect Competition, http://www.investopedia.com/university/economics/economics6.asp) Large number of buyers and sellers has special significance in perfect competition. Large number denotes that the number of producers are so numerous that they cannot combine and influence the market price by their combined action and decisions. There is no artificial restrictions either preventing the entry of new firms into the market or compelling the existing firm to continue. There is existence of perfect knowledge on the part of buyers and sellers about market conditions. It is also assumed that there are no artificial restrictions from any quarter hindering the smooth functioning of perfect competition. At any given time, there may be firms of varying sizes and efficiency in an industry, possibly some making profits and others incurring losses. As such new firms move in, they compete with existing firms and the most inefficient firms are eliminated. In the long run, therefore, there will remain in the industry only firms which have the lowest average total costs, as low as those which would be incurred by new enterprises in optimal scale adjustments. Some firms may be small with close personal supervision and hence with greater efficiency whereas others may be large and with mass production methods. Illustration Two manufacturers of cotton textiles may be differently located; one may have the advantage of nearness to buyers but the disadvantage of higher rent. The other may be located away from the buyers and as such may have the advantage of lower rent but the disadvantage of higher transport costs There are various advantages of perfect competition such as in perfect competition high degree of competition helps allocate resources to most efficient use. The firm operates at maximum efficiency. Perfect competition gives an optimal allocation of resources but the existence of scale economies makes perfect competition impossible. There is incompatibility of internal economies of scale with perfect competition. There is insufficient profits for investment. There is also lack of product variety which is not attractive for consumers in the market. There is no competition on product design and specification. Human Rights and its implication in Business: Business have a wide impact they have on individuals, communities and the environment. Human Rights principles are there both in national and international law. In many countries especially in MNCs there is a strict checking related with the implementation of human right laws. The law when implemented in the business will help in the smooth functioning of the enterprise. The Human right law will also help to maintain positive community relations and helps to contribute to a more stable and productive business environment. It will lead to a productive business operation. Proper implementation of Human Rights in business will enhance the productivity of the human resources. Human rights standards have been established by international agreement and it has universal applicability to every society. There are various categories of human right law. They are: a) those affecting the employees of the organization b) those affecting Company’s business partners, both in public and private c) those affecting the society Thus through implementing Human Right laws, the business has the following advantages a) There is a good relationship maintained with Stakeholders b) Employee recruitment, retention and motivation is enhanced c) There is a reduced risk of consumer protests d) Increase in brand image e) Maintaining a good relationship with Government, business partners, trade unions, sub contractors and suppliers. WORK CITED 1. Chester I Barnard, The Functions of Executives, Cambridge, Mass: Harvard University Press, 1968 2. Business Environment, Rosy Joshi, Sangam Kapoor, Page No. 6, Kalyani Publishers, 2003 3. The Impact of Energy Price Shocks of the UK Economy – A Report to the Department of Trade and Industry, Page 8, May 18, 2006 4. The Economic Impact of High Oil Prices, Group Economics, The Royal Bank of Scotland Group, Page 4, http://www.rbs.com/content/economic/downloads/insight/oil_prices.pdf 5. Eurostar Gains Travellers as high Oil Price Hits Airlines, http://www.eurostar.com/UK/uk/leisure/about_eurostar/press_release/press_archive_2005/19_07_05.jsp 6. Economics Basics : Monopolies, Oligopolies and Perfect Competition, http://www.investopedia.com/university/economics/economics6.asp BIBLIOGRAPHY 1. Business Leaders initiative as Human Rights – A guide for integrating Human Rights into Business Management 2. Business Environment – Rosy Joshi, Sangam Kapoor, Kalyani Publishers, 2003 3. Business Economics, S.Sankaran, 4th Edition, Margham Publication, Chennai, India 4. Managerial Economics, G.S.Gupta, Tata McGraw-Hill Publishing Company Limited 5. Principles and Practice of Management, L.M.Prasad, 6th Edition, Sultan Chand & Sons, New Delhi Read More