Global Recession and Its Effect on Global Oil Market - Assignment Example

Teacher’s 10 March Global Recession and Its Effect on Global Oil Market Global Recession of 2009 is a contemporary issue, as the after effects of it can still be seen and felt in all economies, regardless of their size and dynamics. More than 80 years have passed since the world faced the Great Depression, which was the worst economic condition that the world faced in the recent times. In order to have a look at the effects of global recession on the Global Oil Market, we will have to understand the terminology of ‘Recession’ first. Recession The term recession is a Macroeconomic term which is used to refer to the contraction or a general slowdown of the economic activities. Economists determine recession with the help of some conventional Macroeconomic indicators like Investment Spending, employment, business profits, capacity utilization, household income and inflation. If the general level of all these macroeconomic indicators is falling, then the economy is most likely to encounter recession. It is pertinent to mention here that as the level of these indicators fall, the level of unemployment and bankruptcies rise on the other hand. The two most important factors that have significant importance on levels of recession are Unemployment and Inflation. In the time of 1930s, when our world encountered Great Depression, most economies of the modern world like Germany were facing hyperinflation. Inflation exceeding the boundaries of Galloping Inflation can make the economy go down thousand times faster .Moreover, inflation accompanying unemployment causes the economy to collapse completely. Recession can be controlled by implementing different policies and by triggering different factors. Countries usually try to overcome recession by announcing sound and stringent Fiscal and Monetary policies. Interest Rates are raised and unemployment is eradicated with the help of different schemes and policies. Impact of Global Economic Recession on Oil Market We know that the global oil market is a complete oligopoly being run by a few powerful oil exporting countries and consortiums. The oligopoly of oil Market is very strong because of the fact that the International demand for oil barrels is relatively inelastic. Due to this reason, leading oil exporting countries have taken the market completely and are running the market according to their own terms and conditions. This type of competition in the global oil market has made the prices inflexible. With the fact that the prices of many other things are dependent on the rates of oil which is being obtained from the global oil market, therefore, oil being a complementary good controls the pricing of many other things, as well. In addition to this, it is also observed by economists that an increase in the price of per oil barrel in the global market leads to increase in the general price levels of many developing countries. The global economic recession that hit our world in 2009 changed the whole scenario of the oil Market. Although, this type of competition was prevalent in the oil market, however, recession ruined the market’s oligopoly. The oligopoly of major oil exporters was eradicated completely as the global demand for oil decreased significantly, making it more elastic than before. That increase in the elasticity of demand for oil forced the competition to go down as the market was moving itself towards perfect competition. Ultimately, this did not happen because of two simple reasons i.e. the world recovered from the recession too early and there weren’t enough oil producing consortium and companies that could have turned the global oil market into perfect competition. Impact of Recession on Pricing of Oil Barrels Significant decrease in the prices of oil barrels can be seen by observing statistics of oil barrels prices during the time of Global recession. As the global demand went down, the global oil market was forced to cut down its prices per barrel. Despite, being an oligopolistic market, the prices went down by a great percentage. A few months before the recession, the demand for per barrel of oil was 87.5 mbd (Million Barrels per Day) however; there was a sharp drop of 3.4 mbd soon after the recession hit. Numerically these numbers might look negligible; however, these numbers were enough to change the market situation drastically (Islamic Development Bank, 2-5). According to the law of Demand and Supply, price has an inverse relationship with demand and positive relationship with supply. These laws are applicable if the other things remain constant. So, when the demand of oil barrels per day dropped by 3.4 million, the market decided a new equilibrium price to make the demand and supply equal again. The drop in the demand for oil barrels enforced downward pressure on the oil prices. Before the recession, the price of Crude Oil was on its peak i.e. $145 per barrel in July 2008. However, in September 2008 when recession hit the world, the price of crude oil gone down by 103 USD declaring the new price of $42 per barrel (Islamic Development Bank, 2-5). Such drastic drop in the prices was never faced by the oil market before, nevertheless, recession made it happen for the first time. The price of oil barrel averaged $45 during the recession, which is the lowest price set by the Oil Market in its history (Counting Inflation). In this regard, a graph is given below that would help in drawing a better picture of the market. Data Source: Oil Market Report, International Energy Agency The sudden dropdown of the prices also affected the economy of the major oil exporting countries. The export surplus of major stakeholder countries in Global Oil Market went down and the countries also faced higher inflation in the period of recession. Taking the example of Saudi Arabia as a reflection of Oil Exporting countries’, condition at the time of recession shows that the real GDP of Saudi Arabia went down by 4.1% and was only 0.1% in the year 2009 (Saudi Arabia Country Report). Such drastic decrease brought forward a higher level of inflation to combat which, the Saudi Arabian Monetary Agency (Central Bank of Saudi Arabia) increased the interest rates. Recovery of Oil Market from Recession The recovery of Oil Market to its original state was dependant on different factors. First of all, the main reason of the crash of Oil Market was Global Recession; therefore the antidote of it was the recovery of world from the global recession. The trend of the Oil market during the time of recession shows that by the end of October 2009,\ when most of the countries started recovering from the effects of recession, the oil market also started stabilizing. The prices started to rise again, witnessing $77 per barrel in the end of October 2009. Another factor that helped the oil market to sustain was to balance the demand and supply i.e. maintaining equilibrium. The OPEC (Organization of Petroleum Exporting Countries) started diminishing the supply of oil in order to maintain equilibrium. The OPEC supply response was crucial in this regard and Saudi Arabia, being the leading exporter was suggested by the OIC (Organization of Islamic Cooperation) to diminish its supply for some time until the world recovers from recession. When the price of oil barrels started to rise again, the Global Oil Market controlled the prices in a wise manner because there was a risk of building inflationary pressure. Cost push inflation might have hit many countries of Asia if the prices would have not been controlled wisely. Conclusion Discussing the contemporary issue of Global Recession that hit our world in 2009 reveals many things to us. First of all, it can be deduced that market structures like Oligopoly, Monopoly, Duopoly or Perfect Competition can be changed or disturbed for some time because of recession or inflation. Although market structures of such big market like global oil market is difficult to change or disturb, however recession has inflicted a significant effect on the market. In oligopolistic market, each supplier has the power to influence prices and can affect its competitors. The consumer has no influence over price. In case of global oil market, the market structure is oligopolistic in nature and the demand for Oil is relatively inelastic which means that the consumer has no influence over price. However, the Global Recession of 2009 influenced the prices by a great deal and not only the prices went down by a fair percentage but the demand also decreased significantly. It is easy to infer that recession has a great impact on the prices. Recession cannot only change prices but can also bring significant change in the demand of a commodity. One interesting observation was that many developing countries like Pakistan and Bangladesh were able to keep their economies stable during the recession, because when oil prices went down and being a complementary good of most things, the rise in the prices of other commodities were compensated by it. Work Cited Fyfe, David, ed. "Oil Market Report." International Energy Agency. Organisation for Economic Co-operation and Development, 10 Sep 2009. Web. 11 Mar 2013. . Islamic Development Bank, ed. IMPACT OF GLOBAL ECONOMIC RECESSION ON OIL MARKET AND IMPLICATION FOR OIC MEMBER COUNTRIES. COMCEC Ministerial Working Session, Istanbul, 7, Nov. 2009: 2-5. Web. 11 Mar. 2013. . "Saudi Arabia Country Report." Global Finance. Global Finance, 2012. Web. 11 Mar 2013. Read More