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An increase of 54% in the prices of crude oil in 2011 would lead to a double recession in the U.S.
This paper aims at examining how shocks of oil prices in the past have impacted the U.S. economy, and makes predictions on how the economy will do in light of the recent oil prices. Using the methodology of forecasting from Hamilton (2008) with time analysis, the paper will use the impulse response functions from the prices of oil to predict the response of GDP. The literature review will be used to describe how oil is an integral part of the economy, and how recessions and oil shocks have coincided ever since World War II. The paper will point out the disagreements in the literature about the impacts of oil shocks on the U.S. economy as well as the asymmetry of price increases and price decreases.
According to Hamilton (2010) when an embargo on oil was instituted by the Organization of Petroleum Exporting Countries (OPEC) the global supply of oil fell by 7.5%. The 1973 oil crisis effects were far reaching. According to Forrester (1984), the U.S set the target of reducing the consumption of oil by 25% at that time led by Richard Nixon. A country wide speed limit of 55 miles per hour was temporarily passed by the congress, and this continues until 1988 (Frum, 2010). The use of Christmas trees was banned in Oregon State (Frum, 2010). Many gas stations in the U.S were shut down as a result of insufficient oil supply, as many other gas stations rationed the gasoline supply (Hamilton, 2010). The American lifestyle was threatened by the Middle East instability which had a huge effect on the American people (Dahl, 2003).
As a result of the political turmoil in Libya in 2011, the prices of crude oil went up to two and a half year high. As the issue was addressed by the U.S president, it became clear that, the U.S used 7% less oil in 2011 than in 2005, but still depends on the foreign oil. According to the U.S. imports over 55% of crude oil from outside.
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This research helps to better determine the role oil prices play in the Saudi Arabian stock market. The results of this research could be significant for investors and enterprises in determining their hedge on their oil investments and could serve as a basis for further research and verifying its validity in other major oil producing countries, and in determining the direction their stock portfolio is expected to go in depending on oil prices.
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Oil industry remains unique and critical to the world economy and there attracts global attention with significant influence in economic policies and events. It is important to undertake a study on Oil industry from a bigger perspective ranging from production to supply and final consumption.
As the author of the text puts it, in the dividend decision, the management of the company decides how many portions of the profit will be distributed to the shareholder as a dividend. It should be noted, there is the average positive correlation between dividend changes and short-term abnormal return in different sectors.
The review of literature for this research paper deals with the effects of the primary sectors in the economy on the economic growth and development of the countries. It has bee observed that the nations all over the world which have attained rapid economic growth rates are majorly due to the contribution of primary sectors in the economy.
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Apart from earning substantial
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The big question is how these changes in the prices of oil are forecasted in the market. The demand and supply framework in the market show the players to buy or sell at each given price. Equilibrium is achieved in the market if its demand is equal to its supply. The oil price at the market equilibrium is the market price of oil at that given time.
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