Oil is one of the world’s most essential natural resources. Possessing this resource helps a country acquire a powerful standing on the international stage. Even the slightest fluctuation in oil prices significantly impacts a country’s and the world’s economy.
The COVID-19 pandemic is affecting the economic growth of countries, which is hurting the global economy. Due to the world’s uncertain situation today, the Coronavirus outbreak has led to a significant decline in oil prices.
The question is ‘whether this decline in the oil price will lead to further deterioration of the economy or will it serve as an economic booster?’
Before we dive deep into this, we need to understand the major causes of the decline in oil prices. Why? It will help you understand the considered impacts of this natural resource on businesses, including other options.
Causes of Decline in Oil Prices
Oil is a natural resource that several states refine as a product and then export to other countries. However, there are specific changes that cause significant fluctuations in oil prices.
- OPEC causes oil costs to fluctuate
The Organization of Petroleum Exporting Countries (OPEC) is one of the major causes of the decline in oil prices. OPEC consists of 13 world states. It takes care of 80% of the global trade of oil reserves. The member countries produce oil to fulfill all global demands. It causes fluctuations in the costs of this natural resource and hinders economic growth.
In the past, the cost of natural resources started increasing as there was a $100 price for one barrel. But the global pandemic starts tumbling the price of these natural resources. It significantly impacts oil importers’ and exporters’ economic growth.
- Supply and requirements cause oil price reduction.
The product manufacturing process and stock exchange also play a role in the decline in oil prices. The oil prices and the demand for products are inversely related. There is a prominent decrease in oil costs when the supply exceeds the demand.
The excessive supply of oil decreases its price. It benefits states’ economic growth, mainly the exporters of this natural resource.
- Political instability
According to the international trading perspective, the Middle East’s political instability causes oil prices to fluctuate. It happens because countries account for a significant share of the global oil trade.
According to the research, political instability in Iraq and Afghanistan caused a significant decline in oil prices. It means a single oil barrel rate reached $128 due to political unrest and uncertain security.
The Decline in Oil Prices and The Global Economy
At the international level, OPEC or other exporters control all-natural resources’ pricing strategies, especially oil. According to recent research, the decline in oil prices due to COVID-19 affected several countries’ economies, including Russia.
Russia, specifically, faced a decrease of $2 billion in its revenue. Additionally, several countries, including oil-producing ones, encountered low profits due to reduced oil costs. It happened due to a commission reduction of more than half of their rigs.
Impact of Oil Costs on Businesses
The decline in oil prices has a tremendous impact on manufacturing and production companies in the country. It also affects transportation and other business operations because the expenditures interrelate. Businesses need transport and fuel to send their goods to the importers.
So, the decline in oil prices makes transportation as cheap as possible. It opens the doors for other business operations. Hence, there is a significant advancement in economic growth.
Employment and Investment
The decline in oil prices in the world’s economies has a negative and positive impact. How can it be?
The oil exploration and refinery process needs a large team of laborers and other natural resource-extracting experts. They also need affordable transportation and experienced diesel mechanics. So, the significant decline in oil prices helps them to achieve this goal.
However, the decline in oil prices slows natural resources’ drilling and exploration activity. It makes economic activities unconventional. It increases a higher barrel cost than a conventional oil and natural resource source.
Conclusion
There is a negative and positive impact of a decline in oil prices. According to the experts, if this downturn benefits you, you should use it for future business advancements. If it isn’t leveraging you, try to cope with it by creating problem-solving strategies.
The most effective and helpful measure is to sign the future contract as discussed above. Due to this, you can decide on a specific amount for oil shopping, and the price will remain the same whenever you need to use this opportunity.
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing service to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud platform where their QuickBooks™️ file, critical financial documents, and back-office tools are hosted in an efficient SSO environment. Complete Controller’s team of certified US-based accounting professionals provide bookkeeping, record storage, performance reporting, and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay. With flat-rate service plans, Complete Controller is the most cost-effective expert accounting solution for business, family-office, trusts, and households of any size or complexity.
