Assignment 2

Salman Yousaf
2013331
Macroeconomics
Since oil is considered to be an important factor of production, decrease in its price low the costs
of production. As a result, domestic productivity will gets better and will raise.
In the short-run oil price shocks affect macroeconomic performance through various channels.
Theoretical literature has identified six transmission channels through which oil price changes
affect the performance of macroeconomic variables (Brown and Yucel, 2002, Jones et al., 2004,
Tang et al., 2010, among others). These transmission channels include the supply-side shock
effect, wealth transfer effect, inflation effect, real balance effect, sector adjustment effect and the
unexpected outcome.

Q1: What are the reasons for fall in Oil Prices in Local Markets?
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Ans: As the prices in the Global Market falls it has a direct impact on the local market.

If the country is an oil importer the country will take the oil at low price.
If the country is an oil exporter not only the petroleum will be flashier, but besides the
price of extracting oil will be more depressed.
Subsidies by the government is also a reason for the decline in oil prices in the local
market.
If the state sustains a vast store of petroleum and the demand of petroleum (for
whatsoever cause) is depressed, that is also one of the causes for the decline in oil prices
in the local market.
For oil exporting nations, there would be an immediate negative shock to GDP growth as
a consequence of the oil price fall. Meanwhile, there might be a substantial bump in GDP
growth for petroleum-importing states, most notably the US, Canada, and some rural
areas in Asia

Q2: What are the reasons for fall in Global Oil Prices?
Ans: The reasons for decline in Global oil prices are as follows:

Saudi Arabia, the worlds largest oil exporter, has cut its oil production from 10 million
barrels a daya record highin September 2013 to 9.6 million as of Sept. 30. Hasnt
done that much to lift costs, largely because other OPEC states are pumping more crude
as the Saudis attempt to slack down. Sharply higher production increases from Libya and
Angola, along with surprisingly steady flows out of war-torn Iraq, have pushed OPECs
total production to about 31 million barrels a day, its highest level this year and 352,000
barrels a day higher than last September. Combined with the continued growth in U.S. oil
production, the world has more than enough oil to fill current demand.
Decreased growth from China. It is significant to notice that China is still growing quite
fast, but their increase is forecasted as lower than previous forecasts. All this extra global
oil supply has been picked up by China, after it all gets more oil from the Middle East
than the US does.
Libya is back along track to it's full export production of 1.6 million barrels/day
compared to less than half a million Boe/d only a few months ago. Libya Oil Output
Rises as Fields Ramp Up Production. Libya's oil output went up to 870,000 bpd from
810,000 bpd last week
The North American energy boom has likely helped increase global oil supplies, which in
turn brought down oil prices. Indeed, OPEC and other nations have warned that North
America remains the principal driver for the non-OPEC supply growth in 2014.
Petroleum and gasoline business in North Dakota, Texas, Oklahoma, Louisiana,
Oklahoma and elsewhere have experienced major expansions around shale plays.
Despite the fighting in and around Iraq, oil prices have defied concerns of heightened
geopolitical risks. The most recent news outside of official price cuts is that Saudi Arabia
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has reportedly been telling OPEC members that it would not be uncomfortable if oil fell
to $80 per barrel for a yr or two. Saudi Arabia and OPEC nations have not exactly been
fond of committing to limiting production, which could hold prices low even if OPEC
tightens quotas. OPEC and certain countries in the Middle East have definitely noted the
growing clout of the United States in global energy markets. A recent OPEC supply and
demand projection showed that the increment in total non-OPEC supply will outpace the
increase in world petroleum demand. Even as recently as the beginning of October, there
were reports that Saudi Arabia was lowering its official price of petroleum. More and
more news stories are out hinting at oil price wars.

Q3:How the falling prices will affect the Pakistan Economy?

Ans: Oil prices and its fluctuations continue to sit as a consequential macroeconomic concern for
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both developed and producing nations. For oil importing countries like Pakistan the impact of
irregular and unexpected price quickly seeps into the domestic economy, threatening the already
existing macroeconomic imbalances.
Falling Oil Price will

Low oil price along with falling inflation can improve competitiveness of Pakistani
exports. Imports, on the other hand, might take advantage of low global commodity
prices and increase further in the rest of FY15. This, at the same time, given the
significant imports intensity for export sector in Pakistan, could add to exports
competitiveness and improve its outlook towards the end of the current fiscal year.
Presently, around 40-45% of the countrys installed generation capacity is based on
furnace oil. As the cost of oil will decrease the price of electricity producing will also
diminish.
Sustainable decreased, in general prices.
Decreased transportation cost.
Improving agricultural and industrial productivity
Improvement in covering water shortages for the rural economic system.
This is causing an enormous fiscal impact on competitiveness in the external sector,
creating record trade and BOP and our foreign exchange reserves.
It will permit the consumer to purchase the end product produced with the new resources,
assuming the end product isnt too expensive relative to the consumers net income.
The fall in unemployment.
Sustained Inflation.
In short the GDP will go towards betterment

Q4: Show diagrammatically the falling global prices level by using Market Demand-Supply
models you learnt earlier?

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COMMENTARY BY

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Stephen Moore@StephenMoore
Stephen Moore, who formerly wrote on the economy and public policy for The Wall Street
Journal, is chief economist at The Heritage Foundation.
American workers and motorists got some badly-needed relief this week when the price of
oil plunged to its lowest level in years. The oil price has fallen by about 25 percent since its
peak back in June of $105 a barrel. This is translating to lower prices at the pump with
many states now below $3 a gallon.
At present levels, these lower oil and gas prices are the equivalent of a $200 billion cost
saving to American consumers and businesses. Thats $200 billion a year we dont have to
send to Saudi Arabia, Kuwait and other foreign nations. Now thats an economic stimulus
par excellence.
There are many global reasons why gas prices are falling, but the major one isnt being
widely reported. America has become in the last several years an energy-producing
powerhouse. And sorry, Mr. President, Im not talking about the niche green energy
sources you are so weirdly fixated with.
Oil prices are falling because of changes in world supply and world demand. Demand has
slowed because Europe is an economic wreck. But since 2008 the U.S. has increased our
domestic supply by a gigantic 50 percent.
This is a result of the astounding shale oil and gas revolution made possible by made-inAmerica technologies like hydraulic fracturing and horizontal drilling. Already thanks to
these inventions, the U.S. has become the number one producer of natural gas. But oil
production in states like Oklahoma, Texas and North Dakota has doubled in just six years.
Without this energy blitz, the U.S. economy would barely have recovered from the
recession of 2008-09. From the beginning of 2008 through the end of 2013 the oil and gas

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extraction industry created more than 100,000 jobs while the overall job market shrank by
970,000.
When the radical greens carry around signs saying No to Fracking, they couldnt be
promoting a more anti-America message. It would be like Nebraska not growing corn.
We are just skimming the surface of our super-abundant oil and gas resources. New fields
have been discovered in Texas and North Dakota that could contain hundreds of years of
shale oil and gas supplies.
Heres another reason to love the oil and gas bonanza in America. Its breaking the back of
OPEC.
Saudi Arabia is deluging the world with oil right now, which is driving the world price
relentlessly lower. The Arabs understandas too few in Washington dothat shale energy
boom is no short term fad. It could make energy cheaper for decades to come.
As American drillers get better at perfecting the technologies of cracking through shale
rock to get to the near infinite treasure chest supplies of energy locked inside, we will soon
overtake Saudi Arabia as the dominant player in world energy markets.
You cant have a cartel if the worlds largest producerAmericaisnt a member. OPEC
will never again be able to create the level of economic turmoil that the Arab members of
OPECs engineered in the 1970s with their oil embargo. And by the way: lower oil prices
place increased pressure on Irans mullahs to abandon their nuclear program and curb
Putins capabilities to engage in East Europe aggression.
Yet the political class still doesnt get it. As recently as 2012 President Obama declared
that the problem is we use more than 20 percent of the worlds oil and we only have 2
percent of the worlds proven oil reserves. Then he continued with his Malthusian
nonsense, Even if we drilled every square inch of this country right now, wed still have to
rely disproportionately on other countries for their oil.
Apparently, neither he nor his fact checkers have ever been to Texas or North Dakota. And
we dont have 2 percent of the worlds oil. Including estimates of onshore and offshore
resources not yet officially discovered, we have ten times more than the stat quoted by
the presidentresources sufficient to supply hundreds of years of oil and gas.
America, in sum, has been richly endowed with a nearly invincible 21st century economic
and national security weapon to keep us safe and prosperous. The plunge is gas prices is
just one visible sign of this supply explosion. Think of how much bigger this revolution
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could be if we started building pipelines, repealed the ban on oil exports, expanded drilling
on public lands, and stopped trying to punitively tax and regulate the oil and gas.
For much of the last forty years, oils periodic price spikes have remained a constant threat
to growth. Higher consumer energy costs as well as increased industrial production costs
weighted on the economy. Now oil is one of the primary accelerators; the new big drag on
the economy is politicians who despise the carbon-based industry.

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