Effects of diminishing oil prices on GDP
Crude oil is one of the vital resources available to man. Its vitality is a result of its extensive number of applications. It also implies that it has a major connection to the gross domestic product of any economy that relies on its sale. Therefore, it comes as no surprise that a drop in its price might be able to cause extensive damage to the GDP of said nation. However, this is not always the case. A reduction in oil prices will effectively cause a drop in the cost of transportation and fuel for firms. The lower prices do not benefit firms alone, they also benefit the individual unit consumers of the by-products of oil. In essence, it implies an increase in their spendable income; giving them the opportunity to spend money on other needs. These effects are however felt on a global scale because oil is one of the most traded resources. As such, it can take a toll on the economy by launching them into a constantly growing rate of inflation.
The specific cause of oil prices dropping is not streamlined to one concept, it can fit for quite a number of reasons. This is why a drop in these prices is mostly considered devastating when the fall in price is major. Just as there are times of dip, there are also times of large profits; especially for oil traders on oilprofit.io. In general, oil-importing countries stand to benefit from these price drops. However, smaller economies that are dependent on this naturally occurring compound can be crippled due to the drop in export revenue.
The year 2020 was filled with several catastrophic events, such as the Coronavirus and its variants. However, there were other smaller unfortunate events. Between March and April 2020, the world experienced one of the most major drops in the price of oil in many years. This was not only a disaster for the final consumers and oil-exporting developing countries alone, but it also affected several oil trading investors. During this period, the price of oil fell to the point of reaching negative for WTI. As was mentioned earlier, this level of reduction had not occurred in the last decade, making it a huge hit for the world of oil trading. The strange thing about this price drop is that even the importing economies felt its damage. This is because the outbreak of the Coronavirus already put the economy in a tight spot. With traveling being outright impossible or extremely strenuous, and people being out of work because of the virus, cheap fuel was not a major compensation.
Oil usage is not limited to petrol, diesel, and kerosene alone, these are just the most demanded byproducts. Oil is also used in other things that are basic to the economy. Among them are motor oil, floor wax, and even clothes. Therefore, the level at which it affects the individuals in the economy is evident.
It is important to note that these effects were only majorly damaging because of the additional problems accompanied by the global pandemic. In a normal environment, the final consumer may not feel the effects as much. A reduction in fuel prices means that transportation cost is reduced. This would further reduce the general prices of goods and services. The effect of this is a general decrease in the general cost of living and this is major, especially in an economy with a stagnant wage growth rate. It is essentially similar to having a free tax cut. Theoretically, if the prices of oil fell this low under normal circumstances, it could lead to higher purchasing power for other goods and by extension, increase the gross domestic product of an economy. And as for the firms and investors, they would most certainly experience a devastating loss.
