The article discusses the effects of the new OPEC deal on gas prices as well as the transportation sector tool. Tuttle (2016) wrote the article on September 29 this, retrieved on October 20, 2016 from the website, and published by the Wall Street Journal. The article explores the impact of the OPEC deal on gas prices and thus effect on the flight or transportation sector as well as the general economy (Tuttle). According to Turtle, flight prices are expected to skyrocket.
Gas prices are very significant in determination of situation in the global economy. According to this article, this summer the lowest prices for a decade were experienced, which facilitated reduction in transportation costs charged by drivers (Tuttle). Due to the economic analysis, fluctuation of prices reduces transportation costs and increases the demand in the transportation sector. Hence, improvement in the transportation sector affects the economy since it lowers general production costs for industries in many perspectives. For instance, reduction in oil and gas prices makes a supply of raw materials and finished goods cheaper. As a result, producers, in turn, reduces their price levels stimulating demand, which contributes in the macroeconomic objectives such as the promotion of employment.
However, the South Eastern pipeline leakage among other factors led to hike in gas prices in many parts of the country (Tuttle). Consequently, the average industrial price of gasoline increase to about $ 2.2 per barrel for almost a month (Tuttle). Currently, oil and gas prices are expected to hike because of the latest deal by OPEC members to scale the production capacity of oil (Tuttle). Apparently, this will affect the transportation sector, which, thus, will lead to increase in general price level. Drivers will pay over $ 2.0 per gallon of oil in the preceding autumn and winter (Tuttle).
The move by OPEC to cut back the production of oil led to surging of its price levels by about 6 %. Before this deal was reached, Saudi Arabia, the major oil producer and exporter had promoted a reduction in prices of oil since the country had removed constraints to manufacturers where they could export as much oil as they wanted to (Tuttle). Reduction of the price levels was caused by an increase in supply. According to macroeconomic analysis, supply is inversely related to demand and, therefore, the price levels are likely to reduce. Since oil is an important economic variable, especially in the production sector, the general price levels decreased thus stimulating aggregate demand (Cashin et al. 113-134). Currently, oil price has raised from $30 per barrel in the last winter to $50 per barrel. However, an increase is less significant because oil was traded at $110 per barrel in last two years (Tverberg).
Causes of Increase in Gas and Oil Prices
The article by Turtle highlights various causes of increase in gas prices due to the fact that OPEC organization undertook the deal. A number of factors caused the growth of gasoline prices such as the increase in oil costs provoked by the pipeline leak that was experienced by the team (Tuttle). Development in the economies of the countries producing gas also led to increase in prices and changes in the weather conditions of those states.
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Firstly, the leak of the pipeline triggered the uptick in prices at around $2.20 per container of gas (Tuttle). The shortage of oil in gas production industry leads to demand for oil and thus it makes price of the fuel increase. Due to higher cost of output that is incurred through purchasing of oil with high prices, organization tends to increase amount of gasses so that they can avoid losses.
Additionally, the agreement of the OPEC organization to reduce the production in a period of two years affected prices of gas. Cutting down of the production provoked prices to rise until another agreement to produce more to the market was reached. More production of crude oil induced prices of gasses to fall to $50 that was favorable to consumers of the product (Tuttle).
Moreover, some analysts like the UBS say that there is no fear of expecting sharp prices because OPEC is in control of the deal (Tuttle). They say that although price will rise it will have certain limits beyond which they will not go. An increase is inevitable though the agreement will determine the success it will have.
Additionally, economic conditions in the market of countries producing the product will influence prices of gas. The use of gas in other states have raised their economies as well. Growth thus forces these countries to enhance the capital of product to be in line with their state economies (Tuttle). Development enables the countries to import more crude oil. The use of crude oil increases its demand because it is more efficient and reduces the need of gas in exporting countries. Supply of gas decreases because of the less demand by the consumers (Anandan 53-57).
Moreover, due to limited provision of gas consumers continue to demand the product. The organization has to make adjustments to increase prices of gas to enable potential users to proceed to purchase the product (Tuttle).
Additionally, the adverse weather conditions make prices of gas increase regarding the processes used to produce oil. Cold weather in the oil production areas encourages home heating to generate energy for production. An increase in the demand for the heating of homes producing the crude oil makes the request for the gasoline to decrease. A reduction in the need of gas for suppliers that will to offer and use oil so that they can build a financial project of the home heating (Anandan 53-57). The effects of decrease in gas production and usage make supply curve representing the gas to make a shift to the left. The change causes an increase in cost of gasoline.
Effects of the Skyrocketing of Oil Prices to an Economy
Oil is one of the most significant resources to the global economy. Therefore, the price movement for the crude oil affects the world economic situation as explained below.
Firstly, the cost of production increases, thus leading to an increase in general price levels. In return, the demand reduces since the purchasing power of individuals diminishes, as their income levels remain unchanged (Tverberg). For example, the transportation sector is adversely affected thus increasing the cost of distribution of raw materials and finished goods (Tverberg). As a result, the production costs increase, which stimulates the producers to raise the price to maintain profit levels. In this case, the demand decreases due to a reduction in the purchasing power. Apparently, the living standards decline in the society (Cashin et al. 113-134).
Secondly, the remuneration rate fails to increase to offset the rise in the oil prices. Salaries have continued to remain constant despite the prices growth (Tverberg). This disparity leads to economic discomfort because of the reduction in the purchasing power. Apparently, the only solution left to the consumers is cutting back on the discretionary expenditure (Tverberg).
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Thirdly, the spikes in the gas and oil prices associate the recessionary periods that adversely affects the economy (Tverberg). After the increase in the oil prices, the consumers take precautionary measures by cutting the aggregate discretionary expenditure to raise the level of income for the essential goods such as food, water, and commuting gasoline. Apparently, these lay-offs presented in certain sectors usually lead to more cutbacks in expenditure, as well as more defaults in debts (Tverberg).
Additionally, hiking of oil prices adversely affects the economy.
For instance, the increase in the oil prices promoted to the 2008-2009 global economic recession (Tverberg). The financial crises were the worst to have hit the world economy since the World War II. The housing prices led to underperformance in the stock exchange market, contributing to massive unemployment due to the reduction in the production capacities (Cashin et al. 113-134).
Furthermore, the hiking of oil prices has a negative effect on the profitability of businesses. Along with this, most of the firms in the discretionary sectors usually lose their marketability and may choose to close because of bankruptcy (Tverberg). Others decide to lay off some employees to get bank equilibrium in the demand and supply (Cashin et al. 113-134).
Lastly, oil price advance usually does not work well within the economy, as it leads to economic development of oil-exporting countries and adversely affects the oil-importing ones (Tverberg). The same tendency applies to the employment levels. Similarly, the oil prices increase debt levels and fluctuation of foreign exchanges of oil-importing countries’ currencies (Tverberg).
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The prices of gas have increased because of several factors that influence it as regards the usage, production, and competition with other resources such as the oil. The increase in crude oil prices has been the primary cause for this drastic raise. The price of the oil is one of the main reasons affecting all sectors ranging from production of gas to distribution of oil. The growth of the economies of the oil-purchasing countries has also influenced the prices of the gas. The economies are set at various levels to promote development and increase the demand for products. Additionally, unfavorable weather conditions add to the usage of oil. Thus, the demand for gas decreases while that of oil increases. The usage of the oil motivates many other users to opt for using it rather than gas in their households.