BUSINESS ARTICLE

DERYK SUNNY.V.  1621112  PGDM-1B

OIL CRISIS – AND IT’S IMPACT ON CUSTOMER BUDGET

Global economy now a days is relentlessly depending upon the oil prices. In the annual budget of almost all the nations,oil prices seems to be an inevitable factor. After August 2014, global economy has started to decline with the fall in oil prices. This has created a lot of socio - economic impacts in the society. A few are listed below.

1.Most of the economic sectors are becoming increasingly inefficient.

2.Stagnating wages leads to more woes in the employment sector.

Together, both these factors leads to a mismatch between

1.The amount consumers who can afford for oil.

2.The cost of oil, if oil price matches the cost of production.

The low oil prices created a lot of threat in the current market. A some of these are mentioned below.

Ø  INCREASED DEBT DEFAULTS

Employees who have been terminated becomes unable to payback their bank loans.

Ø RISING INTEREST RATES

High interest rates are charged for bank loans. Especially middle class customers have to suffer.

Ø RISING UNEMPLOYMENT

Due to the crisis, most of the companies in Middle East have introduced a “cost cutting” strategy in their business processes. So they are cutting down the allowances of their staff. Employees are criticized for even smaller faults and are forced to leave the company. Most of the overseas workers, especially Indian workers are affected by this situation. Indian economy is entirely depending upon the NRI money. Economy is getting shattered as a result of this. Government finds it very difficult to handle this situation.

Ø DROP IN STOCK MARKET PRICES

Oil crisis also leads to a drop in stock market prices. Due to the high interest rates, Investors are not getting ready to invest in stock markets. End results include rise in unemployment, decrease in production and so on. As a result, Indian economy is currently facing the shortage of useful goods. End customers are facing the worst side of it as they have to pay double for their daily goods.

Unfortunately, with stagnant or lower wages, consumers find that goods from the increasingly inefficiently sectors are increasingly unaffordable, especially if prices rise to cover the resource requirements of these inefficient sectors. For most periods in the past, commodities prices have stayed close to the cost of production (at least for the “marginal producer”). What we seem to be seeing recently is a drop in price to what consumers can afford for some of these increasingly unaffordable sectors. Unless this situation can be turned around quickly, the whole system risks collapse. Some of these inefficient resources which can affect a customer are listed below.

Fresh Water

This is another increasingly inefficient sector of the economy, in terms of the amount of fresh water that can be produced with a given amount of resource investment. In some places deeper wells are needed; in others, desalination plants. Water from deeper wells may need additional treatment to remove the harmful minerals and radiation found in water from deeper wells.

As a result of the extra investment required, the price of fresh water is rising in many parts of the world. The higher cost is often justified as necessary to encourage conservation of a scarce resource. But from the point of view of the buyer, what is happening is an increasing price for the same product, or diminishing returns

Electricity

The price of grid electricity has been rising faster than inflation in many parts of the world for a variety of reasons. If nuclear plants are planned, they are being made in ways that are hopefully safer, but are more expensive. Adding solar PV and offshore wind is expensive, especially when grid changes to accommodate them are considered as well. Functioning plants of various kinds (coal, nuclear) are being replaced with other generation because of pollution problems (CO2) or feared pollution problems (radiation). The cost of producing electricity then rises because the cost of electricity from a fully depreciated plant of any kind is extremely low. Building any kind of new facility, no matter how theoretically efficient over, say, the next 40 years, requires physical resources and people’s time, in the current time period.

Metals and Other Minerals

In the same manner as oil, we extract the easiest (and cheapest) to extract minerals first. These minerals include metals and other substances such as uranium, lithium, and rare earth minerals. Oil is generally used in the extraction of these minerals. As the oil prices rises, the cost of extraction increases. So, all these minerals become increasingly unaffordable.

HIGHER EDUCATION

Wage earners find themselves increasingly squeezed. They take out big student loans, only to discover that they really cannot pay them back without deferring buying a home and having a family. Thus the housing industry stagnates. The need for new home furnishing drops as well. Births drop below the “replacement rate. At some point, something has to “give”. One thing we have seen recently is a sudden drop in oil prices that does not represent a sudden drop in the cost of extraction. Instead, it reflects the fact that current wages are not high enough to pay today’s high cost of oil extraction. There is getting to be a difference between

•         The full cost of oil extraction, including governmental services needed to keep the country’s economy functioning well enough for this extraction to continue.
•        The amount the economy can afford, considering both wages and the increase (or decrease) in debt for the economy.

This situation is not simply affecting oil; it is also affecting other commodity prices as well. Clearly we cannot continue indefinitely on this trajectory. Something has to give. So far, what we have seen is a drop in oil prices and other commodity prices to levels that are likely to seriously disrupt production. How this will all play out is worrisome, if a person understands the dynamics behind what is happening. After all, the major recipient of this crisis is the common man itself. He will have to pay more for his family’s needs. Influence of this scenario will ranges from a corporate to a normal farmer who wants to purchase some fertilizers for his vegetation. Only solution to mitigate this scenario is the proper government action, which includes giving subsidies to the citizens for their various services, through which even  a common man can get benefit.