Source: The Times of India
Oil prices are a key influence among many economies. Prices of oil is known to be very volatile which causes numerous impacts for countries and their economy. In the UK, the automotive industry is massive, every house has an average of 1.21 cars (Yurdnay, 2019). This means factors like prices of petroleum oil (petrol) is important as demand can vary. Although, oil like petrol is relatively inelastic, so it can cause demand too lower if prices are increased by a little bit, therefore there can be numerous impacts upon the UK’s economy.
Changes in prices of oil often occur for a range of reasons, most recently being the Russian war with Ukraine. This caused a surge in prices of petrol increasing to an average $120 per barrel compared to one year ago when it was only $60 (Stewart, 2022). This oil they need is vital as so many people require petroleum from not only companies but also the government who also purchase it. In light of this, the UK economy has had numerous different changes arise like output increasing due to the increase in government spending on petroleum which is used for heating and cars etc... This is bad for the economy as the government will require to make changes in the economy. To change they will use fiscal policy, this policy will be used to reach a new equilibrium which does increase output but it eventually lowers and allows interest rates to increase forming this new equilibrium. Also, consumption and investment decreases causing AD too fall which helps output lower towards a new equilibrium (As seen below). This policy used is relatively effective even though there will be a period of time where the economies interest rate will vary far from their target of 2% (Monetary policy, no date). This issue has been fixed to a certain extent because the UK has said they will buy no oil from Russia. However, price in will still be high compared to alternatives due to the UK having less choices of who too import from, so this issue of government spending on petroleum increasing still occurs.
In order for the UK too minimise issues with oil and other fossil fuels like prices, the UK’s been conducting research into cheaper non-fossil fuel energy generation alternatives. This process is likely to take at least 50 years Whalen, 2016), however the benefits are endless. For example, since 2012 there has been an 83% decrease in the price of solar photovoltaic energy (‘What are the likely costs of the transition to a sustainable economy?’, no date). This renewable energy from the sun as well as the increased use of electric vehicles will mean the economy will benefit. This is because in the long-term UK can save a lot of money. This is will be beneficial because factors like AD increasing occurs. This means, exports of the renewable energy would increase over a long-period of time. Therefore, the sudden impact on the economy is minimised as a result, factors like interest rates etc… wouldn’t change drastically due to this change, given the government and the central bank time to adjust too these changes. Furthermore, higher export income could mean that the UK’s government can have more money to invest into the public sector improving healthcare, street lighting and other factors. Therefore, if oil prices do continue to rise, research into renewable energy will occur and as seen below in the graph, these prices will continue to lower, creating a positive multiplier effect for the economy.
(Zenghelis, 2021)
In conclusion, it is clear that constant fluctuations of oil prices are impactful on the economy. This is because it has wider impacts than just having too import oil for higher prices, like the car and renewable energy examples. It’s often that changes cause a multiplier effect where more issues and changes to the economy occur in the short-term and slightly into the long-term. Although, changes in oil prices have meant wider research into renewable energy. This is beneficial in the long-term, because over-time more countries will want to invest and use this new renewable energy like France and Germany (Murray, 2021). So, the shock that may occur due to an increase in oil prices as stated in the first paragraph are going to be less impactful due to the income that is received over-time as stated in paragraph two. Although, there’s likely to be changes in the short-run, in the long-run though this is likely to be smaller as renewable energy will cause a source of income for the UK and also will mean little too no oil is purchased so the fluctuations won’t be impactful.
Bibliography
Monetary policy (2022). Available at: https://www.bankofengland.co.uk/monetary-policy (Accessed: 26 March 2022).
Murray, J ‘Top five countries for renewable energy investment’ (2021). Available at: https://www.nsenergybusiness.com/features/top-countries-renewable-energy-investment/ (Accessed: 1 April 2022).
Stewart, E. (2022) Yup, the Russian oil ban means gas prices are going to suck, Vox. Available at: https://www.vox.com/the-goods/22949683/russia-ukraine-gas-prices-oil-inflation-stock-market (Accessed: 25 March 2022).
Whalen, C.The time needed for Energy Transitions (2016) Carbon Commentary. Available at: https://www.carboncommentary.com/blog/2016/11/17/the-time-needed-for-energy-transitions (Accessed: 26 March 2022).
Yurdnay, E. Number of Cars in the UK 2022 (2019). Available at: https://www.nimblefins.co.uk/cheap-car-insurance/number-cars-great-britain (Accessed: 25 March 2022).
Zenghelis, D. ‘What are the likely costs of the transition to a sustainable economy?’ (2021) Economics Observatory. Available at: https://www.economicsobservatory.com/what-are-the-likely-costs-of-the-transition-to-a-sustainable-economy (Accessed: 26 March 2022).
By Samuel Golder
Founder and Editor
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