Macroeconomics Principles - Problems - and Policies Method

Question: Discuss about the Macroeconomics for Principles, Problems, and Policies Method. Answer: Introduction: The reasons for frequent change in price of oil in Australia are explained below (Sweeney, 2016). Oil is a commodity and hence the global price is governed by the underlying demand and supply forces. As a result, a supply shock could limit the supply and increase the price. The benchmark prices of oil are expressed in USD and hence the fluctuation of exchange rate of Australian dollar vis--vis the US dollar would result in price movements of oil. The oil prices are also impacted by the pricing cycles witnessed in the major cities which tend to be variable. The fuel prices are also impacted by these cycles. The major reasons contributing to the shift of global oil supply are outlined below (EIA, 2010) Production by OPEC members The OPEC is a cartel of major oil producing nations led by Saudi Arabia and is responsible for a majority of the global oil production. In order to ensure that the interest of the members remains safeguarded, the production trends are altered which alters the global supply. Shale production in US In the recent times, the production of shale oil has transformed the global oil industry as the US has become a major producer of oil. With the shale boom, the bargaining power of the OPEC has significantly declined as US has become self-sufficient in oil production. Production by non-OPEC members The production by non-OPEC members in the recent times has increased which to some extent has also altered the global supply. Further the exclusion of Iran from OPEC and the lifting of global sanctions also has impact on the oil supply. There is a close link between oil prices and economic growth. This is primarily because the usage of oil is very wide right from the raw material in production of various goods to the usage as transportation fuel which is a key component of logistics cost. As a result, the increase in global price of oil leads to increase in the prices of various fuels such as petrol, diesel. The increase in prices of these fuels tends to influence the logistics cost, electricity production cost and tends to enhance the cost of these. Besides, various petrochemicals derived from oil are used as raw materials for a host of finished goods whose input price would increase (Mankiw, 2012). The increase in input prices for various goods coupled with higher logistics cost would lead to rise in prices or cost inflation. Due to the rising prices of the goods, the consumption of these goods would decrease. The lower consumption of goods would gradually lead to a surplus of goods created which in turn would result in lowering capacity utilisation. As a result, there would be higher unemployment and further reduction in the income levels. The cumulative effect of the above would be decreased economic growth as there is lower production and lower consumption of goods and services. In such cases, government needs to intervene so as to enhance the overall consumption of goods and services by simulating demand (McConnell, Brue and Flynn, 2014). References EIA 2016, What drives crude oil prices?, [Online] Available at https://www.eia.gov/finance/markets/reports_presentations/eia_what_drives_crude_oil_prices.pdf [Accessed 5 February 2017] Mankiw, G. 2012. Principles of Macroeconomics, 6th ed., London: Cengage Learning McConnell, C., Brue, S. and Flynn, S. 2014. Macroeconomics: Principles, Problems, Policies, 20th ed., New York: McGraw Hill/Irwin Publications Sweeney, L. 2016, Petrol prices: Why do retail prices fluctuate from city to city, day to day?, [Online] Available at https://www.abc.net.au/news/2015-01-07/why-do-petrol-prices-fluctuate-around-the-country/6004866 [Accessed 5 February 2017]