Relationship between oil prices and several indicators, Macroeconomics

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"The price of Brent crude oil has hit $111 a barrel and US crude also rose in price, as worries persist about the unrest in Libya". (BBC News, 2011) This quote, from the BBC news website is indicative of global concern when oil prices rise to certain levels. From this, mass panic ensues. Forecasters release downbeat statements on the UK's economic future, on business profits, and on other macroeconomic indicators. Furthermore the UK general public worry immensely about their personal future, specifically their employment, and their ability to make mortgage payments, heat their home or feed their family. Oil is used in astronomical proportions in the UK, 1611 barrels each day (Rogers, S. Guardian, 2010). However statistics from the US Energy Information Administration show that the production of oil in the UK has decreased by such an amount and has reached such a level that, in 2004, the UK switched from being a net exporter of Oil, to being a net importer.

One would expect this to have drastic effects on the macroeconomic indicators. The main usage of Brent crude is for motor fuel, although it has been used to heat homes and is also widely used in the manufacturing industry. This trend has changed over the past 30 years, as now the majority of houses do not require oil for heating. The same cannot be said for the main usage. As yet, whilst car manufacturers face increasing pressure to create a substitute for oil powered cars, they have only been mildly successful and oil suppliers do not yet consider the emergence of electric cars as a serious threat to the demand for oil (Bergin, Reuters, 2012). The fashion for electric cars and renewable energy sources has led to an increase in electric cars, but not nearly significant enough to reduce the UK's need for oil. Consequently when oil prices rise in the future, the same trend of doom and gloom will continue to engulf the United Kingdom (UK).

Another major problem associated with this topic is that, due to the Arab spring and the political unrest in major oil producing economies across the world, oil prices may keep on rising to previously unseen levels. This uprising doesn't show any sign of relenting which would suggest that volatility of the price of oil will remain high for the foreseeable future. Therefore from observing the relationship between the indicators, a more accurate understanding of the relationship that oil prices have with the macroeconomy can be gained. This is useful as it will indicate whether there is cause for such worry and panic when oil prices are subject to a shock.


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