Asia-Pacific Capital Markets and Standards of Practice

EF 3331

GR_010

Assignment 2

CAI Jiale 53075804

Chan Nok Hei 53095201

Li Chun Ling 53091552

Crude oil price dropped by more than 50% in 2014. Please discuss what will be its impacts on global capital in 2015-2016.

Introduction

During the past year, crude oil price has kept falling from its peak at over $100 down to less than $50 within several months. The decreasing crude oil price shifted the whole energy sector’s equilibrium price to fall as people have lower demand for other alternative energy gases, but higher preference to use crude oil as input for production. As production costs decreased in the market as a whole, this spurs most products’ price level to fall. The plunging oil price causes not only the prices of oil and its by-products to fall, but also quakes related financial market as it sparks the falling price of crude oil and also crude oil futures. In this essay, we will discuss the impacts of falling crude oil price in terms of the potential risks of deflation, its effects on consumers’ behaviors and equity market and the income shifting across borders.

Deflation

A study by De Gregorio, Landerretche, and Nielson found that with a 10 percent increase in the oil price raising inflation by up to 0.3percentage point at its peak impact. The impact is essentially one-off, peaking after three to five months, before fading gradually. These results suggest that a 30 percent decline in oil prices, if sustained, would reduce global inflation by about 0.4-0.9 percentage point through 2015.

Given the evidence that China’s consumer price index in Jan, 2015 rose by 0.8%, the lowest since Nov 2009 after financial tsunami and UK reached its record low of 0.5% CPI index in Dec, 2014 since 2000, it is believed that if crude oil price continues to fall further in the future, many countries may face the potential risks of deflation. Under deflation, general public incline to save their capital and delay their spending as they believe...