NATIONAL ECONOMICS UNIVERSITY

BACHELOR OF INTERNATIONAL PROGRAM

IN FINANCE AND ACCOUNTING

IMPACT OF OIL PRICE FLUCTUATIONS

ON INFLATION
Subject: Introductory Macroeconomic_S2NEU_22
Supervisor: Pham Xuan Nam
Student: Ha Thi Van Anh
Student ID: 20255075
Class: BIFA 8F

Hanoi, April 2022

 TABLE OF CONTENTS
INTRODUCTION...................................................................................................3
RISING OIL PRICES.............................................................................................4
1. Pricing changes in 2022....................................................................................4
2. The trend of oil price volatility over the past time has been influenced by
a number of key factors, as follows:...................................................................4
2.1. Booming economic growth driving demand for oil.................................4
2.2. Limited oil supply due to long investment cycles and cautious capital
allocations...........................................................................................................5
2.3. Geopolitical tensions..................................................................................5
COST OF INFLATION..........................................................................................6
1. The increases in the price of oil affect inflation and the global economy....6
CONCLUSION........................................................................................................8
1. The measures to stabilize gasoline prices and curb inflation.......................8
REFERENCE..........................................................................................................9
 CHAPTER 1: INTRODUCTION

Article entitled "Why do oil prices matter to the global economy?" from the World Economic

Forum, written by Amy White-the author of Forum Agenda, published February 16, 2022. In

2020, we saw a significant drop in economic activity as a result of the COVID-19 epidemic and

widespread lockdowns. The price of oil fell below zero for the first time in history as a result of

the sharp decline in demand for oil. Following a robust economic comeback after the lockdowns,

oil prices have now grown rapidly to almost $100 per barrel. The demand for oil increases in

tandem with the economy. In addition, escalating geopolitical unrest in the Middle East and

between Russia and Ukraine is fueling supply concerns. This is a factor in both rising inflation

and worries about the pace of the economy's recovery.

Against this backdrop, this article sought to determine what impact the price of oil matter on the

economy. A quantitative approach was used in this study with secondary data, which was

obtained through documentation techniques from Intercontinental Exchange and the

International Monetary Fund (IMF) 2021. The findings of this study suggest that, while oil prices

are still significant, they are not likely to be the primary cause of inflation.

In this article, I will support the idea that the increase in gasoline prices will have certain effects

on increasing costs for businesses and the economy, especially inflation, in three sections.

Section 1 contains the causes of rising oil prices, followed by an analysis of the impact of oil

prices on inflation and the implications for the world economy in section 2. The conclusion in

section 3 demonstrates some measures to stabilize gasoline prices and curb inflation.
 CHAPTER 2: RISING OIL PRICES

1. Pricing changes in 2022.

Figure 1: Oil price movements in 2021 and 2022

Brent crude oil, a benchmark price for the world market set in Northwest Europe, closed at $85

per barrel on the last trading day of 2022, $7 more than the price on January 3, 2022 ($78 per

barrel). While the second half of 2022 had a broad fall in the price of Brent, the first half of the

year saw a substantial increase. A similar pattern was observed in the spot price for West Texas

Intermediate (WTI), the U.S. benchmark price for crude oil. It ended the trading year in 2022

$4/barrel higher than it had on January 3. In 2022, the WTI and Brent spot prices for crude oil,

respectively, averaged $95 and $100 per barrel.

Geopolitical tensions with Russia caused a rise in crude oil prices in the first half of 2022. This

tension peaked on February 24 with Putin's full-scale invasion of Ukraine. On March 8, 2022,

the price of crude oil reached its highest level since 2014 as a result of the invasion of Ukraine

by Russia and low global crude oil inventories.

2. The trend of oil price volatility over the past few years.

The only thing that seems to be consistent in the oil market is change and volatility. It is,

nevertheless, probably safe to argue that there are three main underlying causes lending to this

change:

2.1. The demand for oil has increased due to the strong economic expansion.

Two years ago, when the COVID-19 pandemic initially emerged, there was a notable decrease in

economic activity and a corresponding drop in the demand for oil. Despite efforts by producers

to adjust their output levels, they faced limitations in terms of depleting resources such as capital

and reservoirs, as well as limited storage capacity. Furthermore, the severity and duration of the

impending economic crisis were uncertain factors. These interconnected factors led to oil prices

reaching historically low levels, unseen in many decades. At one point, oil prices even briefly

fell to a negative value of $40.

The challenging phase endured for a number of months until a remarkable economic rebound

occurred, leading to a surge in the demand for oil and its associated products. Current

assessments indicate that the demand for oil has not only returned to pre-pandemic levels but has

potentially exceeded them, reaching unprecedented heights. In essence, the current level of oil

demand is higher than it has ever been.

2.2. Limited oil supply due to protracted investment cycles and conservative capital

allocation.

While the demand for oil has experienced growth, the supply side has struggled to keep pace.

Despite gradual increases in oil output, there remains limited spare capacity, and caution is being
exercised to avoid flooding the market once again. Additionally, the investment cycles involved

in oil production tend to be lengthy. It can take up to ten years from the certification of resource

availability to initiate production. Although certain unconventional sources may have smaller

outputs, they can deliver production more rapidly. Furthermore, all producers are adopting a

conservative approach to their financial decisions, having learned from their mistakes during the

period when oil prices plummeted to negative $40. This highlighted the consequences of an

oversupplied market.

2.3. Geopolitical tensions.

Another cause is since February 2022, escalating conflict tensions between Russia and Ukraine,

along with the imposition of sanctions by the US and Western countries on Russia, have added to

the instability of global energy security. This is significant because Russia is the second largest

oil exporter globally and provides approximately 40% of the gas demanded by the European

Union market. Consequently, the disruption of oil supplies from Russia to pipelines in Europe

has had a notable impact on global energy availability. In fact, the initiation of a special military

operation by Russia in eastern Ukraine on February 24, 2022, has coincided with a substantial

increase of 60-70% in the world oil price during the same period.
 CHAPTER 3: COST OF INFLATION

1. Inflation and the global economy are impacted by the rise in oil prices.

Figure 2: Oil’s further rise is fueling inflation.

About 3% of the world's GDP is made up of oil. Therefore, if the price of oil were to double, it

would undoubtedly have some impact on inflation. However, I do not consider it to be a major

driver of inflation. In my view, loose monetary policies are the primary contributors to inflation.

While oil prices may not be the primary cause of inflation in this context, they still hold

significance. This is because oil is present in a wide range of products and its influence on

pricing extends beyond just the petrol station. The spike in oil prices affects practically

everything, as it serves as a raw material, an energy source, and a means of transportation for
various goods. Nearly all the goods and services we consume would be affected by such an

increase in oil prices, reflecting its pervasive impact throughout the economy. However, it is

important to note that the impact of oil prices is more related to pricing rather than having a

volumetric effect on inflation.

For the reasons mentioned above, some analysts believe that soaring oil prices will be a threat to

cause hyperinflation. This outcome could result in a devaluation of the US dollar and oil prices

reaching levels surpassing $180 per barrel by 2022. Central banks in developed economies are

cautious, as escalating inflationary pressures place strain on the overall economy. According to

an analysis by Deutsche Bank in Germany, examining inflation across 111 countries, the average

inflation rate in the past 12 months (from June 2021 to May 2022) stood at 7.8%, more than

double the rate observed a year earlier (3%). This surge in inflation is largely attributed to the

steep rise in fuel and food prices.

More or less, gasoline is used by most industries. 3.52 percent of the overall production expenses

across the economy are accounted for by the cost of gasoline. This means that gasoline both

contributes significantly to and makes up a sizable share of production costs. Notably, rising fuel

prices will have a significant negative impact on gasoline-intensive activities like fishing and

transportation. Rising gas prices also increase the cost of items in circulation, create inflationary

pressure, lower the competitiveness of domestic goods, and negatively impact economic growth.

The consumer price index (CPI), which affects people's income and expenditure, is fueled by

rising gas prices, which also drive up the cost of products and services. The CPI would increase

by 0.36 percent if gasoline costs rose by 10%. 1.5% of total final consumption spending in

households go toward gasoline. Consumers will redistribute income and cut spending as a result

of rising gas prices, which will lower overall demand.

 Figure 2: Global Rebound.

According to Enda Curran and Rich Miller (2022) from Bloomberg News, The International

Monetary Fund (IMF) has revised its projections for global consumer prices, anticipating an

average increase of 3.9% in advanced economies this year, up from the previous estimate of

2.3%. In emerging and developing countries, the IMF predicts a higher average inflation rate of

5.9%. Economists Janet Henry and James Pomeroy from HSBC released a report on February 4

expressing the need for the global economy's recovery to avoid a further escalation in energy

prices. This caution arises as inflation is already at levels not seen in decades, and the uncertainty

surrounding future inflation remains unprecedented. China, known as the largest importer and

exporter of oil globally, has thus far maintained relatively low inflation. However, given the

challenges faced by producers in managing high input costs and concerns about energy

shortages, the Chinese economy remains fragile.

 CHAPTER 4: CONCLUSION

1. The measures to stabilize gasoline prices and curb inflation.

Firstly, in the past, the monopoly of gasoline has made customers, the entire population,

miserable. If they don't use their products, people will "die". Production was halted. The car

doesn't fill up with gas, it won't run, and life is almost paralyzed. But that shouldn't be the reason

why the petroleum monopoly wants to scream at any price. When the price of gasoline goes up,

farmers and producers have to bear a lot of pressure from input costs, raw material costs,

transportation costs, sales... Thus, petrol prices are transparent. then it is necessary to say "no" to

the petroleum monopoly.

Secondary, In the context of high world oil prices, as well as geopolitical conflicts in the world

affecting the domestic economy. It is necessary to closely monitor developments in the gasoline

and oil markets to proactively and flexibly assess the impacts of the increase/decrease in gasoline

and oil prices on the economy. From there, develop impact assessment scenarios and propose

timely policy adjustments. At the same time, it is necessary to further improve forecasting

because this is an important solution to cope with oil price fluctuations and estimate oil revenues

close to the actual situation.

Finally, using flexibly and effectively the gasoline and oil price stabilization fund in order to

limit the sharp fluctuations of domestic gasoline and oil prices compared to world price

fluctuations will contribute to the achievement of the goal of controlling inflation and supporting

economic recovery.
The increase in gasoline prices has more or less affected the economy. Therefore, to a certain

extent, the adjustment of gasoline prices still requires the intervention of the state to serve the

macro target. However, that goal should be based on an assessment of important economic

developments and indicators. It is necessary to clearly identify the factors that affect the increase

of inflation, the level of tolerance in the economy; putting the adjustment of gasoline prices into

that problem would be more reasonable because petrol prices affect many fields of consumption,

investment, production, and business. The risk of increasing inflation stems from many causes,

however, whether that can cause inflationary pressure or not depends on the operating ability of

the management apparatus. monetary policy tool to stabilize or reduce the risk of inflation. The

increase in gasoline prices also contributes to increasing inflation pressure, but it is not large and

has not tended to directly affect inflation.

 REFERENCE

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