The Impact of Rising Oil Prices on the South African Economy in Relation to the Demand and Supply of New Motor Vehicles
TABLE OF CONTENTS
INTRODUCTION. 1
SUPPLY VS DEMAND 2
FINDINGS 6
PRIMARY FACTORS. 7
CONCLUSION. 7
REFERENCE. 9
THE IMPACT OF RISING OIL PRICES ON THE SOUTH AFRICAN ECONOMY IN RELATION TO THE DEMAND AND SUPPLY OF NEW MOTOR VEHICLES.
INTRODUCTION
A continual upward trend in the price of crude oil in recent years has led to increasing concerns about its economic implications, both abroad and in South Africa. This study looks at the rising oil prices and their impact on the South African economy within the framework of supply and demand, looking at the impact rising oil prices has had on demand and supply for vehicles as well as the impact on South African GDP growth. Cognisance must be taken of the fact that this slowdown in car sales is not only related to high fuels prices but is also as a result of successive increases in domestic interest rates, the introduction of the National Credit Act, high debt levels among consumers, and high levels of debt-servicing costs. For the purpose of this assignment these factors are not considered.
SUPPLY VS DEMAND
The demand for goods refers to the relation between the price of a good and the quantity of the good that consumers will be willing to pay for it.
Oil has a relatively inelastic demand mainly due to the fact that there currently is no suitable and viable product substitute for it. Despite world production problems, rising prices, war and economic slow down at various periods, the price of oil has shown a resilient projected increase in price (see fig 1). Oil price is very price inelastic. Fig 1. Source: WTRG Economics (2007)
The oil supply demand relationship has, to an extent fuelled or influenced, the oil price hikes however this cannot be established as a fixed indicator of the rising oil price trend. Fig 2. Source: WTRG Economics (2007)
However when looking at the cross price elasticity of demand of motor vehicles in relation to Oil, we see a highly elastic environment.
INTRODUCTION. 1
SUPPLY VS DEMAND 2
FINDINGS 6
PRIMARY FACTORS. 7
CONCLUSION. 7
REFERENCE. 9
THE IMPACT OF RISING OIL PRICES ON THE SOUTH AFRICAN ECONOMY IN RELATION TO THE DEMAND AND SUPPLY OF NEW MOTOR VEHICLES.
INTRODUCTION
A continual upward trend in the price of crude oil in recent years has led to increasing concerns about its economic implications, both abroad and in South Africa. This study looks at the rising oil prices and their impact on the South African economy within the framework of supply and demand, looking at the impact rising oil prices has had on demand and supply for vehicles as well as the impact on South African GDP growth. Cognisance must be taken of the fact that this slowdown in car sales is not only related to high fuels prices but is also as a result of successive increases in domestic interest rates, the introduction of the National Credit Act, high debt levels among consumers, and high levels of debt-servicing costs. For the purpose of this assignment these factors are not considered.
SUPPLY VS DEMAND
The demand for goods refers to the relation between the price of a good and the quantity of the good that consumers will be willing to pay for it.
Oil has a relatively inelastic demand mainly due to the fact that there currently is no suitable and viable product substitute for it. Despite world production problems, rising prices, war and economic slow down at various periods, the price of oil has shown a resilient projected increase in price (see fig 1). Oil price is very price inelastic. Fig 1. Source: WTRG Economics (2007)
The oil supply demand relationship has, to an extent fuelled or influenced, the oil price hikes however this cannot be established as a fixed indicator of the rising oil price trend. Fig 2. Source: WTRG Economics (2007)
However when looking at the cross price elasticity of demand of motor vehicles in relation to Oil, we see a highly elastic environment.
References: Association for the Study of Peak Oil and Gas (ASPO). 2006. Newsletter No. 69. Available online: http://www.peakoil.ie/newsletters Bellamy, D. 2006. "The Macroeconomic Effects of the Crude Oil Price on the South African Economy." Unpublished Master 's Dissertation, University of Cape Town South African Petroleum Industry Association (SAPIA). 2006a. Basic Fuel Price Formula Wakeford, J.J. 2006. "Risks to Global Trade and Implications for South Africa 's Economy and Policy." DPRU Working Paper No