Brent crude is now down over $2 per barrel, at $62.40, while US crude has dropped back below $60 per barrel. This means oil prices have now fallen over 3%, extending their earlier losses, amid worries that fresh Covid-19 restrictions in Europe will hit demand.
17 EU countries, such as Germany and France, have temporarily stopped giving out the AstraZeneca vaccine due to possible side effects that it may cause. This means that the economies of these countries will not get back on track as quickly.
Vaccine deployment is essential for better public health, this makes them essential for bettering consumer confidence as the primary reasons why consumers aren’t spending is the uncertainty associated with COVID-19.
Hence, the banning of vaccines in these countries will likely yield a reduction in spending from economic agents, primarily consumers. This will result in a large decrease in aggregate demand within European economies. This will lead to a reduction in output, meaning fewer goods and services will be produced.
This may lead to a contraction in real GDP within European economies which will worsen the government’s efforts to improve public health. Due to fewer goods and services being produced, EU governments will gain less revenue from VAT, preventing them from allocating more resources towards vaccination efforts.
Consequently, EU countries may have to fund vaccination efforts with additional loans, worsening the already unfavourable opportunity cost.
Nevertheless, the reduction in the number of goods and services produced within the EU will decrease the global demand for Oil.
Therefore, oil prices will decrease, and, due to oil being a raw material used by the majority of firms for logistics, the operating costs for businesses will decrease.
This decrease in operating costs will allow firms to increase the supply of goods and services which they provide., yielding a decrease in the general price level as well as an increase in Real GDP.
The increase in Real GDP will relate to an increase in employment, as the increase in output will require more people to work. This will increase the living standards of the newly employed as now they have more disposable income.
Additionally, the increase in Real GDP will reap benefits for the government. Due to more goods and services being bought and sold, the government will see an increase in VAT revenue.
Consequently, the government will have more money to spend on public services such as HS2, a high-speed railway linking London to Manchester costing £106bn designed to improve the geographical mobility of labour. This will help to improve the productive capacity of the economy, yielding long-term economic growth.
However, oil prices fluctuate frequently, this means the benefits of decreased costs will only be temporary. Therefore, economic agents may not have enough time to upscale their operations to reap the benefits associated with decreased oil prices.
Overall, because of these short-term limitations, as well as the fact that oil prices have been steadily rising over the past few years, it is unlikely that the drop in oil prices will be capitalised on by firms. Therefore, the economic benefits associated with an increased supply of goods and services will not be felt.
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