How might a sustained fall in oil prices stimulate consumption and economic growth in the UK?

Assignment Brief 

Online assessment – ECON1542

Essay

This assessment has been set to replace the final exam (60%).

Word count: 2000 words

The Task

Students must answer two essay questions from the topics below, 1000 words each. Students must evaluate the proposed economic questions using an essay format. Students must apply their economic knowledge and evaluation using the tools covered within this module.

Students must submit a 2000 words file, +/-  25% following the university regulations; the word count does not include appendixes, tables, graphs or figures. Students must submit the piece of work through Turnitin before the deadline.

Marking criteria

• Subject economic knowledge 20%
• Econonomic Analysis 20%
• Economic Evaluation 20%
• Recommendations, policy alternatives, plans 20%
• Visual aids and professional impact 20%

TWO ESSAY-TYPE QUESTIONS TO BE ANSWERED

1. How might a sustained fall in oil prices stimulate consumption and economic growth in the UK?
2. Why have the IMF and the OECD concluded that rising income and wealth inequality has slowed economic growth?
3. To what extent might aggressive ‘quantitative easing’ by the European Central Bank increase inflation and stimulate economic growth in the Eurozone?
4. What are the possible explanations for the UK’s recovery from the financial crisis of 2007-9 being much slower than anticipated?
5. To what extent have the regulatory and structural reforms of the UK banking sector since the 2007-9 financial crisis made bank bailouts at the taxpayers’ expense less likely?
6. To what extent can ‘structural reforms’ promote economic growth in a period of fiscal austerity?

Sample Answer

How might a sustained fall in oil prices stimulate consumption and economic growth in the UK?

Introduction

Oil is one of the most important commodities in the world economy. For the UK, which is a net importer of oil, changes in global oil prices can have a strong impact on households, firms, and the government. A sustained fall in oil prices can influence economic growth by reducing costs, raising disposable income, and changing patterns of investment. However, the long-term effects also depend on inflation, fiscal policy, and environmental concerns.

This essay will examine the main channels through which lower oil prices may stimulate consumption and growth in the UK. It will also evaluate the limitations of this process and whether the impact is always positive.

Oil Prices and Household Consumption

When oil prices fall, the cost of petrol, diesel, heating oil, and energy in general tends to decrease. This lowers household bills and transport costs. For most UK families, energy spending takes up a noticeable share of disposable income. Cheaper fuel therefore acts like a tax cut, leaving households with more money to spend on other goods and services.

This rise in real disposable income increases aggregate demand. The multiplier effect means that higher demand in one sector leads to greater demand across the economy. For example, if families spend more on leisure and retail, businesses hire more workers and incomes rise further.

However, the size of this effect depends on how much of the savings households choose to spend rather than save. If consumer confidence is low, they may save the extra money, weakening the growth stimulus.

Firms and Production Costs

A fall in oil prices also benefits firms, especially those heavily reliant on transport and energy. Lower input costs improve profit margins, which can encourage businesses to expand production, hire more workers, or reduce prices for consumers. This strengthens both aggregate demand (AD) and aggregate supply (AS), leading to higher output with lower inflationary pressure.

Industries such as airlines, logistics, and manufacturing gain directly. For example, airlines save on jet fuel costs and may expand routes or lower ticket prices. Logistics firms benefit from cheaper diesel, reducing distribution costs across the economy.

Nevertheless, firms in the oil and gas sector may suffer. The UK still has an oil industry in the North Sea, and lower prices reduce profits, jobs, and investment there. The regional economy of Scotland is particularly affected. Thus, while most of the UK economy gains, some sectors lose.

Macroeconomic Growth

From a macroeconomic perspective, cheaper oil has a positive supply shock: it shifts the short-run aggregate supply curve to the right. This lowers inflation while increasing output. At the same time, the rise in consumption boosts demand. The result can be a period of strong non-inflationary growth.

Lower oil prices also help the UK balance of payments. Since the UK imports more oil than it exports, the value of imports falls when prices drop. This improves the current account balance, supporting economic stability.

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