Impact Of Local Oil Prices On Automobile Sales Economics Essay

Impact of oil in day-to-day life is rather apparent. Oil is considered as a strategic energy for economic clip line. The monetary value of oil has an consequence on cost of production in diversified ways such as with the addition in oil monetary values, there is an addition in the costs of transit of export, import and goods for local outgo. Apart from this there is besides an upward incline in rates of air, route, rail and sea transit with the rise in the monetary value crude oil.

Hire a custom writer who has experience.
It's time for you to submit amazing papers!

order now

Oil endows with 97 % of the transit fuels that facilitates in running the trucks autos and other cars in the state ‘s main road. Therefore, when the monetary value of the oil additions, it obviously alarms the car industry because the auto-companies are in competition with one another to carry through the new demands for more fuel proficient consumer mindful at condensed monetary value. There are no reserves that profit border of the companies are affected by this. Furthermore, rise in oil monetary value besides affects the sort of agencies of transit demanded by the purchaser and the manner those vehicle motors are designed.

The escalation in the crude oil monetary values plays a major portion in the automotive industry. “ The universe consumes over 82 million barrels of oil per twenty-four hours ( BPD ) , with the united provinces taking approximately 20 million BPD ” . ( Edward Perez, Gerald Drumright, Sherry H, Andrea Carlson, Waren Busby, Lisa Holguin, Trent Madsen,2006 )

Petroleum is one of the most indispensable parts in a state ‘s economic system and its monetary value has extended economic and societal impacts. Assorted researches illustrate that the monetary value of crude oil in Pakistan is well high either with or without affecting per capita income and it needs to be leveled downwards in order to vouch fight of Pakistan ‘s exports and decrease the load on the purchasing competency of the state. However, this can non be a simple undertaking as Pakistan to a great extent depends upon imported oil in order to carry through its crude oil necessity and the development surcharges and the import grosss compose a major sector of the Government income. However, a executable and sensible solution to pare down oil monetary value is needed maintaining in sight the gross doing aspects and the prevailing planetary monetary values of rough oil.

The major ground of escalated oil monetary values is linked with the demand of oil and the complication in oil refineries. Petroleum is used normally for two grounds: First, in the gasolene production and secondly in the production of tyres. In the US, during the last few old ages the monetary values of gasolene have risen up well making on an norm over $ 3.00/gallon ( EIA-Energy Information Administration ) .Oil is considered as the chief component in the tyres production. With the addition in the oil monetary values, the cost and outgo in doing the tyres escalates, the cost to heat up or chill the fabrication works where tyres are produced additions, and finally escalates the outgo of transporting the tyres to farther finishs. Because of the rise in the monetary value of crude oil, the tyre shapers are besides increasing the monetary value of tyres. The car sector is affected by both, tyre production and gasolene monetary values as the net income borders are affected by the rise in oil monetary values and tyre production monetary values.

During one of a reappraisal from Global car gross revenues will worsen in ( 2009 ) , the car industry calamity, presently worldwide phenomena, started during 2008-H2. The automotive sector is traveling through a crisis status in US and Canada because of the Automobile merchandises Trade Agreement. Nevertheless, all car shapers worldwide, particularly in Japan and Europe are besides confronting the same crisis. The first delicate connexion in the car sector was the record high crude oil monetary values during 2008 which caused planetary oil crisis and made fuel costs and expenditures unreasonable, doing purchasers to choose for smaller autos instead than larger SUVs ( athleticss public-service corporation vehicles ) and the choice up trucks.

Background of Pakistan ‘s Automobile industry

The planetary oil crisis has affected Pakistan economic system badly. Automobile sector has been greatly impacted by the oil monetary value dazes. There had been consistency in the Gross Profit Margin of Pakistan ‘s Automobile industry. It raised from FY01 ( 6.83 ) to FY03 ( 13.73 ) .Then had a downward incline for two back-to-back old ages to 12.17 ( FY05 ) , so remained stable for two more back-to-back old ages ( FY05 – FY07 ) .Since FY07 there has been a changeless downward incline, making 6.14 ( FY09 ) the diminishing Net income border was because of the of all time escalated cost of goods sold. The risen up cost is chiefly due to the planetary oil monetary value dazes and the high depreciation value of Rupee. The escalated costs were besides linked to the high rising prices rate during FY09. ( Economics and Finance Department, Institute of Business Administration, Karachi, 2009 ) .


Escalated oil monetary values have been accountable for periods of utmost rising prices, recessions, and lower productiveness and decreased economic growing. For the Automobile makers the fuel monetary value argument is nil new. Due to predefined terminal of crude oil resources, the car manufacturers have come up with assorted schemes to debar any sudden demand for action. However till now, no 1 has clearly defined the oil supply unequivocal terminal.

Kiseol Lee and Shawn Ni ( 2002 ) analyzed the effects of oil monetary value dazes on demand and supply in car industry picturing the consequence of oil monetary value dazes chiefly cut downing demand. They suggested that oil monetary value dazes influence economic activities.

The first OPEC oil trade stoppage in early 1970s has led to the start of argument over the oil dazes and its Macroeconomic effects. The most comprehensively surveyed theories on the direct effect of oil monetary value dazes incorporates that ” an input-cost consequence, that higher energy cost lowers use of oil which in bend lowers productiveness of capital and labour ; and an income consequence, that higher cost of imported oil reduces disposable income of U.S. families ” .

Harmonizing to an column in 1973-1974 oil crises: ” Automobile gross revenues, particularly for standard and moderate-sized autos, began decreasing about with the first realisation that the energy crisis is world. The trade-in value of large gas-guzzlers toppled mercilessly and some traders were endangering non to take them in trade at all. Gasoline milage, non size and comfort all of a sudden became the paramount concern for the consumer. ” ( Ward ‘s Auto World )

K.Lee and Shawn Ni ( 2002 ) contrasted to the state of affairs in the crude oil refinery and industrial chemical industries which were bothered by the escalated cost of fuel, research in trade documents proposed considerable indicants that the automotive industry distraught by the two fuel monetary value dazes chiefly due to the demand for larger vehicles stabbed. The effects of oil monetary value hikings for about all other industries are less terrible and intricate. The Hagiographas in trade diaries of gum elastic, metals and other machinery industries frequently cited that the major factor of boggy economical activity is the dejected and down automotive market, nevertheless the highlighted that assorted sectors of these industries have besides gained benefit from augmented economic activity in energy geographic expedition and protection.

The steel sector was adversely affected by the intuition in automotive gross revenues. Harmonizing to the Ward ‘s Auto World, Chemical hebdomad and Industry Week magazines, the oil monetary values crunches lowered the demand for the metals by their consequence on cars, lodging and consumer durable goodss. Globally, the car nomadic assembly programs are confronting fiscal crisis at their worst which is finally prima to recession. In the same manner, as Pakistan ‘s Auto Market is an export driven industry which attracts both foreign and locals investings, therefore is confronting diminishing gross revenues and production degree and picturing a cheerless hereafter. Because of the present critical state of affairs prevailing in the car sector, many companies are on the threshold of economic failure and bankruptcy.

K Lee and Shawn Ni ( 2002 ) besides discussed that after an oil monetary value daze, demand for vehicles is destabilized in position of the fact that a prospective new auto holder may travel for other ways of transit to salvage the operating outgo of vehicles, or detain purchasing a new auto because ambiguity about future energy monetary values makes it hard to come to a determination which type of car to buy. Increase in Oil monetary value besides alters the composing of the car demand. As compared to the small-size autos, the demand for life-size autos is much more destabilized. The U.S. car shapers suffered more ruthlessly from lifting and falling oil monetary value because they manufacture inconsistently more life-size autos than their abroad rivals.

Hamilton ( 2004 ) mentioned in his Hagiographas that the oil crisis stimulate recessions chiefly because a crisp addition in oil monetary value escalates ambiguity and elevates runing costs and outgos of several lasting goods, which diminishes demand for durable goodss, venture and investings.

Brad M. Barber, Reid W. Click, Masako N. Darrough ( 1998 ) analyzed and through empirical observation estimated the grade to which exchange rate and oil monetary value changes have contributed to this market swing. Addition in oil monetary values diminishes the sum of vehicles sold by the US car shapers, but conversely to the common thought, had minor consequence on the Nipponese car nomadic shapers.That oil monetary value consequence reported 6.5 per centum of the discrepancy of change in monthly gross revenues volume for US car makers. They besides discussed that productions costs are affected by oil monetary values hikings. For their research they used VAR to foreground the environmental issues that influence the cost of fabrication and demand in the car industry.

They clearly account for the consequence of oil monetary values and exchange rates on fabrication costs and the impact of oil monetary values and income on the demand for vehicles. Their results suggested that the all the considered macroeconomic variables affected gross revenues volumes as forecasted by the theoretical account they used. With mention to oil monetary values, escalated oil monetary values have surely led to turn down in gross revenues by the U.S car industries.

The fluctuations in oil monetary values in local currency are inflated and unpredictable in contrast to the fluctuations in monetary values of oil in dollar footings peculiarly in 1999 and onwards. This underlines the inside informations that the impacts of external oil monetary value dazes have considerable consequence upon local rising prices via exchange rate fluctuations in the economic system.

Khawar ( 2009 ) proposed that fiscal slacks tend to emerge after oil monetary value tendencies. In peculiar, the worldwide inflationary strains of 2008 became strict with the spikes up in fuel monetary values dazes in the planetary fiscal system including Pakistan. Fuel monetary values with regard to domestic currency emphasized the fact that the delivering channels of planetary dazes via exchange rates fluctuations put down major effects on the domestic rising prices within the economic system.

Steven J.Davis and John Haltiwanger ( 2001 ) discussed that the OPEC oil monetary value daze in US during 1973 had major impact on the U.S car Mobile industry. It amplified the demand for smaller, fuel efficient autos and at the same clip condensed the demand for larger autos. As the financess, fiscal stock and labour force were fundamentally bound for the fabrication and production of larger autos, hence the U.S automotive companies were unequal to react to this oil monetary value daze. As a consequence, capacity ingestion, use and the end product cut down during the period of Oil monetary value daze. Merely few workss were equipped to bring forth the little autos, fabrication and operating at their extremum capacity.

They studied the impact of oil monetary value dazes on the creative activity and desolation of American car fabricating employment from 1972 to 1988. The oil monetary value daze unfavourably had an consequence on the propinquity between the preferable and existent features of factor contributed in the car industry along different dimensions. First, a big sum of the physical resources in the car industry was devoted to the industry of larger autos alternatively of the smaller 1s. Second, the American car labour had built up proficiency that was skilled and specialized in the industry and production of peculiar auto theoretical accounts, and these were likely to be larger vehicle theoretical accounts.

With mention to the statistics of Pakistan Automotive Manufactures Association, auto gross revenues during the period of 2008-09 positioned at 82,844 units, which were declined by 48 % from 164,650 units in the 2007-08. In Pakistan besides the addition in oil monetary values had impact on many endeavors. Many different little to medium Automobile companies in the fabrication sector are confronting a terrible menace of retrenchment, closings, layoffs and limited production cuts due to an disconnected rise in their cost and outgos of making fabrication and a important decrease in their auto gross revenues. Harmonizing to the proprietors of different little car manufacturers, the gross revenues of different car parts have plunged downwards to 30 % -in proportion to the decrease in the auto gross revenues. The overall borders have besides dropped down.

The association between mobility, calculated as clip spent in motion, and economic end product is more stable than the relationship between end product and fuel use, partially due to increased possibilities of permutation between the latter. This scrutiny bears a important policy lesson: comparative monetary value alterations to diminish energy ingestion per unit of end product are most effectual where possibilities for permutation are highest. ( Birol, Keppler, 2007 )

Storchmann ( 2005 ) employed a pooled theoretical account to cipher approximative mean fuel use utilizing assorted explanatory variables such as, population, private income, urbanisation rates, denseness, oil monetary values and car outgos. The sale of car sector is affected by all these variables.

Thomas Klier and Joshua Linn estimated the impact of the monetary value of gasolene on the demand for fuel efficient vehicles. They institute the thought that gasolene monetary values well influence the new car market and the monetary value escalations explained about half of the down bend in market portion of U.S car houses. The results suggested that consumer demand reacts when the monetary value of gasolene additions or lift up during 1970 ‘s and near the beginning of 1980 ‘s. During stable monetary values in the in-between period, the gross revenues had a negligible consequence by the monetary values of gasolene ; their consequences were steady with insouciant observation of the new car market.

Assorted research workers used a theoretical account called sectoral displacements that elucidated how an oil monetary value slog might take down existent GDP. The primary extension method in this theoretical account is that an oil monetary value escalation will take down consumer purchasing power of energy-using trade goods such as cars.

Kenneth A. Small and Kurt Van Dender ( 2007 ) discussed the recoil consequence for motor vehicles by which improved fuel efficiency caused extra travel. They referred how Goldberg ( 1998 ) determined the recoil consequence by agencies of the Consumer Expenditure Survey for the old ages between 1984-1990, as an ingredient of a bigger equation system that besides forecast the consequence of oil on car gross revenues and monetary values.

Lutz Kilian ( 2007 ) used Regression analysis to discourse that Automobile purchases were by far the most antiphonal outgo point when the oil monetary values fluctuates. Purchase of other durable goodss goods for case contraptions or furniture ; by contrast, are far less antiphonal to energy monetary value swings. Spending on public transit and on nutrient at place are few of the outgo points that privileged from unexpected elevated energy monetary values.

There will be a demand side impact of oil monetary value additions. When oil monetary values rise, consumers are likely to detain or prorogue their buying durable goodss such as cars. This demand side impact leads to relative addition in stock lists to gross revenues and so worsen industrial production.


The aim of this survey is to find the impact of local oil monetary values on Pakistan ‘s Automobile gross revenues.

The research is explorative in nature and relied on secondary research and informations aggregation, reexamining available literature and information. The sample informations consists of five old ages monthly oil monetary values ; taken from OGRA ( Oil and Gas regulative authorization ) , and five old ages monthly car gross revenues ; taken from PAMA ( Pakistan Automotive Manufacturers Association. )

An extended secondary informations analysis was done where the impact of oil monetary values were observed and the related research were besides examined to happen out the linkages of the oil monetary values with the car gross revenues, informations analysis was done through Ms-excel. The statistical tool used is arrested development and correlativity. The tabular arraies were besides generated through Ms-Excel 2007 version.

5.0 HYPOTHESIS Testing

The intent of this research is to happen the relationship between Local oil monetary values and the Pakistan ‘s car industry gross revenues. Globally, research workers have observed that oil plays a major function in impacting the Automobile industry gross revenues. In our research we are besides proving the undermentioned hypothesis.

H1: The local oil monetary values have a direct impact on Automobile gross revenues in Pakistan.


5.1.1 Independent Variable – domestic oil monetary values

In Pakistan, the oil monetary values passed through to domestic consumers is determined by Oil and Gas regulative authorization ( OGRA ) and although the oil monetary value in international oil market fluctuates on a day-to-day footing, in Pakistan the base on balls through is carried out after every 15 yearss. The international oil monetary values pass through local oil monetary values and impact about every sector of the state from transit to the Agriculture. Hence oil is the anchor of every sector of the economic system and plays an of import function in the development of any economic system.

5.1.2 Dependent Variable – Pakistan ‘s Auto mobile Gross saless

Pakistan ‘s car gross revenues were taken from PAMA which is a registered Pakistan Automobiles Association company. The planetary oil crisis has affected Pakistan economic system badly. Automobile sector has been greatly impacted by the oil monetary value dazes.

The escalation in the crude oil monetary values plays a major function in the car industry worldwide. When the monetary value of oil additions, it obviously alarms the car industry because the car companies are in the competition with one another to carry through the new demands for more fuel efficient consumer mindful at condensed monetary value. Furthermore, rise in the crude oil monetary values besides impacts the sort of agencies of transit demanded by the purchaser and the manner those vehicle motors are designed. However after analyzing the oil monetary value impact on Pakistan ‘s car industry gross revenues the research concluded that the relationship of oil monetary values and car gross revenues does non be in Pakistan. The consequence shows that the correlativity between the two variables is really minor and the significance value F indicated that there is no additive relationship between the two variables.

The consequences have changed the misconception of investors who think that if the oil monetary values diminish, there is an upward incline in car gross revenues since the consequence clearly indicates that consumers are non affected by the alteration in oil monetary values while purchasing cars in Pakistan.

This research will besides impound the false feeling of immature shareholders who invest in stock markets and purchase portions of car companies at the clip of lowers oil monetary values presuming that when the oil monetary values decreases the portion monetary values of Automobile companies will speed up upward.

Since oil impacts automobile gross revenues worldwide therefore we can besides construe that the consequences might be differing in Pakistan ‘s Market due to restriction of informations.


I'm Heather

Would you like to get such a paper? How about receiving a customized one?

Check it out