Impact of Local Oil Prices On The Automobile Sales

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Abstract
The objective of this research is to study and understand the relation
between the oil prices and the sales of automobiles. The escalation in the
petroleum prices plays a major role in the automobile industry worldwide.
When the price of oil increases, it evidently alarms the automobile industry
because the auto companies are in the competition with one another to fulfill
the new demands for more fuel efficient consumer mindful at condensed
price. Furthermore, rise in the petroleum prices also impacts the kind of
means of transportation demanded by the buyer and the way those vehicle
motors are designed. However after studying the oil price impact on
Pakistans automobile industry sales we have concluded that the relationship
of oil prices and auto sales does not exists in Pakistan.
Contents
Acknowledgements II
Abstract III
Contents IV
1.0 INTRODUCTION 1
The Impact of Rising Oil Prices on Automobile Sales: 1
Background of Pakistans Automobile industry 4
2.0 LITERATURE REVIEW 5
4.0 RESEARCH METHOD 14
5.0 HYPOTHESIS TESTING 15
5.1 INDEPENDENT AND DEPENDENT VARIABLE 15
5.1.1 Independent Variable domestic oil prices 15
5.1.2 Dependent Variable Pakistans Auto mobile Sales 16
6.0 DATA ANALYSIS: 17
7.0 CONCLUSION & IMPLICATIONS 19
8.0 REFERENCES 20
List of Tables:
Table 6.1 ANOVA and level of Significance 18
Table 6.2: Regression Statistics of the tested variables 18
1.0 INTRODUCTION
The Impact of Rising Oil Prices on
Automobile Sales:
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IMPACT OF LOCAL OIL PRICES ON THE AUTOMOBILE SALE... http://www.ukessays.com/dissertations/economics/local-oil-prices-on-t...
1 of 8 15-03-2013 00:11
energy for economic time line. The price of oil has an effect on cost of
production in diversified ways such as with the increase in oil prices, there is
an increase in the costs of transportation of export, import and goods for
local expenditure. Apart from this there is also an upward slope in rates of
air, road, rail and sea transportation with the rise in the price petroleum.
Oil endows with 97% of the transportation fuels that facilitates in running the
trucks cars and other automobiles in the countrys highway. Thus, when the
price of the oil increases, it evidently alarms the automobile industry
because the auto-companies are in competition with one another to fulfill the
new demands for more fuel proficient consumer mindful at condensed price.
There are no reservations that profit margin of the companies are affected by
this. Furthermore, rise in oil price also affects the kind of means of
transportation demanded by the buyer and the way those vehicle motors are
designed.
The escalation in the petroleum prices plays a major part in the automotive
industry. The world consumes over 82 million barrels of oil per day (BPD),
with the united states taking roughly 20 million BPD1.
Petroleum is one of the most essential contributions in a nation's economy
and its price has extensive economic and social impacts. Various researches
illustrate that the price of petroleum in Pakistan is considerably high either
with or without involving per capita income and it needs to be leveled
downwards in order to guarantee competitiveness of Pakistans exports and
lessen the burden on the buying competence of the nation. Nevertheless,
this cannot be a simple task as Pakistan heavily depends upon imported oil
in order to fulfill its petroleum necessity and the development surcharges
and the import revenues compose a major sector of the Government
income. However, a feasible and reasonable solution to trim down oil price is
needed keeping in sight the revenue making facet and the prevailing global
prices of crude oil.
The major reason of escalated oil prices is linked with the demand of oil and
the complication in oil refineries. Petroleum is used usually for two reasons:
Firstly, in the gasoline production and secondly in the production of tires. In
the US, during the last few years the prices of gasoline have risen up
considerably reaching on an average over $ 3.00/gallon (EIA-Energy
Information Administration).Oil is considered as the main element in the tires
production. With the increase in the oil prices, the cost and expenditure in
making the tires escalates, the cost to heat up or cool the manufacturing
plant where tires are produced increases, and eventually escalates the
expenditure of shipping the tires to further destinations. Because of the rise
in the price of petroleum, the tire makers are also increasing the price of
tires. The automobile sector is affected by both, tire production and gasoline
prices as the profit margins are affected by the rise in oil prices and tire
production prices.
The automobile industry catastrophe, currently worldwide phenomena,
started during 2008-H2. The automotive sector is going through a crisis
condition in US and Canada because of the Automobile products Trade
Agreement. Nevertheless, all auto makers worldwide, especially in J apan
and Europe are also facing the same crisis. The first fragile connection in the
auto sector was the record high petroleum prices during 2008 which caused
global oil crisis and made fuel costs and expenditures unreasonable,
causing buyers to opt for smaller cars rather than larger SUVs (sports utility
vehicles) and the pick up trucks.
Background of Pakistans Automobile
industry
The global oil crisis has affected Pakistan economy severely. Automobile
sector has been greatly impacted by the oil price shocks. There had been
consistency in the Gross Profit Margin of Pakistans Automobile industry. It
raised from FY01 (6.83) to FY03 (13.73).Then had a downward slope for two
consecutive years to 12.17 (FY05), then remained stable for two more
consecutive years (FY05 - FY07).Since FY07 there has been a constant
2 of 8 15-03-2013 00:11
because of the ever escalated cost of goods sold. The risen up cost is
primarily due to the global oil price shocks and the high depreciation value of
Rupee. The escalated costs were also linked to the high inflation rate during
FY09.
2.0 LITERATURE REVIEW
Escalated oil prices have been accountable for periods of extreme inflation,
recessions, and lower productivity and reduced economic growth. For the
Automobile manufacturers the fuel price debate is nothing new. Due to
predefined end of petroleum resources, the automakers have come up with
various strategies to avert any sudden need for action. However till now, no
one has clearly defined the oil supply definitive end.
Kiseol Lee and Shawn Ni analyzed the effects of oil price shocks on demand
and supply in automobile industry depicting the effect of oil price shocks
mainly reducing demand. They suggested that oil price shocks influence
economic activities.
The first OPEC oil embargo in early 1970s has led to the start of debate over
the oil shocks and its Macroeconomic effects. The most comprehensively
surveyed theories on the direct consequence of oil price shocks incorporates
that an input-cost effect, that higher energy cost lowers usage of oil which in
turn lowers productivity of capital and labor; and an income effect, that
higher cost of imported oil reduces disposable income of U.S. households.
(K.Lee, 2002)
According to an editorial in 1973-1974 oil crises:" Automobile sales,
especially for standard and medium-sized cars, began diminishing almost
with the first realization that the energy crisis is reality. The trade-in value of
big gas-guzzlers toppled unmercifully and some dealers were threatening
not to take them in trade at all. Gasoline mileage, not size and comfort
suddenly became the paramount concern for the consumer." (Ward's Auto
World)
K.Lee contrasted to the situation in the petroleum refinery and industrial
chemical industries which were bothered by the escalated cost of fuel,
research in trade papers proposed considerable indications that the
automotive industry distraught by the two fuel price shocks mainly due to the
demand for larger vehicles stabbed. The effects of oil price hikes for nearly
all other industries are less severe and intricate. The writings in trade
journals of rubber, metals and other machinery industries often cited that the
major factor of soggy economical activity is the dejected and depressed
automotive market, however the highlighted that various sectors of these
industries have also gained benefit from augmented economic activity in
energy exploration and protection.(K Lee ,2002)
The steel sector was adversely affected by the hunch in automotive sales.
According to the Wards Auto World, Chemical week and Industry Week
magazines, the oil prices crunches lowered the demand for the metals by
their effect on automobiles, housing and consumer durables. Globally, the
auto mobile assemblers are facing financial crisis at their worst which is
eventually leading to recession. In the same way , as Pakistan s Auto
Market is an export driven industry which attracts both foreign and locals
investments, therefore is facing decreasing sales and production level and
depicting a depressing future. Because of the present critical situation
prevailing in the automobile sector, many companies are on the threshold of
economic failure and bankruptcy.
K Lee discussed that after an oil price shock, demand for vehicles is
destabilized in view of the fact that a prospective new car holder may go for
other ways of transportation to save the operating expenditure of vehicles, or
delay buying a new car because ambiguity about future energy prices makes
it difficult to come to a decision which type of automobile to purchase.
Increase in Oil price also alters the composition of the automobile demand.
As compared to the small-size cars, the demand for full-size cars is much
more destabilized. The U.S. auto makers suffered more ruthlessly from rising
and falling oil price because they manufacture inconsistently more full-size
3 of 8 15-03-2013 00:11
Hamilton in 1988 mentioned in his writings that the oil crisis stimulate
recessions primarily because a sharp increase in oil price escalates
ambiguity and elevates operating costs and expenditures of several durable
goods, which diminishes demand for durables, venture and investments.
(Hamilton 1988, 1999).
Brad M. Barber, Reid W. Click, Masako N. Darrough analyzed and
empirically estimated the degree to which exchange rate and oil price
alterations have contributed to this market swing. Increase in oil prices
diminishes the amount of vehicles sold by the US auto makers, but
conversely to the common idea, had minor effect on the J apanese auto
mobile makers .That oil price effect reported 6.5 percent of the variance of
alteration in monthly sales volume for US automobile manufacturers. They
also discussed that productions costs are affected by oil prices hikes. For
their research they used VAR to highlight the environmental issues that
influence the cost of manufacturing and demand in the automobile industry.
They clearly account for the effect of oil prices and exchange rates on
manufacturing costs and the impact of oil prices and income on the demand
for vehicles. Their outcomes suggested that the all the considered
macroeconomic variables affected sales volumes as forecasted by the
model they used. With reference to oil prices, escalated oil prices have
certainly led to turn down in sales by the U.S automobile manufactures.
Hamilton proposed that financial slumps tend to emerge after oil price
trends. In particular, the worldwide inflationary strains of 2008 became
rigorous with the spikes up in fuel prices shocks in the global financial
system including Pakistan. Fuel prices with respect to domestic currency
emphasized the fact that the delivering channels of global shocks via
exchange rates variations put down major effects on the domestic inflation
within the economy.
According to Hamilton, the variations in oil prices in local currency are
inflated and unpredictable in contrast to the variations in prices of oil in dollar
terms particularly in 1999 and onwards. This underlines the details that the
impacts of external oil price shocks have considerable effect upon local
inflation via exchange rate variations in the economy (Hamilton, 2005).
Bresnahan and Ramey discussed that the OPEC oil price shock in US
during 1973 had major impact on the U.S auto mobile industry. It amplified
the demand for smaller, fuel efficient cars and at the same time condensed
the demand for larger cars. As the funds, financial stock and labor force
were basically bound for the manufacturing and production of larger cars,
therefore the U.S automotive companies were inadequate to respond to this
oil price shock. As a result, capacity consumption, utilization and the output
cut down during the period of Oil price shock. Only few plants were equipped
to produce the small cars, manufacturing and operating at their peak
capacity. (Bresnahan and Ramey ,1993).
Steven J . Davis, J ohn Haltiwanger studied the impact of oil price shocks on
the creation and devastation of American automobile manufacturing
employment from 1972 to 1988. The oil price shock unfavorably had an
effect on the proximity between the preferred and actual characteristics of
factor contributed in the automobile industry along different dimensions.
Firstly, a large amount of the physical resources in the auto industry was
devoted to the manufacture of larger cars instead of the smaller ones.
Secondly, the American automobile labor had built up proficiency that was
skilled and specialized in the manufacture and production of particular car
models, and these were likely to be larger vehicle models.
In Pakistan also the increase in oil prices had impact on many enterprises.
Many different small to medium Automobile companies in the manufacturing
sector are facing a severe threat of downsizing, closures, layoffs and limited
production cuts due to an abrupt rise in their cost and expenditures of doing
manufacturing and a significant reduction in their car sales. According to the
owners of different small automakers, the sales of different auto parts have
plunged downwards to 30%-in proportion to the reduction in the car sales.
The overall margins have also dropped down.
4 of 8 15-03-2013 00:11
Association, car sales during the period of 2008-09 positioned at 82,844
units, which were declined by 48% from 164,650 units in the 2007-08.
According to Birol and Keppler (2007) the association between mobility,
calculated as time spent in movement, and economic output is more stable
than the relationship between output and fuel utilization, partly due to
increased possibilities of substitution between the latter. This examination
bears a significant policy lesson: relative price changes to decrease energy
consumption per unit of output are most effective where possibilities for
substitution are highest. (Birol, Keppler, 2007)
Storchmann (2005) employed a pooled model to calculate approximate
average fuel utilization using various explanatory variables such as,
population, private income, urbanization rates, density, oil prices and
automobile expenditures. The sales of automobile sector is affected by all
these variables.
Thomas Klier and J oshua Linn estimated the impact of the price of gasoline
on the demand for fuel efficient vehicles. They institute the idea that gasoline
prices considerably influence the new auto market and the price escalations
explained almost half of the down turn in market share of U.S auto firms.
The outcomes suggested that consumer demand reacts when the price of
gasoline increases or rise up during 1970s and near the beginning of
1980s. During stable prices in the middle period, the sales had a negligible
effect by the prices of gasoline; their results were steady with casual
observation of the new auto market.
Hamilton (1988) used a model called sectoral shifts that elucidated how an
oil price slog might lower real GDP. The primary propagation method in this
model is that an oil price escalation will lower consumer buying power of
energy-using commodities such as automobiles.
Goldberg (1998) determined the rebound effect by means of the Consumer
Expenditure Survey for the years between 1984-1990, as an ingredient of a
bigger equation system that also forecast the effect of oil on automobile
sales and prices.
Lutz Kilian in 2007 used Regression analysis to discuss that Automobile
purchases were by far the most responsive expenditure item when the oil
prices fluctuates. Purchase of other durables goods for instance appliances
or furniture; by contrast, are far less responsive to energy price swings.
Spending on public transportation and on food at home are few of the
expenditure items that privileged from unexpected elevated energy prices.
There will be a demand side impact of oil price increases. When oil prices
rise, consumers are likely to delay or postpone their purchasing durables
such as automobiles. This demand side impact leads to relative increase in
inventories to sales and then decline industrial production.
4.0 RESEARCH METHOD
The objective of this study is to determine the impact of local oil prices on
Pakistans Automobile sales.
The research is exploratory in nature and relied on secondary research and
data collection, reviewing available literature and data. The sample data
consists of five years monthly oil prices; taken from OGRA (Oil and Gas
regulatory authority), and five years monthly auto sales; taken from PAMA
(Pakistan Automotive Manufacturers Association.)
An extensive secondary data analysis was done where the impact of oil
prices were observed and the related research were also examined to find
out the linkages of the oil prices with the auto sales, data analysis was done
through Ms-excel. The statistical tool used is regression and correlation. The
tables were also generated through Ms-Excel 2007 version.
5.0 HYPOTHESIS TESTING
The purpose of this research is to find the relationship between Local oil
5 of 8 15-03-2013 00:11
observed that oil plays a major role in impacting the Automobile industry
sales. In our research we are also testing the following hypothesis.
H1: The local oil prices have a direct impact on Automobile sales in
Pakistan.
5.1 INDEPENDENT AND DEPENDENT
VARIABLE
5.1.1 Independent Variable domestic
oil prices
In Pakistan, the oil prices passed through to domestic consumers is
determined by Oil and Gas regulatory authority (OGRA) and although the oil
price in international oil market fluctuates on a daily basis, in Pakistan the
pass through is carried out after every 15 days. The international oil prices
impact almost every sector of the country from transportation to the
Agriculture. Hence oil is the backbone of every sector of the economy and
plays an important role in the development of any economy.
5.1.2 Dependent Variable Pakistans
Auto mobile Sales
Pakistans automobile sales were taken from PAMA which is a registered
Pakistan Automobiles Association company. The global oil crisis has
affected Pakistan economy severely. Automobile sector has been greatly
impacted by the oil price shocks.
6.0 DATA ANALYSIS:
The data analysis was done through Ms-Excel 2007, Correlation and
Regression analysis was done to find out the relationship between the two
variables. The monthly local oil prices were compared with the monthly
automobile sales.
The regression Analysis was done to determine if escalation in oil prices
affects the sales of automobile industry or not, to find out this the following
equation has been used
Y = a + bx
Here Y=auto sales
And X=oil prices
Sales = f (oil price)
S=16,150.92-32.03(oil price)
Negative sign of X intercept shows that the result is inline with the literature
review i.e. with the increase in oil prices, automobile sales is declining.
However the relationship is insignificant because P value is 0.51 (greater
that 0.05).Therefore, the research hypothesis has been rejected and there is
no relationship between oil prices and sales of auto industry.
Table 6.1 ANOVA and level of Significance
ANOVA
df
SS
MS
F
Significance F
6 of 8 15-03-2013 00:11
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1.00
7,521,403.95
7,521,403.95
0.44
0.51
Residual
55.00
939,576,283.03
17,083,205.15
Total
56.00
947,097,686.98
Table 6.2: Regression Statistics of the tested variables
Multiple R
0.09
R Square
0.01
Adjusted R Square
(0.01)
Multiple R is 0.09 which means the correlation between the two variables is
negligible.
R square is also 1% which also indicates negligible effect of oil on the auto
sales .Y intercept signifies that if oil price is 0, still the auto sales will be
16,150.92 units. Whereas, the slope indicates that with the increase in oil
prices, the auto sales will decrease with 32.03 units.
Log of both the variables was tested in order to find out the linearity, but no
such relationship exists between the two variables.
7.0 CONCLUSION & IMPLICATIONS
The purpose of this study is to find out the effect of local oil prices on
automobile sales in Pakistan. After conducting this research the results
indicates that there is no significant impact on the Auto sales when the oil
price changes.
The escalation in the petroleum prices plays a major role in the automobile
industry worldwide. When the price of oil increases, it evidently alarms the
automobile industry because the auto companies are in the competition with
one another to fulfill the new demands for more fuel efficient consumer
mindful at condensed price. Furthermore, rise in the petroleum prices also
impacts the kind of means of transportation demanded by the buyer and the
way those vehicle motors are designed.
However after studying the oil price impact on Pakistans automobile industry
sales the research concluded that the relationship of oil prices and auto
sales does not exists in Pakistan. The result shows that the correlation
between the two variables is very minor and the significance value F
indicated that there is no linear relationship between the two variables.
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