Relation between the oil prices and the sales of automobiles

1.0 INTRODUCTION

The Impact of Rising Oil Prices on Automobile Sales:

Impact of oil in daily life is quite evident. Oil is considered as a strategic 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 country’s 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 BPD”1.

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 Pakistan’s 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 Japan 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 Pakistan’s 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 Pakistan’s 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 downward slope, reaching 6.14 (FY09) the diminishing Profit margin was 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.

5.1.2 Dependent Variable – Pakistan’s Auto mobile Sales

Pakistan’s 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

Table 6.2: Regression Statistics of the tested variables

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.

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 Pakistan’s 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.