December 28, 2014

Diversification versus Specialization – The Case of Russian Oil

Crude Oil Price from 2006 to 2014

Oil plays a major role in the economic growth of a country; oil is the source of mobility and energy. The decline in the price of oil can have a positive or negative note, depending, whether a country is an importing or exporting country.

One good recent example is the case of Russia – one of the biggest oil exporters in the world. Oil price started to decline in the month of August 2014 (based on U.S. EIA data). From July to December 2014, oil price declined by 41% from 103 USD to 61 USD per barrel, respectively, on average.

With the declined in the price of oil which is Russia’s major export product, income coming from oil declined. As a result, foreign currency coming from oil income declined; foreign currency reserve declined which is being used to purchase imported goods. With high demand for foreign currency, and supply of foreign currency reserve declining, the value of Ruble (Russia’s currency) was negatively affected - which means that a person will need more Rubles to purchase a Dollar. Moreover, price of imported goods could increase which could lead to harmful inflation.

Based on the above case, we could learn that diversification of business would be good for an economy; relying in one specialized product could be dangerous in the long run. This means that a balanced economy is recommended; the economy must be self-sufficient, which means that an economy should be able to sustain its basic needs (food & water, shelter, clothing, and energy), without importation, before deciding to specialize in one product. With self-sustainable economy, the country can shield itself from foreign exchange fluctuations and harmful inflation – which could negatively affect import dependent countries.

In the case of the Philippines, we could optimize food production by promoting agriculture business; water, shelter and clothing can be optimize by taking care of rivers, trees and mountains by imposing strict environmental regulations; and, energy will be optimize by expanding renewable energy plants (hydro, wind, solar, and geothermal plant).

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