Impact of Crude Oil Prices on Automotive Industry – MERCEDES BENZ Case Study

1.0 Introduction

1.1 Background of the study

The demand for crude oil in the modernised and civilised world is increasing at an alarming rate. This has an impact on the economies of scale and thus, the value of crude oil has become a major area of concern for the people across the globe. The major reason for such concern in the globalised world is the impact of crude oil prices on the performance of the stock market and an increase in the prices of crude oil. The sensitivity in the crude oil market and its increasing demand have been a major area of concern be because the world is energy-dependent to a greater degree and thus, without this important non-renewable sources, the economies are reaching to a threshold level (Waheed et al., 2018).

The most dependent sector on crude oil is utility or electronic industry, which is found to be severely affected in case of a change in the price of crude oil. The price elasticity has an influence on the daily life of people, as the world is highly reliant on technology. The increase in the crude oil price has also made negative impact on stock price in automobile sector. According to Abdulrazzaq(2018), it is evident the change in the price of crude oil has a major impact on automobile companies and one of the most evident examples as found during the oil crisis in Iran in 1979. The shortage in oil within the country led to making US investors refrained from investing the automobile to the energy sector.

1.2 Research Aim

The aim of this study is to evaluate the impact of the price of crude oil on the stock returns of Mercedes Benz for 10 years. The focus of the study is the automobile industry which is highly dependent on the crude oil for its success.

1.3 Research Questions

The research questions are:

  • What is the relation between the price of crude oil and stock PRICE in Mercedes Benz for a period of 10 years?

2.0 Literature Reviews

2.1 Role of Crude oil in the global economy

Oil is referred to as the lifeblood of the industrialised nation and has become of the most important source of energy in the world since the middle of the 1950s. The products associated with it are crucial in the modern society including supplying of energy to power industry, heating homes and offer fuels for vehicles to carry people and goods to different parts of the world.  According to Babu, Hariharan& Srinivasan(2017), oil helps in meeting 97% of the transport demand. The refined oil products are found to be useful in the production of chemical, detergents, fertiliser, and paints and even possess medicinal properties.

In a recent study conducted by Rasheed(2019), it was found that using an extensive supply chain, hundreds and thousands of people are employed in the oil and gas industry that has a major contribution on the economies of scales including technologies, tax revenue and exports. With the increase in the price of oil in a rapid manner had caused as well as affected the economy to a greater extent. The increase in the demand, as well as the fear of disruption in the supply, has exerted pressure on the cost of price. The global demand had outpaced the production and excess capacity of oil. The most significant reasons opined in this regard is the developing nations, likeChina and India are growing at a rapid scale.

The economies are transforming to industrial and urbanised in nature that demands more oil in the process. In another study conducted by UlHaq (2017), it was found that the chaos in oil-producing countries such as Iran, Iraq, Nigeria and Venezuela was another reason for the rise in price. The steep increase in the cost of oil in the last half of 2007 and the early of 2008 had also stated that the role of the commodity market was predominant in nature. Even though this is a debatable topic, however, speculation is opening various avenue in this debate. As opined by Alfadli(2015), the supply and demand of oil were slow-moving as compared to the sharp increase in the price within a short period and thus, the large change was needed for maintaining the equilibrium in this case.

2.2 Impact of the increase in oil price on stock return

According to various researchers, the movement in the price of oil was rapid and surprising to many. The association between the price of oil and stock market was discovered however, there was less correlation between the variables. Even though it was not stated that there was no impact of these variables on each other, however, it was suggested that the analysts were unable to predict the ways by which the stock reacts on the change in oil cost. According to Lele(2016), a rise in oil price was responsible for increasing the input cost in business and thus, forcing the customer to spend more on gasoline.

This, in turn, reduces the earning of the other business and the opposite is true in the case of fall of oil price. In a study, Andrea Pescatori, an economist at the International Monetary Fund (IMF) tried to test the theory in the year 2008. He measured the change in the S&P 500 as a deputation of stock price and crude oil. It was observed that the variables moved on an occasional basis in the same direction at the same time, when though the relation was weak in nature.

Hamma, Jarboui & Ghorbel(2014) opined that there was an impact of oil price of the economy of countries such as the US, which was found to go two ways due to diversity industries. The increase in oil price led to the creation of employment and investment as it was economically viable for oil companies, however, it affected the people working in the consumer and transportation industry as it increased the cost. On the other hand, the lowering of price affects the unconventional activity oil however, have a positive impact on the manufacturer and other industry where the cost of fuel is a major issue.

2.3 Economic Influence of Oil in the Automotive industry

The increase in oil prices plays an important role in the automobile sector. According to Clements & Kocke lman (2017), the world consumes 82 million barrels of oil each day and 97% of the transportation that allowing in running cars, trucks and other vehicles in the national highways. The rise in the price is thus, a clear concern in the auto sector as the companies are competing in order to meet the demand of becoming more fuel-efficient and consumer conscious at a low price. The profit margin is affected to a large extent and it also affects the designing of cars. The demand for oil and challenges in oil refineries is one of the major aspects that increase the prices. As per the opinion of Baumeister & Kilian(2016), oil is mainly used for two purposes, to make gasoline and in production of tire. The price of gasoline has increased steeply in the last few years that cost about $3 per gallon.

2.4 Gap in Literature

From the elucidation of the previous studies with respect to the topic of discussion, a vast knowledge has been gained. The role of oil in the global economy, the relationship between stock price and rise in oil price was evaluated and the impact of oil in the automobile industry had assessed in detail to obtain a background knowledge. However, it can be found that the impact of the rise in oil price on the stock return on the automobile industry has not been touched by the researcher. The subject was considered from two different aspects, which posed a challenge in gaining any knowledge in this regard. Therefore, the study was conducted that evaluated and assessed the impact of a rise in the cost of crude oil on the stock returns which highlighted the automobile industry. This is because this industry is founded to be highly affected by the change or shift in the price of crude oil.

Negative impact on Mercedes Benz Rise in Oil prices  

2.5 Conceptual Framework

Demand in crude oil

Figure 1: Conceptual Framework

3.0 Methods

3.1 Research method

The research aims to evaluate the relationship between two variables, namely the rise in the price of crude oil, which was the dependent variable and the stock return, which was the independent variable. The use of descriptive designhas been employed in order to undertake the research involving describing in detail the various aspects of the topic and obtaining an outcome that suffices the research question formulated in the introductory chapter.

3.2 Data Collection

Palinkaset al. (2015) opined that the use of primary and secondary data collection method is employed in a study. The primary data involve the use of raw material or information from the participants whereas, in secondary data, the use of previous or existing data have been used. In this case, the use ofsecondary data sourceswas used that gave a clear idea of the topic that allowed the researcher to undertake a clear understanding of this study. The secondary data sources included books, journal articles, and websites of various relevant and important sources.

3.3 Data analysis

The use of thematic content analysis was conducted using the secondary sources that allowed to form themes of a particular variable in relation to the given researcher. This allowed in evaluating as well as an assessment of the study from all perspective.

3.4 Ethical considerations

It was important to consider the ethical consideration of the study. Since there are no live participants thus, the level of ethical issues has been reduced. The consideration that needs to be kept in mind, in this case, is to acknowledge in a proper manner the work that has been used in this particular study.

4.0 Findings

The use of various journal articles has been undertaken that will offer an elaborative understanding of the topic to the researcher. The use of thematic content analysis has been undertaken that specifically evaluates the topic from all perception and offers a summarised version of the articles. In order to gain a compact and qualitative evaluation, the use of tabular representation of the theme has been done in the finding section. The analysis and discussion were conducted in the preceding section.

Figure 2: Stock value of Dailmer (whose subsidiary is Mercedes Benz) from 2009 to 2019

(Source: Daimler.com, 2019)

Figure 3: Share prices for a period of 10 years

(Source: Daimler.com, 2019)

From the figures and statistic obtained from the Dailmer which is the parent company of Mercedes Benz, it can be clearly understood that the values are constantly changing. The stock price was highest during the period of 2015 to 2017. The reason that had been found that lead to such high rise in stock price was the low cost of crude oil. An evaluation of the market price of crude oil in US dollar was estimated and it was found that in 2014, the cost was 98.89, in 2015 it was 52.32, in 2016, it reduced slightly and was approximately, 43.74, in 2017, the price was 54.15 and then in the successive years, it kept on increasing from time to time (Refer to the table 1). Therefore, the cost of crude oil has an influence on the stock price of the company to a large extent.An investigation on different stock returns if oil producers, as well as oil consumers, have been evaluated with respect to the change in oil prices.

It was found that the stock return was positively affected due to the change irrespective whether the price is increasing or decreasing. This is because for the oil producers the oil does not affect them as they are producing it and thus, the effect is considered as heterogeneous in nature. It was also observed that the oil price returns have an asymmetric impact on the stock price in various sub-sectors of oil.

The analysis of oil price sensitivity of the largest automobile manufacturer was undertaken. The systematic effect was controlled where it was identified that there is a negative oil price sensitivity which was consistent in nature with the fuel cost demand. Furthermore, the effect was strengthened by the increase in popularity of SUVs despite the fact that the manufacturers are trying to produce hybrid or electric cars. Thus, it was observed that Telsa showed a positivity oil price sensitivity, which was consistent with the substitution effect.

The influence oil market shocks in the oil price had an implication on both national and international investors. A nonlinear relationship of oil price and stock market of the major oil-exporting countries was studied using a multifactorial Markov switching framework. It was found that the flow of oil demand had an impact on the stock return of countries such as Saudi Arabia, Canada, Russia, Norway, UAE and Kuwait.

5.0 Discussion

From the finding section, it was identified that the price of crude oil has a significant impact on stock returns of Mercedes Benz. The focus of the analysis was given on the assessment of the relationship between crude oil prices and stock returns of the company. This was because the impact of crude oil on the global economy has been elucidated in the literature review. The impact of the rise in oil price is variable in nature. The effect is dependent on various factors that help in the assessment of the relationship in an effective manner. From the study, it was opined that the automobile industry, Mercedes Benz is one of the most significant in this case. This is because it is the key stakeholder of oil-producing companies, as the chief source of transportation is fuel.

The rise in oil price may have an impact on automobile companies of several developing countries. The reason opined was it limit the spending power of the customers and thus, the demand for vehicles fall below expectations. On the other hand, the oil-producing countries are least bothered about it as well as the developed countries. The affordability of the customers located in these countries is on par with the price of crude oil. Thus, there is a positive impact of stock returns of the automobile industry as a whole.

From various studies, the impact of crude oil on the economies of scale has been identified and studied using a number of the framework. The rise in price has a slothful influence since it is one of the most used energies in the world and requires day-to-day operations in each country. Thus, the stock price of oil-producing countries is found in the sky reaching in nature. On the other hand, the impact is detrimental to various sectors specifically energy and automobile. The main source of energy required in these sectors is crude oil, thus, the increase in price affects the capability of purchasing oil. There is a limitation being imposed on the pur

chasing capability that somehow, lowers the producing capability. Since the manufacturers are forced to manufacture the products however, the customers do not buy the products at the rate at par with the manufacturing capability. This, in turn, affects the stock price of the companies. In the stock exchange, the stock prices of the companies are found below as a result, the negative effect can be observed clearly and evidently.

6.0 Conclusion and Recommendations

6.1 Conclusion

It can be concluded that stock return and crude oil prices are tow variables that have an asymmetric relation between them. The relationship is dependent on a number of factors and has an overall impact on the economic condition of the world. In order to evaluate the impact on the rise in crude oil which is a trend in the market, it is important to understand the factors behind the cause. From the study, it was found that there is a negative impact on the stock return specifically on the automobile industry. The reason behind this is because the vehicles are based on fuel and require constant usage of fuel for its operations.

The conclusion was formed in respect to one of the leading automobile companies in the world, Mercedes Benz. The stock price of the company had been found to be higher when the price of crude oil was whereas the opposite was true in today’s situation. This indicates to the fact that crude oil price is one of the factor that had a critical impact on the stock return. In due course of time, it was important for the company to be one of the most leading automobile manufacturers in the world. Thus, it need to strategically play in the market. Thus, the next section will highlight the recommendations required for improving the scenario.

6.2 Recommendations

The recommendations need to be given in order to improve the stock returns of automobile companies specifically Mercedes Benz and thus, it is important to find alternatives. The recommendations include:

  • To design vehicles based on alternative fuel or electric in nature
  • To develop a vehicle that uses less fuel thus, reducing the dependence of crude oil
  • To strategically position the sector that maintains a positive balance the crude oil price in the market

6.3 Limitation of the study

There are limitations found in the study. The first limitation is there was less focus on the automobile industry thus, the primary data collection need to be done that will allow in obtaining more vivid data related to the stock return of the automobile industry. The second limitation is a constraint in time that need to be taken into consideration.Due to limitation in time, the assessment of various factors cannot be included in the study. Due to time constraint, the research had to resort to secondary research that involves company’s record of the stock price in the ten years. In case, there was more time, it may involve comparsional study that would enhance the scope of the study. The third limitation is in term of financial that had also limited the scope of the research to certain extent. The funding was less and thus, a number of variables were not incorporated in the study that had restrained the study from few aspects.

References

Abdulrazzaq, Y. (2018). An Analysis of the Effects of Political Events on Oil Price Volatility and Consequential Spillover Effects on Selected GCC Stock Markets: An Emphasis on the Case of Kuwait.

Alfadli, D. A. (2015). Monetary union and stock markets integration in GCC.

Babu, M., Hariharan, C., & Srinivasan, S. (2017). Impact of Crude Oil Prices on Stock Returns–A Study with Special Reference to OPEC Nations. Pacific Business Review International10(4), 147-151.

Basher, S. A., Haug, A. A., &Sadorsky, P. (2018). The impact of oil-market shocks on stock returns in major oil-exporting countries. Journal of International Money and Finance86, 264-280.

Baumeister, C., & Kilian, L. (2016). Lower oil prices and the US economy: Is this time different?. Brookings Papers on Economic Activity2016(2), 287-357.

Baur, D. G., & Todorova, N. (2018). Automobile manufacturers, electric vehicles and the price of oil. Energy Economics74, 252-262.

Clements, L. M., &Kockelman, K. M. (2017). Economic effects of automated vehicles. Transportation Research Record2606(1), 106-114.

Ding, H., Kim, H. G., & Park, S. Y. (2016). Crude oil and stock markets: Causal relationships in tails?. Energy Economics59, 58-69.

Hamma, W., Jarboui, A., &Ghorbel, A. (2014). Effect of oil price volatility on Tunisian stock market at sector-level and effectiveness of hedging strategy. Procedia Economics and Finance, 13, 109-127.

Lele, U. P. E. N. D. R. A. (2016). Impact of Oil Prices on Revenue Growth and Profitability of Saudi Listed Companies in Non-Financial Sectors. International Journal of Management, Information Technology and Engineering4(6), 13-20.

Palinkas, L. A., Horwitz, S. M., Green, C. A., Wisdom, J. P., Duan, N., &Hoagwood, K. (2015). Purposeful sampling for qualitative data collection and analysis in mixed method implementation research. Administration and policy in mental health and mental health services research42(5), 533-544.

Phan, D. H. B., Sharma, S. S., & Narayan, P. K. (2015). Oil price and stock returns of consumers and producers of crude oil. Journal of International Financial Markets, Institutions and Money34, 245-262.

Rasheed, Q. (2019). Energy Prices and the Financial Performance of Different Industries in Pakistan. Global Journal of Management And Business Research.

Saunders, M. N., Lewis, P., Thornhill, A., & Bristow, A. (2015). Understanding research philosophy and approaches to theory development.

UlHaq, I. (2017). Impact of Oil Prices on Financial Performance of Corporate Firms: A Study of Omani Companies. International Journal of Accounting Research42(90), 1-8.

Waheed, R., Wei, C., Sarwar, S., &Lv, Y. (2018). Impact of oil prices on firm stock return: industry-wise analysis. Empirical Economics55(2), 765-780.

Appendix

Number Article Name Theme Brief Summary
1 Oil price and stock returns of consumers and producers of crude oil Relationship between crude oil and stock returns In this article, the investigation on different stock returns if oil producers, as well as oil consumers,have been evaluatedwith respect to the change in oil prices. It was found that the stock return was positively affected due to the change irrespective whether the price is increasing or decreasing. This is because for the oil producers the oil does not affect them as they are producing it and thus, the effect is considered as heterogeneous in nature. Itwas also observed that the oil price returns have an asymmetric impact on the stock price in various sub-sectors of oil.
2 Crude oil and stock markets: Causal relationships in tails? Relationship between crude oil and stock returns In this paper, the assessment of the causal relationship between the Dubai crude oil return, WTI and five stock index return that are S&P 500, Hang Seng, Nikkei, KOSPI and Shanghai in a quantile causality framework was evaluated for a period of 1996 to 2012. The test was useful in gaining an understanding of the causal relationship between the two returns. It was revealed that WTI return was not in close association with the Asian counties and there are some financial markets that cause WTI returns. The significance in the relationship can be derived from low to high level of quantile from one to another market exception was found in case of Nikkei to WTI returns. All the stock index returncauses Dubai crude oil returns.
3 The impact of oil-market shocks on stock returns in major oil-exporting countries Relationship between crude oil and stock returns Theinfluence oil market shocks in the oil price had an implication on both national and international investors. A nonlinear relationship of oil price and stock market of the major oil-exporting countries was studiedusing a multifactorial Markov switching framework. It was found that the fow of oil demand had an impact on the stock return of countries such as Saudi Arabia, Canada, Russia, Norway, UAE and Kuwait.
4 Automobile manufacturers, electric vehicles and the price of oil Automobile manufacturers, electric vehicles and the price of oil Role of crude oil price in the automobile industry The analysis of oil price sensitivity of the largest automobile manufacturer was undertaken. The systematic effect was controlled where it was identified that there is a negative oil price sensitivity which was consistent in nature with the fuel cost demand. Furthermore, the effect was strengthened by the increase in popularity of SUVs despite the fact that the manufacturers are trying to produce hybrid or electric cars. Thus, it was observed that Telsa showed a positivity oil price sensitivity, which was consistent with the substitution effect.

Table 1: Qualitative Data Findings

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