Milestone 3
Ekenedilichukwu C. Onyechi
Macroeconomics, Regent University
ECON 230
Professor Nick Bergan
August 8, 2022
Introduction
Many factors come together to support a country’s economy. These factors can also affect businesses in or tied to that country. For instance, a country’s Central Bank can influence the country’s economy because of its impact on the banking system in the nation, in America, this is the Federal Reserve. Another factor is fiscal policies that affect a nation’s economy due to government spending. These different factors can affect a country’s growth, profitability, decision-making, and so on. A company such as the oil and natural gas company Shell will be affected by these factors due to its influence on the country’s economic market. However, to see these effects on a business, one must understand what these factors are.
Central Banks and Fiscal Policy
The first factor is the central bank of a country, it is a financial institution that controls the production and distribution of a nation(s) credit or currency and creates monetary policy. In most countries, the central bank isn’t a government agency. Meaning it’s politically independent and its powers are protected by the law. There are three fundamental duties that every central bank has. The first duty is its ability to influence a country’s money supply, like setting interest rates and issuing currency. The second duty is to regulate other banks through capital requirements, reserve requirements, deposit guarantees, and manage foreign exchange policy. The third duty of a central bank is to be an emergency lender to commercial banks and the government. Two examples of a central bank in the Federal Reserve and the De Nederlandsche Bank. The Federal Reserve is the central bank of the United States and “it is arguably the most powerful financial institution in the world” (Hayes, 2022). The De Nederlandsche Bank is a public limited company founded by King William the 1st in 1814 and overseen by the governing board.
The second factor is fiscal policy, which uses government spending and tax policies to influence economic conditions. The government uses fiscal policy to help influence demand for goods and services, inflation, unemployment, and economic growth. For example, to encourage economic activity and consumer demand, the government may lower tax rates and increase government spending on things like infrastructure, social security, Medicare, subsidiaries, and so on. Depending on the economic state of the country the government either cuts back on spending or increases it to help balance the economy.
Royal Dutch Shell Company & Central Banks
Central Banks and fiscal policies are used to support a country’s economy. However, they also influence businesses such as Royal Dutch Shell or Shell plc within the market. Regarding central banks, The Federal Reserve created the Main Street Lending Program that benefitted oil companies affected by the coronavirus in the US. The Fed loaned up to $600 billion to midsized companies who applied for the loan. They also gave companies 5 years to pay back the low-interest loans and a 2-year break before starting. For companies that want to expand their loans, the Federal Reserve said they’d raise their maximum from $200 million to $300 million. Another central bank that had the same idea was the De Nederlandsche Bank or DNB. On their website, it stated that as of 2019-2020 they issued out more banknotes than they had ever since 2003. However, due to the shutdown banknotes received were at a decline of -25%, and banknotes issued increased to -10%. But to sustain their economy the DNB was obligated to issue banknotes and lower their buffer requirements to help businesses.
For oil companies such as Shell, this is a major economic boost. Loans like the Main Street Landing went to oil companies because they pay it back due to their high demand. According to Washington Post, the Main Street Landing policy “…will be especially helpful for oil companies as they wait for the price of crude to recover after dropping by nearly 40 percent since the start of the year.” (Grandoni, 2020). So, for an oil company like Shell, this loan did not just sustain them but it helped them bounce back economically for the coming year to meet inevitable consumer demand. This year alone Shell reported $9.1 billion in earnings for the January to March period.
Royal Dutch Shell Company & Fiscal Policy
Fiscal policy is another way countries try to balance their economy by their government spending their money. A type of government spending is through subsidiaries that are given to certain economical organizations to help balance the nation’s economy. In 2020 the US subsidized the burning of coal, gas, and oil by $5.9 trillion and totaling $20.5 billion in oil subsidiaries annually. Another government that spends on oil subsidiaries is the Netherlands government and this year they offered $169 million in subsidies this year to fill up gas shortages, and annually the country spends $8.3 million. Another government is the Nigerian government and they reported that oil subsidiaries this year could cost $9.6 billion due to rising oil costs. The country pays an estimated $7 billion in oil subsidiaries annually.
For oil companies like Shell, government subsidiaries mean lower costs for fossil fuel production or raised prices received by fossil fuel companies. This helps Shell’s profitability because governments are helping fund their work and it reduces the costs of recourses like land, water, research development funding, and more. Fewer recourse expenses mean they can produce more oil and make more profit. Shell could also charge more while paying less for production, bringing in more revenue than they are spending. With fossil fuel and oil being a key economic game changers, governments are going to continue to support companies like Shell to help stabilize their economy.
References
Ambrose, J. (2021, February 5). Shell makes $20bn loss as Covid crisis downgrades assets. The Guardian. https://www.theguardian.com/business/2021/feb/04/shell-makes-20bn-loss-as-covid-crisis-downgrades-assets
Grandoni, D. (2020, June 10). The Energy 202: Federal Reserve’s changes to lending program could be boon to hurting oil companies. Washington Post. https://www.washingtonpost.com/news/powerpost/paloma/the-energy-202/2020/06/10/the-energy-202-federal-reserve-s-changes-to-lending-program-could-be-boon-to-hurting-oil-companies/5edfd22f88e0fa32f8236820/
Hayes, A. (2022, June 7). Federal Reserve System (FRS) Definition. Investopedia. https://www.investopedia.com/terms/f/federalreservebank.asp
hello@generation180.org. (2022, March 16). The absurd truth about fossil fuel subsidies. Generation180. https://generation180.org/the-absurd-truth-about-fossil-fuel-subsidies/