Exogenous Effects of Oil Price essay

Download this essay in word format (.doc)

Note: Sample below may appear distorted but all corresponding word document files contain proper formatting

Excerpt from essay:

This invariably means reducing the profit margin for the producers, which economists feel has long-term implications. That is the lack of smooth inflationary shock transmission leads not only to reduction in production output but also contributes to reduction in future investments. Thus, inflationary shocks due to oil price hikes are more long lasting in China. [Tang et.al, 2009]

Sub-Saharan Countries

The impact of Oil price explosion is nowhere as pronounced as in sub-Saharan Africa and in particular the oil importing countries. Among the lower economies those that are oil intense such as the sub-Saharan countries are bound to suffer more -- as much as 3% of their GDP. Oil dependence has not change much with only 6% reduction between 1990 and 2005. This is because these countries have a total dependency on oil as their major source of energy compared with other developing countries in Asia. For instance, India and China use coal as their principal source of energy (50% and 70% respectively). Besides few oil exporting countries most other nations in Africa are entirely dependent on oil such that some of these countries lost as much as 3.5% of their GDP for few years during the recent Oil price hike. Seventeen countries in the continent are totally dependent on Oil or biomass for their energy demands. Sub-Saharan African countries are very vulnerable to Oil price fluctuations as most of these countries spend as much as 14% of their GDP for oil imports. Statistics show that compared to the 1990 Oil price hike Africa is adversely affected during 2003. The fact that sub-Saharan African countries have the lowest per capita income and highest external debts makes it difficult for the economy to absorb the Oil price shocks. Also while Asian (Philippines and Thailand increased production) and South American countries such as Brazil (reduced oil imports by 50%) have increased local production there are no similar possibilities for the sub-Saharan African countries (excluding the few oil exporting countries) in the immediate future which makes their situation very bleak and vulnerable to oil price changes. Statistics from 1990 to 2003 show that 10 out of the 37 oil importing countries experienced a GDP per capital fall of around 10% while for five countries it was 20%. Rwanda, Burundi, Central African Republic and Malawi experienced a doubling of the debt ratio during this period. [Robert Bacon, 2005]

Macroeconomic Effects of Oil Price Hikes (A comparison)

Comparing the oil price shocks in the 1970's with the recent years and their respective impact from a global economic standpoint would help us better understand the macroeconomic effects of Oil shocks. Understanding the differences between the periods would help us better prepare for future episodes of stagflation. Firstly the Yom Kippur war in 1973 and the ensuing oil embargo of the OPEC nations and next the 1979 Iranian revolution both resulted in severe recession. Blanchard et.al conducted an extensive comparative study of these varied periods of economic downturns and by using statistical multivariate and bivariate VAR analysis tools using GDP, CPI and other variables such as prices and quantities, arrived at some conclusions. Inferring from the statistical data and graphs it was clear that the impact of Oil price hikes in the context of unemployment, price hikes, wages and overall productivity were milder in the recent years than in the 1970's. One of the reasons ascribed to this is the declining wage rigidities particularly since the 1990's. The absence of wage adjustment or slower wage adjustment in the 1970's could have led to the loss in productivity and increased inflation. Secondly, improvements in monetary policies in the recent years have helped to reduce the inflationary impact of Oil price changes. Today's banks are more committed to maintaining low levels of inflation. Also, the OIL GDP share is significantly reduced today when compared to the early periods. Last but not least, many nations today have built strategic oil reserves to offset any sudden and short-term supply limitations. So overall, the world is better prepared now than it was in the earlier period to tackle the repercussions of oil price fluctuations. [Blanchard (2007)]


Oil price directly influences the economic development of all the countries of the world. The destabilizing effects of Oil price hikes in the trade balance of both developed and developing oil-importing economies is very clear. As discussed above, both for the OECD countries as well as the non-OECD countries oil price hikes tend to slow down the economy. Even for the OPEC nations, the initial gains in their national revenues will be offset by the depressive effects of inflation in the oil importing countries. Oil importing developing nations would bear the brunt of the oil price hike more compared to developed countries as their higher oil intensive economies and higher import costs would stretch their already overstretched resources. Though, on a comparative level, we are much better prepared now than the 1970's, Oil price still remains an important macrovariable that governs the global economy. Today's governments are better prepared to control inflation while maintaining low interest rates. Still the frequent upswing in oil prices is a big problem for most nations, including the OECD nations that have large and growing budget deficits driven by surging oil import bills. In developing economies such as India where government offers subsidies, fiscal imbalances due to Oil subsidies will be further amplified. Sub-Saharan African countries having the lowest per capita income and highest external debts are the worst prepared to absorb the Oil price shocks. Over the next decade energy diversification would be the key strategic focus for countries that are struggling to manage the ever-increasing demands with the limited sources and striving to reduce their dependence on oil.


1) Jad Mouawad, 2009, 'Rising Fear of a Future Oil Shock', retrieved Nov 18th 2009, from, http://www.nytimes.com/2009/03/27/business/energy-environment/27oil.html

2) Tom Doggett, (2009), 'U.S. Sees OPEC 2010 Oil Export Earnings at $750 Billion', retrieved Nov 18th 2009, from, http://www.reuters.com/article/reutersComService_3_MOLT/idUSTRE5AA4HD20091111

3) Christopher Johnson, (2009), 'OPEC Oil, Gas income tops 1 Trillion, Reserves Up', retrieved Nov 18th 2009, from, http://www.reuters.com/article/GCA-Oil/idUSTRE5673L920090708

4) OECD, 'Unemployment in OECD Countries to approach 10% in 2010, says OECD', retrieved Nov 19th 2009, from, http://www.oecd.org/document/57/0,3343,en_2649_33927_43136377_1_1_1_1,00.html

5) Tang, Weiqi & Wu (2009), 'Oil Price Shocks and their Short- and Long-Term Effects on the Chinese Economy', MPRA, no 14703, Retrieved Nov 19th 2009, from http://mpra.ub.uni-muenchen.de/14703/1/MPRA_paper_14703.pdf

6) Robert Bacon & Adib Mattar, (2005), 'The Vulnerability of…[continue]

Cite This Essay:

"Exogenous Effects Of Oil Price" (2009, November 20) Retrieved October 22, 2016, from http://www.paperdue.com/essay/exogenous-effects-of-oil-price-17280

"Exogenous Effects Of Oil Price" 20 November 2009. Web.22 October. 2016. <http://www.paperdue.com/essay/exogenous-effects-of-oil-price-17280>

"Exogenous Effects Of Oil Price", 20 November 2009, Accessed.22 October. 2016, http://www.paperdue.com/essay/exogenous-effects-of-oil-price-17280

Other Documents Pertaining To This Topic

  • Chad Guinea Promises Superior Transparency

    S., France and publicity, Chad was able to renegotiate more favorable contracts with the Bank, expropriate over $450 million in taxes from the private Consortium firms which they claim they had already paid, under the threat of replacement with Chinese firms. Global oil prices spiked, and Chad cleared over $1 billion in revenues in the last year of the Bank's project in 2008. Much of this increased income coincided at

  • Role of Private Investment on

    This also implies inadequacies in fiscal sustainability, which influences investments in private sectors. The second channel happens through the level, composition and quality involved within the public investment, which shows the level at which the public investment replaces the private investments (Schmidt- Hebbel, Serven, & Solimano, 1996). The final channel regards the level of taxation on the corporate earnings and the rules applicable in depreciations. There have been arguments that fiscal policy

  • International Financial Crises and the IMF

    International Financial Crises and the IMF Demand failures are a major economic problem, and one that cannot necessarily be addressed by cutting interest rates as once believed. Small economies, such as those known as the Asian "tigers" are not invulnerable to international speculation. They may, in fact, resist cutting their interest rates -- raising them instead in an effort to keep their currencies from collapse. Failed economies financed poor investments with

  • Economics Finance MBA Level

    Disrupting America's economic system is a fundamental objective of terrorists Even as the world continues to struggle with the terrible shock from the September 11 attacks in New York and Washington, one principle lesson has already become clear: disrupting our economic system is a fundamental objective of terrorists. Prior to September 11, our economic environment was certainly not immune to terror, in comparison to many other nations; we lived relatively terror-free. Now,

  • Study on Improvement of Low Cost Airline in Thailand

    Low Cost Airline in Thailand The Study on Improvement of Low Cost Airline in Thailand Geography of Thailand Nature of Airlines Variables under Study The Profitability of Low Cost Airlines in Thailand Thai Economy Operating Results, Selected Airlines, Financial Year 1999 The Economies of Scale Attained By Airline Industry Human Resource Practices The future of low cost Thailand Airlines Contrasting Qualities of State Owned and Non-State Owned Airlines The Study on Improvement of Low Cost Airline in Thailand Thailand is a global

  • Optimal Monetary Policy in a

    This suggests that fine-tuning the model may be required in order to identify optimal approaches. For instance, Gionnani and Woodford add that, "It is only if we ask whether the same policy continues to be optimal when we vary the statistical properties of the disturbances that we can hope to find an advantage of one representation of the policy rule over the other (1427). Gionnani points out that rather than

  • Advertising and Word of Mouth

    (Snyder & DeBono quoted in Kjeldal 2003, Introduction section, ¶ 6). The results from the study Kjeldal (2003) conducted with 70 participants in two stages suggest that the word association responses high self-monitors (HSMs) produce reflect selective activation of a personally meaningful, experiential, system. The responses low self-monitors (LSMs) produce, on the other hand, indicate an intellective factual system. 2. Decision Making Process Theories Dr. Bonnie Halpern-Felsher (2009), an Associate Professor at

Read Full Essay
Copyright 2016 . All Rights Reserved