The effect of high oil prices on the economy

High Oil Prices and Effect on the Economy

Global oil prices have maintained a creeping trend since 2004, following the 2001 initial oil crisis (Pahl & Richter, 2009). The increase in oil prices and the expected further increase in the future pose a serious threat to the stability of the global economy. This study looks at how high oil prices affect the economies of both developed and third nations, which makes them remain vulnerable following an unstable period of fluctuating oil prices. It draws and contributes to the existing literature carried out by researchers globally. This study is based on the most recent dynamics of high oil prices and the effect on the global economy. Oil is a significant factor of production in many countries; the fluctuation of its price to a high level has a significant negative effect in the growth of global economy.

High oil prices and effect on the global economy

Oil costs remain a critical determinant of global economic performance. An increase in oil prices prompts an exchange of income from importing to exporting nations through a transfer in the trading terms. The extent of the immediate impact of a given price increase relies on the proportion of the costs of oil in national income, level of reliance on imported oil, and the capability of users to minimize their utilization and switch to substitutes of oil. The degree to which gas costs rise relative to the oil-price increment and the economy's gas intensity are important parameters to be considered. The effect of higher costs of different types of energy like electricity also plays a critical role. Commonly, the greater the prices of oil increment and the longer the higher prices are maintained, the greater the macroeconomic effect (Ye-pez-Garcia & Dana, 2012). For oil exporting nations, an increase in price builds real national income through higher export profit. However, part of this profit might be later balanced by losses from decline export demand due to trading partners suffering from economic recession.

Adjustment impacts, which stem from structural, price and wage rigidities in the economy, add to the immediate income impact. Higher oil prices accelerate increased costs of input, inflation, reduced investment, and reduced non-oil demand in net oil importing nations. Budget deficits rise and tax revenues decline because of rigidities in government budgets, which drive investment rates up. Because of imperviousness to real decreases in wages, an increase in oil prices ordinarily prompts upward pressure on nominal wage levels (United Nations, 2008). Wage pressures coupled with decreased demand have a tendency to expedite higher unemployment, only in the short-term. These impacts are more sudden and greater and are more amplified by the effects of increasing oil prices on business and consumer confidence.

Increase in oil prices also reforms the balance of trade between nations and trade rates. Net oil-importing nations ordinarily experience a deteriorating payment balance, putting descending pressure on rates of exchange. Therefore, imports come to be more expensive while exports lose their value. This accelerates a drop in real national income. Without a change in government and national bank monetary policies, the dollar tends to rise as oil-manufacturing nations' interest for the dollar-designated universal reserve assets develop (United Nations, 2008).

The energy and economic policy responses to a synthesis of higher unemployment, higher inflation, lower rates of exchange and reduced outputs likewise influences the overall effect on the economy in the long-term. In such cases, government policies cannot eliminate unfriendly effects portrayed, but can only minimize them. However, wrong approaches can exacerbate them. Similarly, contractionary and fiscal policies aimed at curbing inflationary pressures might intensify the unemployment impacts and recessionary income. Expansionary financial and financial policies may halt the fall in real earnings precipitated by the rise in oil prices, reinvigorate inflationary forces, and intensify the effect of higher costs in the end.

Although the effect of higher oil prices on a country's investment performance is comprehensible, the magnitude and dynamics of the impacts including changes in the trading terms are uncertain. Quantitative gauges of the macroeconomic harm brought by past oil cost shocks and benefits from the 1986 collapse of the price to the economies of oil importing nations vary. This is because of distinctions in the models used to analyze the issue (Pahl & Richter, 2009). The impacts were certainly notable: a sharp economic decline in oil importing nations due to price spans between 1973 and 1980. In fact, the major economic declines in the United States, the Pacific, and Europe since the 1970s have been surpassed by a sudden rise in the cost of unrefined petroleum, despite the fact that different components were more imperative in a few cases.

Essentially, the support of economic development in oil-exporting nations given by higher prices of oil in the past has dependably been less than the loss of financial development in importing nations, such that the net impact has dependably been negative. The development of the global economy has dependably fallen sharply in the wake of every major run-up in oil costs, incorporating that of 1999-2000. This is always the case because the tendency to diminish the net importing nations losing from higher costs is higher than that of the exporting nations. Demand in the latter nations is expected to ascent steadily according to higher costs and export profit, with the intention that net global demand will likely drop in the short-term (Ye-pez-Garcia & Dana, 2012).

Net impact on the world economy

The consequences of the maintained stimulation of higher oil prices for both the OECD and non-OECD nations infer that the net impact on the global economy might be negative. This means that, the economic boost gave by higher oil (and gas) trade profit in OPEC and other exporting nations might be exceeded by the depressive impact of higher costs on economic activities in the importing nations, following the rise in price. Integrating the consequences of all global regional output translates into a net decline of around 0.5% in global GDP. This may be identical to $255 billion during the first year of higher costs. The GDP loss diminishes the degree of demand from oil-exporting nations and GDP of oil-importing nations. The income transfer from importers of oil-to-oil exporters in the year due to the $10 increase in price might amount to approximately $150 billion (Ye-pez-Garcia & Dana, 2012).