Fluctuating Price of Oil and How It Affects the Global Economy

Topics: Peak oil, Inflation, OPEC Pages: 24 (5262 words) Published: April 25, 2013
Fluctuating price of oil and how it affect the global economy Abstract:
The oil prices have started rising
significantly since the initiation
of the twenty first century.
Theoretically, one can judge the impact of an oil price shock. The immediate effect of the oil price shock is the increased cost of production
due to increased fuel cost. This creates an
inflationary effect (mainly cost push inflation which is accompanied by a situation of unemployment). Whenever there is an overall inflation in the economy, the cost of production would also rise causing a decrease in supply. On the other hand, inflation implies a fall in the purchasing power of people. In short, oil price fluctuation has adverse effects on the economy. The paper seeks to find out the causes of oil price hike in recent times and its impact on the economy of some selected countries. It has been

found out that although oil price hike adversely
affects a large number of economies, it does not necessarily affect all the countries in the same way.
The oil, specially the fuel is an indispensable commodity for each and every country in this age of civilization. Without the fuel
the pace of the development of any country will be hampered
drastically. The world history has witnessed how the oil price shock in the global market has created inconvenience for all of the countries more than once since the emergence of OPEC (Oil and Petroleum Exporting Countries) Union. In recent time, the world is experiencing severe fluctuation in the prices of oil. The price of oi

l showed huge increase since the beginning of the
twenty first century. But the prices
of oil reached all time high in the current year. The prices are

found to break every record in the last year reaching above $140 per barrel. (Econbrowser, 2008; Jones, Donald Leiby, and Paik, 2004)
The oil prices have started rising significantly particularly since 2002. In the early days of 2002 the global economy emerged from a phase of huge economic down turn, which had been caused by the bursting of the bubbles of information and communication technologies and 9/11 attack on World Trade Centre in U.S.A. During 2002 the world economy launched a major recovery process, which was led by the developed countries like U.S.A and emerging economies like China. Significant growth of U.S. and Chinese economies, the two most powerful countries in the present economic scenario, has helped in providing a huge boost to the demand for oil along with other resources and consequently caused their prices to rise significantly. Changes in the level of prices are expected to produce huge impact on the economies of the oil exporting as well as oil importing countries.

The fall in purchasing power of people, owing to inflation, would in turn cause a decline in the demand for commodities. As a result there would be overall decline in the sale of the products and consequently a fall in production and thereby employment. The paper seeks to analyse the impact of oil price fluctuation on global economy. For doing so, a rigorous review of existing literature is conducted on the issue under consid

eration, i.e. fluctuation in oil prices and its
impact. Then, the data on some macroeconomic variables like real GDP, inflation, etc. of some of the important countries in the current economic scenario are used and a descriptive analysis of the impact of oil price fluctuation on the global economy is carried out.

Prices of oil are considered to be a very important determinant of the economy’s performance across the world. On a overall basis, an increase in oil price results in a transfer of income from importing countries towards the exporting nations through a change in the terms of trade in favour of the exporting

nations. There are certain important factors on which the extent of direct effect of the price change on economy is dependant. Among these factors the most important ones are the ratio of...
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