The Economic Impact of Rising Oil Prices

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Table of Contents
2Historical Overview of Oil prices5
3Dependence on Oil and Impacts of High Oil prices7
Determining the Dependence of a Country8
Dependence on oil-imports8
Costs Compared to Income Level10
Impacts of High Oil prices on the Economy10
Decline in Aggregate Demand11
Production Costs11
Inflation and Unemployment12
4How to Minimise the Negative Effects of High Oil prices13 Monetary Policy14
Implementing Monetary Policy15
How Federal Banks Use Their Tools16
Government Incentives and Environmental Policies18
Course of Action Diagram20

Table of Figures
Figure 1 – Oil Price Development5
Figure 2 – Comparative Analysis of Oil Dependency in 20048 Figure 3 – Instruments, Targets and Objectives of Federal Banks16 Figure 4 – Policy Responses to a Rise in Oil Price18

The rising price of oil is a burning theme nowadays that societies have to deal with. The impact of rising oil prices creates economic, as well as social problems. High oil prices can lead to substantial output reductions, decreasing nominal wages, increasing competitiveness in oil dependable businesses and unemployment. Getting a precise assessment of how much a country is affected and what counter measures can be implemented is of interest for both governments and individuals. Making predictions into the future is not what this paper is about. It also does not analyse in depth specific factors influencing the oil price. The strength of this paper, however, is that it tries to generalise - on a non-mathematical approach - how economies are influenced by different factors and which appropriate and corresponding counter measures can be taken. In the first part the paper gives a short historical overview of how the oil price has developed in the last decades and points out the most important events that have influenced the oil price. In a second part it will be explored to which degree a country depends on oil and the factors influencing high oil consumption. An assessment is made of the different impacts the oil price has on nations mainly belonging to the Organisation for Economic Co-operation and Development (OECD) and the economic consequences for developing countries. Furthermore, the paper deals with typical monetary and fiscal policies that are implemented by most industrialised nations to reduce the shock of oil price hikes. The paper closes with a tentative conclusion that summarises the most important findings. 2Historical Overview of Oil prices

1950 – 1972The nominal price of oil remained stable at about US-$ 2 per barrel and in terms of the real price it even declined from about US-$ 14 to US-$ 9 per barrel. 1973 – 1974In Oct. 1973 the Yom Kippur War started with an attack on Israel by Syria and Egypt. The Israelis received strong support form the USA and other western countries. As a result several Arab oil-exporting nations imposed an embargo on the countries supporting Israel. 1974 – 1978The oil price remained at a relatively stable level, in terms of real price it even slightly declined. 1979 – 1980The combination of the Iranian Revolution and the Iraq / Iran War caused another major increase of the oil price. 1981 – 1994In this period the price came down to a relatively normal level with two exceptions; 1987 an OPEC-price-accord and 1990 the Iraqi invasion and the following Gulf War affected the oil price again and led to a temporary increase. 1994 – 1997The slight rise of the oil price was mainly caused by the growing demand for oil, especially in the Asian region. 1998The combination of lower consumption (due to the economic crisis in Asia) and the higher oil production of the OPEC caused prices to fall in 1998. 1999 – 2002The oil price recovered since the OPEC adapted its production and the global demand started growing again. 2003The war on Iraq and the unrests in...
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