Effects of Oil Prices on World Economics

Introduction

Recent spikes in oil prices have thrown light on how economic activity in emerging markets may be impacted by oil price shocks. Oil prices have been increasing sharply from time to time and this has brought adverse effects on the economies of different countries. It is no surprise that high oil price is good news for oil companies as it directly boosts their profits. Given that oil is vital to the world’s economy, the bang of oil price instability is the key to economic growth and security. It is expected that oil consumption will continue growing, however, the process will be slower as it is evident during the past three decades, which showed a considerably lower rate of oil consumption as compared to the other energy resources, especially those that are less expensive. The process depends on the oil prices and their hiking: if they are getting bigger, the process becomes more evident. Changes in oil prices can affect the global economy through various ways such as the rise in the cost of production, inflation, uncertainty regarding investment, or transfer of wealth from oil-exporting to oil-importing countries.

The Impact on World Economies

One of the essential factors that impact the world’s economy is the fact that oil is the world’s most vital source of primary energy, accounting for over 33 percent of the world’s total energy demands followed by coal (28 percent) and natural gas (23 percent). Recently, the world has experienced increased rates of energy consumption, particularly from China which is now the global leader in energy consumption. As a result of the high prices, oil-exporting countries such as Russia and Venezuela that suffered badly due to the decline of oil prices in the previous years will gain substantially. Speaking about individual developing countries, their economy will be affected by the oil price hike even more than that of the industrialized ones. Mainly, the developing countries will suffer from the oil price hike. On the other hand, there exists an unfavorable impact on the countries-importers of oil, which is getting even more intense on the reason of oil dependency growth. As a response to this situation, numerous countries faced more economical pressure from non-oil articles of trade. The economies most commonly affected by the spikes in oil prices are the Heavily Indebted Poor Countries (HIPC). Economies from these regions have had to divert more resources to acquire oil at the expense of other crucial services and products, such as healthcare.

The high prices of oil have also affected the economies of oil-exporting countries. Nevertheless, the consequences for these countries are different from those ones of oil-importing courtiers, as the degree of such influence is affected by different factors. Thus, it is significant how bonus oil revenues are used. The government makes decisions as to the oil revenues’ use in numerous countries-exporters of oil, and these decisions mainly depend on the current financial situation in the country. The other exporters of oil, which were net debtors in the past, will benefit from the oil price hike as it would both raise export earnings levels and lessen foreign lending costs.

How the Global Economy is Affected

Different mechanisms direct the way oil prices influence the global economy. Firstly, oil consumers and oil producers are connected by the income transfer. The fall in demand is caused by the tendency to spend more among energy consumers than among energy exporters. In addition to this, the energy producers tend to have less prosperity than energy consumers, which leads to an even bigger reduction in demand.

Secondly, various economies went through a considerable rise in prices for the production of services and goods. Consequently, there has been a lull in production in developed economies over the past three decades. In a domino effect, this lull has slowed oil production. Hence, oil prices affect both oil-importing and exporting countries and developed and developing countries.

Oil prices have had a strong sway on inflation in a number of economies around the world. The inflation level has a direct connection with the level of monetary tightening and the way the consumers cope with the decline of their incomes and manufacturers strive to reinstate retained earnings. Financial markets are affected by oil prices both directly and indirectly. Currency exchange rates, as well as bond and equity valuations, inflation and corporate earnings, have a strict coupling with the oil price. Finally, there appear opportunities for oil consumers to economize and for oil producers to raise the production and investment levels when oil prices have a longstanding rising tendency.

How Lifestyle is Affected

First of all, people’s lifestyle is greatly affected by oil prices on the reason that 90% of the world transportation depends on oil products; and without transportation people cannot perform their daily activities as many of them live in city suburbs. With the constant growth of oil prices and thus, the petroleum ones, people are forced to travel by electric vehicles or bicycles. It is thought that in the future, these suburbs may become slums. By 2050 the issue of petroleum supply will become an ever-increasing problem for 2.3 billion people from constantly growing urban areas and cities in developing countries. High oil prices not only affect today’s economy; the effects may be felt several years later.

How to Curb Fuel Prices Hikes

All countries have to improve their efforts in reducing overreliance on oil, and instead adopt other renewable sources of energy to prevent oil prices from rising further, and from exerting negative effects on the world economy. There have been several examples of nations coping with high oil prices. For instance, Saudi Arabia has recently increased its oil output. Other countries like Kuwait and the United Arab Emirates have launched similar tactics, and discussions are thought to be underway among OPEC members in a bid to fix the oil prices. According to Hooker (1996), all relevant parties have to make efforts to lower oil prices. Indeed, hikes in oil prices are becoming a significant matter of concern in the global economy and in international relations. The state of oil scarcity can be mitigated by changing the government policy towards the development of sustainable sources of energy, mostly among nations with high net oil consumption. Changes in policy will also be required for nations that use subsidies to keep energy costs low.

The Future of Oil Prices

With the current prices of oil in the global marketplace, and judging from previous figures, higher oil prices are expected in the future. If oil prices continue to hike, people will be forced to seek alternative energy sources.

Reference

Hooker, M. A. (1996). What happened to the oil price-macro-economy relationship? Journal of monetary economics, 38(2), 195-213.

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NerdyTom. 2022. "Effects of Oil Prices on World Economics." January 12, 2022. https://nerdytom.com/effects-of-oil-prices-on-world-economics/.

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NerdyTom. (2022) 'Effects of Oil Prices on World Economics'. 12 January.

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