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The Impact of Higher Oil Prices On The Global Economy

Higher oil prices will have several negative economic impacts: 1) There will be a transfer of income from oil importing countries to exporters, reducing demand. Oil exporters spend increases in revenue gradually while importers have a higher propensity to consume. 2) Production costs will rise for all goods and services due to increased energy input prices, squeezing profit margins. 3) Inflation will increase as consumers and producers seek to maintain real incomes and profit margins, potentially creating a wage-price spiral.

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Umi Mariam
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55 views2 pages

The Impact of Higher Oil Prices On The Global Economy

Higher oil prices will have several negative economic impacts: 1) There will be a transfer of income from oil importing countries to exporters, reducing demand. Oil exporters spend increases in revenue gradually while importers have a higher propensity to consume. 2) Production costs will rise for all goods and services due to increased energy input prices, squeezing profit margins. 3) Inflation will increase as consumers and producers seek to maintain real incomes and profit margins, potentially creating a wage-price spiral.

Uploaded by

Umi Mariam
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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The Impact of Higher Oil Prices on the Global Economy

 There will be a transfer of income from oil consumers to oil


producers. As the propensity to spend of those who lose
income (energy consumers) is generally larger than the
propensity to spend of those who gain income (energy
producers), there will be some fall in demand. On an
international level, the transfer is from oil importing
countries to oil exporters and oil exporters tend to expand
demand only gradually (in the past, they have spent about
1/3 of their additional revenues after one year, rising to 75
percent after 3 years).In addition, a reduction in demand
can also occur within producing countries that allow higher
oil prices to feed through to consumers, as energy
producers tend to have a lower propensity to consume than
energy consumers.
 There will be a rise in the cost of production of goods and
services in the economy, given the increase in the relative
price of energy inputs, putting pressure on profit margins.
As the oil intensity of production in advanced countries has
fallen over the past three decades, the supply side impact
for a given increase in oil prices can be expected to be less
than in past episodes. In developing countries, however,
where the oil intensity of production has declined less, the
impact may be closer to that in the earlier period.

 There will be an impact on the price level and on inflation.


Its magnitude will depend on the degree of monetary
tightening and the extent to which consumers seek to offset
the decline in their real incomes through higher wage
increases, and producers seek to restore profit margins.
These responses can create a wage/price spiral, as was the
case, for example, during the oil shocks in the 1970s.

 There will be both direct and indirect impact on financial


markets. Actual as well as anticipated changes in economic
activity, corporate earnings, inflation, and monetary policy
following the oil price increases will affect equity and bond
valuations, and currency exchange rates.

 Finally, depending on expected duration of price increases,


the change in relative prices creates incentives for suppliers
of energy to increase production (to the extent that there is
scope for doing so) and investment, and for oil consumers to
economize.

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