Oil has been, for decades, seen as a basic commodity to the production and manufacturing processes among other industries. Therefore, basic changes in oil prices can have widespread economic impacts on processes. Net supplier countries as well as net consumer countries are affected by these changes because the impact of the change ripples through the entire world. Net supplier countries will benefit as a result of oil production, while significant investment will be put into purchasing oil for consumer countries. This paper looks at the macroeconomic effects of oil price changes.
Oil prices are generally considered to be very volatile and unstable at different times of the year, except the sharp decline in prices in 2014 (Le-Coq & Trkulja, 2015). Generally, such price changes will affect both consumers and producers. Because of the crucial role that oil plays in the production industry, consumer countries generally benefit with lowered oil prices. However, producer countries will benefit the more with increased oil prices. The effect of increasing oil prices on the economy means that consumer countries will experience price changes in almost all basic commodities and experience higher costs of living. However, falling prices can have a significant effect on oil producing countries. Russia was considered in this, and a correlation was found between the GDP of the country and oil prices (Le-Coq & Trkulja, 2015). However, this correlation was not perfect as there are many determining factors when measuring a country’s GDP. Therefore, product demand elasticity for oil can be considered inelastic, as oil is a basic commodity in the production processes. However, ripple effects of changes in oil prices can be felt through entire economies, as was shown in the Russian case study.
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Long term and short term effects can be derived from changes in oil prices. Immediate changes are experienced once a change in oil prices happens. For example, the change in pricing for basic commodities in oil consuming countries is one such effect. Since oil is critical in the production processes in such a country, an increase in oil prices means that the producers within the country are counting higher costs of production, resulting in a subsequent addition in prices for basic commodities. This increases cost of living for residents and inflates prices of non-essential commodities. A continued rise in oil prices could see tax adjustments to enable the government meet costs of purchasing oil beforehand, especially in poor countries (Wang, Wu, & Yang, 2013).
On the other hand, declines in oil prices means an off-day for oil consumers and the opposite for oil exporters. This is because oil-reliant countries experience downturns in oil earnings and therefore a poor performance of their economies. This is especially the case in countries where oil production is the major earner. This could mean lower standards of living, increased debt due to continued government expenditure and higher tax burdens should such trends persist.
Therefore, the long-term and short-term effects of oil price changes can be felt through the economies of the world. Since oil is a necessary commodity in today’s industry and production processes, oil demand becomes inelastic. Therefore, fluctuations in oil prices can be felt throughout the economy in the case of significant changes. This is why it is necessary to maintain balance in oil prices to ensure that both consumer countries and producing countries can enjoy economic stability.
References
Le-Coq, C., & Trkulja, Z. (2015). Changes in Oil Price and Economic Impacts . Retrieved from Policy Brief: http://freepolicybriefs.org/2015/12/07/changes-in-oil-price-and-economic-impacts-2/ .
Wang, Y., Wu, C., & Yang, L. (2013). Oil price shocks and stock market activities: Evidence from oil-importing and oil-exporting countries. Journal of Comparative Economics, 41(4) , 1220-1239.
