Oil Prices and the Economy

Oil Prices and the Economy

Introduction

An economy goes through different cycles facing booms and recessions. The economic development of a country is dependent upon the different cycles. Similarly, the prices of goods and commodities also go through various changes having peak and trough points. Oil is one of the most important and most commonly used commodities of the world. It is the main source of fuel and the world economy is heavily dependent upon fuel prices. In the past, oil prices have faced different trends due to market forces. In this essay, we will discuss the various trends oil prices followed and the reasons behind significant changes in oil prices (Roubini, 2004).

Trend in Oil Prices

Oil is one of the most significant sources of fuel (petrol) and any change in its prices could significantly affect industries, sectors and individuals. Crude Oil has gone through a series of price changes from 1960s. The price per litre of Crude Oil rose from $0.5 in January 2007 to $0.92 in July 2008. The year 2008 is considered as the worst year as Crude oil prices increased significantly. In May 2009, the prices of crude oil again fell to $0.55.

Until the year 1973, the oil prices were pretty low at around $0.015 per litre, but after 1973, the oil prices rose significantly. In 1980, the world faced another oil price hike shock as the prices increased to $0.23 in 1980. The prices saw a sea saw the situation and again declined in the year 1986 to $0.08. In the year 2004, it again crossed 1980 peak point.

The prices of most commodities tend to rise due to decline in value of currency (inflation). The lower line in the graph is showing the value of the dollar. It makes it easy to analyze that how much oil price is rising in comparison with the rise in the value of US dollar. If the price of crude oil increases more than the increase in price of the dollar or any other commodity, then oil is becoming more expensive than other commodities and vice versa. Economist terms this as the real adjustment of oil prices. The real value of oil prices remained steady through 1960s and 1970s, but it faced a sharp increase in the 1980s, then declining in the 1990s. The oil prices witnessed the most significant increase in the prices (real terms) in the year 2008, when it passed the record of 1980s (Dargay, Gately & Huntington, 2007).

The impact of high oil prices on oil importing countries is very significant and negative. The increase in oil prices not only increase the importing bill of the country, but also reduce the purchasing power of individuals as the fuel prices are passed on to the customers (Gateley, G. & H. G. Huntington,2002). However, countries exporting oil are greatly benefited from the increase in oil prices.

Factors behind the increase in Oil Prices

The increase in oil prices is dependent upon the increase in ...