Oil prices are continuously fluctuating resulting in various effects in the U.S and world at large. This may be due to the fact that oil is a very critical commodity with regard to the operations of any country hence; a slight change in the macro or micro environments of the oil producing countries alters the oil prices.
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There are various direct and indirect factors that affect oil prices. Oil prices have substantial effect on the economy of the U. S. as well as that of the entire world. This paper seeks to talk about the causes and effects of oil prices on the U.S and the world economy.
Various geo-political factors and natural calamities like the North Korean missile tests, hurricane Katrina and the conflict between Israel and Lebanon in 2006 are deemed to have an indirect link to the global oil market, but have great short-term effects on oil prices (Tuttle & Ola, 2010).
However, the onset of global recession in 2008 seemed to indicate that the aforementioned factors have insignificant effects on oil prices because the recession was associated with a fall in oil price from $147 to $32. Fall in oil prices has a positive effect on the economy of the U. S. as well as that of the entire world since business activities are not limited (Tuttle & Ola, 2010).
Supply disruption is also conceived to be an attributing factor to oil prices with the incidence of 1973 as evidence. The oil supply growth has been slow despite the fact that oil production has surpassed new discoveries. Similarly, the demand is too high to be met by the slow supply for oil hence, acting as an attributing factor for oil prices as well. High demand and low supply leads to an increase in oil price. The United States is the leading consumer of oil and high oil prices usually have a very great impact on the country’s economy (Roubini & Setser, 2004).
The impact of oil prices varies depending on the fluctuation of the continuously changing oil prices. When fluctuation in oil price is increased, then the effect on the U. S. and global economy is negatively affected. The U. S., as well as the global economy improves with every decline in oil price. The effects of oil price shocks are great and have been the reason for every U.S. and global recession experienced in the past.
Oil price shocks tend to suppress the economic growth of the U.S and related oil importing countries. An adamant escalation in oil price by 10% leads to a reduction in the US and global economic growth rates by 0.3-0.4% in one year. High oil prices lead to reduced consumer spending hence a reduction on economic growth. An increase in oil prices results in increased production costs and a reduction in profits for industries that highly rely on oil in the United States (Roubini & Setser, 2004).
The international Energy Agency (IEA) supports the highly held conventional wisdom that oil price increase leads to lowered GDP and increased inflation and high rates of unemployment causing a general dwindle in OECD’s economies. Facts show that barrel increase by 10 $ results in a reduction of OECD’s GDP by 0.4%, which is below baseline, as was the case in 2004 and 2005 respectively. In addition, the inflation rate is raised by 0.5 and 0.6% respectively, above the standard or acceptable rates (McKibbin & Stoeckel, 2004).
It is without doubt that oil prices have a great impact on the U.S and global economy. Oil prices are continuously changing due to various factors as mentioned above.
An increase in oil prices is however associated with lowered economic growth, high rates of inflation and unemployment while acceptable/reduced oil prices ensure economic growth, increased business activities as well as increased consumer spending. Regulation of oil prices is very important because it is apparent that high oil prices negatively affect the U.S and global economy.
McKibbin, W., & Stoeckel, A. (2004). Oil Price Scenarios and the Global Economy. Economic Scenarios. Web.
Roubini, N., & Setser, B. (2004). The Effects of the Recent Oil Price Shock on the U. S. and Global Economy. Web.
Tuttle, R., & Ola, G. (2010). Oil Ministers See Demand, Prices Rising Undeterred by Greek Debt Crisis. Bloomberg. Web.