What Is The Relationship Between Oil And Economic Development

Student’s Name
Instructor
Course
Date
THE RELATIONSHIP BETWEEN OIL AND ECONOMIC DEVELOPMENT
The world is major large dependent on oil products, therefore reviewing the relationship between oil products and the growth of the economy is very important. The prices of oil can be used as an indicator of GDP growth of the economy. It is important to also separate the increase and decrease in the prices of oils as an asymmetric response to the economic activities of the country. In today’s world the price of oil is very important given the fact that oil is the largest international commodity that is traded international both in volume and value terms. Therefore, it is very important to review some of the abrupt changes in prices of oil in both oil producing and consuming countries. According to growth models the transmission mechanisms between the prices of oils and OPEC countries shows the causality between the relationship in both short term and long term. Due to such reasons, the paper explores the relationship that exists between crude oils and economic growth.
Increase in the oil prices results to the increase in GDP and economic growth. Increase in the demand of oil has resulted to increase in the Gross Domestic Product (GDP) (Alexeev, Michael, & Shlomo, 154). The perception that oil has negative effects on the growth of the economy has resulted to closes correlations in the prices of oils and economic downturns. The price elasticity of oils is always thought as negative. That is the demand tends to fail by certain percentages for a certain increase in the percentage price in some input factors. In this case increase in the prices of oil should be considered positive in the exporting countries and negative in some of the oil importing countries (Investment and the Digital Economy, pg 215). An increase in the price of oils, results to the transfer of income from importing to exporting countries through a shift in the terms of trade. The impact of this is, is that the global demand impact will be dependent on the extra revenue accruing to the oil exporters. In order to boost the economic growth of oil exporting countries provided with the fact that the prices of oil are relatively, high there is poor economic growth in the importing countries such that the effect should always be negative. However, Czarnowski, Ireneusz, Robert, & Lakhmi, Pg 214, stated that oil price shock itself is not a huge contributor to GDP fluctuations in the instance where there is 10% increase in the price of oil; it means that there is only 0.5% decline in private sector output.
The following are some if the effects of increasing the process of oil in exporting countries. Increase in the price of oils for a net exporter country results in increase in the real national income of the country through high export earnings. These nations are always at risk because if the prices tends to get much higher and stay high (Czarnowski, Ireneusz, Robert, & Lakhmi, Pg 214). The growth of Gross Domestic Product in the consuming countries will decline and the demand and price of the oil will automatically reduce. Additions increase on the also increase in the prices of oils results to increase in the exploration and development of budgets. As these countries continues to explore new oils and introduces it to the market. There will be an increase in the supply and the prices will continue to fall hence damaging the economic growth of the oil exporting countries. The direct effect of increasing the prices of oils in oil importing countries is decrease in income. Income is dependent on the intensity of oil production and the degree in which the demand for oil is inelasticity of price. This also depends in the impact of inflation in the changes in price of oil. This means the prices of gases will also rise in response to increase in oil price. Similarly, the intensity of gas in the economy and the effects of high prices on other forms of energy that are generated from gas and oil will increase in response to this (Alexeev, Michael, & Shlomo, 154). For example electricity. For instance, if the process of oil will increase and the consumers are not willing to reduce the consumption of oil products, the consumers might reduce their total expenditure on other products and services and this will slow the GDP growth of a country. Alternatively, the bigger the increase in the oil price and the longer the higher prices are sustained in the economic the greater the microeconomic impact.
When there is final consumption oil products like gasoline, the loss in income arising the increase in the prices of oils would be borne by the consumers because the demand of oils and the prices of oil products are inelastic in the short run. In the case of consumer price inflation, taxes put on the oil products will assist in stimulating the price levels from the changes in the prices of oil since the proportional impact of increase in the oil price is inversely related to the taxes content on the retail price. Alternatively, all the monetary authorities interprets increase in the cost of oils as generalized by price inflation and they tend to adopt this polices in order to slow the growth of the economy (Alexeev, Michael, & Shlomo, Pg 154). Restrictive monetary and fiscal policies that contain inflationary pressures exacerbate the effects of unemployment and the recession of income in the economy. However, expansionary monetary and fiscal policies results to the delay of income necessitated by increase in the prices of oil and inflationary police worsens the effects of increase in the prices of oil in the long run. Alternatively, if the economy is under inflation and unemployment, the costs of oil will increase and will have the potential to cause severe damage by the limiting economic policy.
Increasing and decreasing the prices of is which is as a result of price, wage and structural rigidities in the economy affects the income. This is because when labor market institutions tends to inhibits this adjustments of realm wage to stock, the deterioration on trade affects the equilibrium employment and creates a wedge between value added and consumer prices. Oil is an important input for production of goods and services because it essential for transportation in all types of businesses in the economy (Alexeev, Michael, & Shlomo, Pg 154). Therefore, increase in the prices of oils will increase the costs of output and if these prices cannot be passed on to consumers or adhered to by the consumers other factors of production like labor and capital are usually reallocated. In the case where oil is an input into final goods that are price elastic, these costs cannot be borne by the producers in the competitive market because producers would not be able to pass on the increase in the costs.
On the other hand, decline in the real wages of workers as a result of increase in the prices of oil results to increase in nominal wages level. In this case the producer is usually affected and the profit margins and returns on capital will always fall with impacts on the allocation of capital. Capital is more flexible compared to other factors of production in the lob run and will tend to move to more energy intensive areas with higher rates of return, in the short run, capital in energy intensive areas is unusually inflexible and this makes it an income loss (Alexeev, Michael, & Shlomo, Pg 154). Therefore changes in the prices of oil cause economic losses when the microeconomic frictions prevents rapid adjustments in the prices 0f nominal goods for final goods or key inputs like wages. alternatively, when there are higher prices on oils, this case cause all the layoffs of workers and the idling machines to reduce an the economic output in the short run. While trying to conclude the statement some of the short term economic effects of oil increase on output and employment is smaller because the higher proportion of increase in price is passé d on to the consumers and if their wages are flexible, increase in the prices of oil cannot be passed to them. Some of the negative effects of rise of oil prices on the domestic income and demand will diminish because the producers and consumers will modify their behavior.
Fluctuations in the prices of oils create lots of uncertainty in the economy that this reduces the trend of investments although it is not clear on the effects of profitability utilization. The prices of energy products create cyclical fluctuations in the investments. The effects arise from the increase in oil process which then reduces the economic activities of a country (Alexeev, Michael, & Shlomo, 154). Additionally, the growth in real consumption tends to be weaker due to high rates of inflation and the growth of investments will be very weak. Higher inflations are supposed...