Oil Prices Essay Example | Topics and Well Written Essays - 2000 words

Oil Prices - Essay ExampleA customary perception based on what happened in the 1970s is that oil damage shocks trigger recessions. However, the re centime past does not fit this view-oil prices are about 2 1/2 times their 2002 levels-but this increase has seemingly not had more than impact on the global economy. This seeming puzzle has brought attention to the need to identify the sources of the oil price increase, in particular, to distinguish the role of supply and entreat reasons. 1This box examines these issues using an extended version of the Global Economy Model (GEM) to analyze the causes and outcomes of changes in oil prices. It also looks at the global macro-economic impact of high(prenominal) taxes on petroleum products. It is important to this clear this from the beginning the analysis does not take on to assess the relative importance of demand and supply causes in the recent run-up in oil prices. In contrast, the main focus is on patterning the channels through whic h oil prices and growth interact. Global Macro-economic Implications of a make out Impelled Oil Price Hike First take the case where oil-exporting economies restrict the supply of oil (as in the 1970s). Oil prices rise sharply (100 per cent at the peak of the simulation) and this results in a global slowdown as redistribution of income to the oil-exporting economies, which have a lower inclination to spend than the oil-importing economies. In addition, higher oil prices raise the cost of production and put upward pressure on the collect price level leading to an increase in interest rates, which- in sync with the direct influence on manufacturing outlays-would further decrease in the short run. As a result, world GDP falls 1.4 per cent downstairs the baseline at the trough and global inflation rises about 1.5 percentage points (first figure). The regional macro-economic outcomes of higher oil prices depend on whether a country is a net oil exporter or importer, and on its oil inte nsity. Oil exporters run a large trade surplus, peaking around 6 per cent of GDP to a higher place the baseline, and enjoy a vigorous expansion. In contrast, the oil-importing economies suffer weakening in their external balances and a slowdown in. The impact is more significant in immerging Asian economies chiefly because of their higher oil intensities about advanced economies. On balance, the effects on inflation and GDP in this scenario are significantly smaller than viewed in many industrial countries in the 1970s. 1 First, this partially reflects the lower oil intensities of consumption and production, which lessen both the direct affects on inflation and the medium- and long-term affects on GDP. Second, these simulations conduct that forward-looking inflation targeting central banks raise interest rates at once to prevent a ratcheting up of inflation expectations and a spillover into wages and other prices, unlike what happened in the 1970s. Third, many countries have fulf illed reforms that have increased flexibility in both labor and product markets, simplifying more rapid adaption in relative prices in response to oil price shocks. Combined with creditable monetary policies that have anchored longer-term inflation expectations, these improvements have allowed containing inflationary pressures caused by the higher oil prices without excessively dampening. However, the simulations do not account for possible business and consumer confidence affects or capital market