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 colour price shocks trigger recessions. However, the upstart past does not fit this view-oil prices atomic number 18 about 2 1/2 times their 2002 levels-but this augment has seemingly not had much impact on the global economy. This seeming puzzle has brought attention to the acquire to identify the sources of the oil price increase, in particular, to distinguish the role of supply and demand reasons. 1This box examines these issues development 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 higher(prenominal) taxes on petroleum products. It is important to this clear this from the beginning the analysis does not take on to assess the congeneric importance of demand and supply causes in the recent pile up in oil prices. In contrast, the main focus is on patterning the channels through which oil prices and emersion interact. Global Macro-economic Implications of a Supply Impelled Oil Price Hike First take the fibre where oil-exporting economies restrict the supply of oil (as in the 1970s). Oil prices rise sharply (100 per cent at the lead of the simulation) and this results in a global slowdown as redistribution of income to the oil-exporting economies, which cast a lower inclination to authorize 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 indicate influence on manufacturing outlays-would further decrease in the short run. As a result, world gross domestic product falls 1.4 per cent below the baseline at the trough and global pomposity rises about 1.5 percentage points (first figure). The regional macro-economic outcomes of higher oil prices depend on whether a country i s a net oil exporter or importer, and on its oil intensity. Oil exporters run a large trade surplus, peaking around 6 per cent of GDP above 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 pompousness 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 spending and production, which lessen both the direct affects on inflation and the medium- and long-term affects on GDP. Second, these simulations assume 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 fulfilled reforms that have increase flexibility in both labor and product markets, simplifying more rapid adjustment 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 chore and consumer confidence affects or capital market