Oil Prices And Economic Growth

Have oil prices behaved more recently than in the past? There are many possible answers to this question. The simple answer is yes and no. There are ups and there are downfalls in the behaviour of oil prices over the past decade. There are a wide range of factors that can effect oil prices globally with both positive and negative repercussions and effects.

Points To Note About Oil Prices

The simple answer is yes, because there have been many ups and downs in oil prices over the past decade. The graph shows the history of oil prices as the average daily spot price of a standard barrel of West Texas crude oil, priced in U.S. dollars per barrel. The black line shows the overall inflation-adjusted price change in oil prices from January 1996 through present. The red line shows the actual inflation-adjustment, taking effect after the recent economic stimulus and after the recent outbreak of recession in the United States. The green line is the net change in oil prices, taking effect after all changes in inflation are accounted for.

What you see clearly is that oil prices have been affected by many shocks in the past decade. To identify these changes in oil prices, we need to look at the response of oil prices to various shocks in the economy. The first type of shock to the economy that directly impacts oil prices is an increase in inflation. When inflation goes above the level of zero, consumers in the United States start buying more goods and services on the credit side of the economy, thus reducing the supply of goods and services available to the employers (who are then forced to pass on these higher prices to consumers)

Price Changes In The Economic Market

These price changes are often referred to “price gouging,” which is when companies take advantage of their competitors’ inflationary excess by hiking up retail prices. In response, consumers who have already bought high-priced goods in the run-up to inflation (usually the rich population) cut down on consumption as a way to avoid being hit with higher retail prices when the prices of items to return to normal. This process becomes more prevalent as time passes, and it tends to be more widespread during periods of rapid inflation. However, there are also oil shocks that occur when oil prices are falling below the zero level. In these cases, the opposite of price gouging occurs: companies find it more cost-effective to sell high-value goods at low prices to make up for the reduced value of the goods.

For instance, suppose that high oil prices have forced companies to raise the price level of some energy sources in order to compensate for the lost productivity caused by the price increases. A number of short-term fluctuations in the price level of oil (between $5 and $7 per barrel) can reduce the employment in the energy sector, resulting in layoffs. The resulting negative affect on the economy is often referred to as the global savings effect.

 Oil Prices And Changes In The Future

The second major aspect that we will look at is the relationship between oil prices and the relationship between inflation and economic growth. As we noted above, oil shocks usually occur when oil prices are falling, reducing the purchasing power of workers. Inflation is also important here since higher inflation rates imply higher real interest rates, thereby reducing the profitability of many businesses. However, there is one more element that we need to consider here. One of the most important determinants of inflation is government budget deficits, which tend to be significantly related to oil prices, and which are a key determinant of long-term inflation expectations.


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