Oil And Its Impact On The Economy

May lead to vulnerability

In today's world, as is obvious, there is an increasing demand for oil, thanks to the great transport revolution. People continue to choose private means of transport over and above the public ones, particularly in the well-developed cities, which implies an increasing requirement of oil. Often, this has benefited the oil-exporting countries. But worries about how the extreme reliance of the contemporary economies on oil-needs can influence their growth path, is an interesting topic to dwell upon. For instance, the import of oil by on average several of the nations, make their economies more vulnerable to global economic-changes, and also to the condition of domestic inflation, that may be brought about by the oil-price hike. Often, the developing and the less-developed nations might choose to protect their economies against this price-hike, by offering subsidies. But the provision of these subsidies means an added fiscal-burden over the government, that in turn may be financed by taking debts, or by passing it on the common people in the form of taxes.

The issue of the importance of oil, and its availability continues to be crucial. This has often influenced the formulation of the state's policies to a great extent. As was seen, the USA tried to add up on its oil-stocks by invading and extending its influence in some countries in the middle-East. Since the 1970's when the oil-reserves were first found in some countries such as the Kingdom of Saudi Arabia, it has significantly influenced the country's external policies towards other countries as it began exporting and importing more for the first time in its history. These two policies were however correlated because increased income from exports meant increase in aggregate demand. This increased both-the domestic aggregate demand for goods and the demand for imports. With this came the increase in reliance on products produced by other nations, that is those who were willing to exchange commodities for oil. The disturbance in the regions in the Middle East politically meant extension of help from the developed world that in turn intended to eat up the oil-surpluses.

Increased prices are a concern

Changes in oil prices have been associated with major developments in the world economy, and are often seen as a trigger for inflation and recession. The increase in oil prices in 1974 and then again in 1979 were important factors in producing a slowdown in the world economy at a time when inflation was rising. Recent increases in oil prices have caused concern. Although they have not been on such a large scale as in the 1970's we also live in a higher inflation world since the U.S. sub prime crisis and the following global food inflation of 2008. However, the oil intensity of output has fallen markedly, and hence we might expect the effects of a rise in oil prices to be different now from what they were s in the 1970s and 1980s. Also, we need to take into account the wage-price spiral condition that may arise when the nominal wages tend to catch up with the domestic inflation ignited by the oil shocks

Reduce reliance on oil

Currently as the economies worldwide witness the ups and downs of the global economic downturn, we need to reduce our reliance on oil may be by resorting to electrically-charged batteries or similar technologies. This is not easy, but with rising global population, the reduced reliance may not necessarily translate into reduced aggregate demand for oil. Clearly the Fiscal and Monetary policies of different nations need to be designed on how well they want the integration with other countries via trade at this time, and they want to cater to their own demands.

Clearly, as we see the impact of oil-use on the economy is great, even though it varies from country to country and is context-dependent. This calls for a greater cooperation among the OPEC and the other nations so that we can well plan the future needs and availabilities.