The rise in Oil Prices                       

The rise in Oil Prices

Introduction

Economic shocks may be defined as the events that happen unexpectedly and which have significant negative impacts on the economy, increase unemployment, and cause inflation. The substantial rise in globalization over the past few decades has increased the connection between countries in almost every sector of life. For that reason, every country in the world is susceptible to economic shocks at least to some extent. According to Kocaarslan, Soytas, and Soytas (2020), the developing countries are at a higher risk because they have a less diversified economy (Kocaarslan, Soytas, & Soytas, 2020). A single adverse event is likely to affect a significantly large percentage of their economy. The rise of the prices of oil and gas in the world is one of the significant causes of economic shock. The problem has been experienced in many countries over the past few months due to the increasing tension between the United States and several Eastern countries such as Iran (Estrada et al., 2020). This paper covers the issue of rising in oil and gas prices and its impacts on the variable of interest, including real wages, investment, consumption, interest rates, work effort, and output.

Investment and Output

Rise in prices of oil and gas impacts differently on the economy, depending on whether a country is a net exporter or a net importer of the stated products. Countries that import oil and its related products suffer significantly when the prices go up. They, therefore, experience an economic shock as a result. The first parties to receive the impacts are the companies involved with refinery and marketing of the stated products. (Estrada et al., 2020) (Kocaarslan, Soytas, & Soytas, 2020) They are forced to pay more USD for the same amount of oil, gas, or any other related product. Such companies may be involved in exporting other fuel-related products such as refined oil to earn income in the form of USD. However, even if the companies make through the exports, the net income reduces because they spend more on the purchase of the raw materials (Kocaarslan, Soytas, & Soytas, 2020). One of the best solutions for that problem is raising the prices of the exported products. However, the demand for USD keeps increasing almost all the time, a factor that causes depreciation of the domestic currency.

Work Effort and Consumption

The rise in prices of oil and related products leads to an increase in expenditure on the same products by transport companies. The organizations then pass the effects to their consumer by raising the prices of their services (Kocaarslan, Soytas, & Soytas, 2020). The factors lead to the rise in the current expenditure for the nation’s economy. The exchange rate depreciates a factor that forces other importers within the economy to raise the prices of their commodities.

Real Wages

Citizens of an oil-importing country who work in oil-exporting countries are likely to experience a significant rise in wages as a result of the surge in oil prices. They could remit higher amounts of money to their mother countries (Kocaarslan, Soytas, & Soytas, 2020). If the amount of money sent back home is significant enough, the change could significantly help further degradation of the country’s currency.

Interest Rates

A country that reaches that level anticipates significant inflation. Commercial organizations increase their interest rates. It means that one would be forced to pay more interest for lending and to deposit money (Kocaarslan, Soytas, & Soytas, 2020). Commercial organizations also experience a significant decline in loans.

Conclusion

This paper covers the impact of a sudden rise in the prices of oil and gas. The shock has been experienced in several countries of the world in the past few months as a result of the weak political relationships between the United States and some oil-producing countries such as Iran. For that reason, political instability is likely to cause a significant change in the world economy.

References

Estrada, M. A. R., Park, D., Tahir, M., & Khan, A. (2020). Simulations of the US-Iran war and its impact on global oil price behavior. Borsa Istanbul Review. https://www.sciencedirect.com/science/article/pii/S221484501930290X

Kocaarslan, B., Soytas, M. A., & Soytas, U. (2020). The asymmetric impact of oil prices, interest rates, and oil price uncertainty on unemployment in the US. Energy Economics, 104625. https://www.researchgate.net/profile/Mehmet_Soytas/publication/337207182_The_Asymmetric_Impact_of_Oil_Prices_Interest_Rates_and_Oil_Price_Uncertainty_on_Unemployment_In_US/links/5dd67114a6fdcc2b1fa97801/The-Asymmetric-Impact-of-Oil-Prices-Interest-Rates-and-Oil-Price-Uncertainty-on-Unemployment-In-US.pdf