Price of Oil

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Price of Oil

Oil drives a country’s economy, whether in the industries, on the roads, in institutions or at the home. Oil and gas have different uses such as heating, driving and enabling machines to function effectively among other uses. The consumer price index is one of the factors that affect a country’s economy. If the prices of goods and services are high, the consumer will spend more money on fewer products and will do so frequently and this will in turn lead to a weak economy. A shortage in this commodity often leads to price hikes and this sometimes causes the government to intervene. Shortage can be caused by different reasons such as increase in demand where there is no corresponding increasing in supply, war in oil producing countries, which in turn affects supply, changes in the dollar, where a weak dollar translates into higher prices. Different countries are affected differently when there is a shortage of oil, with those who depend extensively on crude oil suffering the most. When there is a shortage, many people spend their available income on oil and gas and this means that there is less to spend on other commodities.

High oil prices lead to inflation because they increase the prices of commodities. This in turn means that there will be less consumption of goods and services. Unfortunately, the decreased spending does not translate to increased savings since the extra money is spent paying the energy bill. When the price of crude oil increases, this means that the price of gasoline will also be high. People will have to spend more money when buying gas for their vehicles. Manufacturers will use more to produce and transport goods and this will increase the price of goods. The airline industry will also be affected since the price of air tickets will go up. This means that there will be less travel and both exports and imports will be high. Countries which depend on tourism will suffer because they number of tourists will reduce significant. A significant number of people who work in this industry will lose their jobs and this will reduce the country’s gross domestic product. Countries whose economy is largely dependent on exports will suffer and it is therefore important to have a strong domestic market.

The agricultural industry is also likely to be affected. Farmers will increase the price of food because of the increased cost of inputs. If the farmers spend more money on fueling their tractors and other equipment, then they will try to recover this additional expense by charging more for food products. Increase in oil prices has affected the level of activity, corporate earnings and the level of confidence in equity markets. The United States and Europe have tightened their monetary prices in an attempt to control inflation brought on by the increase in oil prices. Higher oil prices might increase the level of investment in the oil sector. Individuals and corporations willing to reap high investment returns will invest in the industry and this will be beneficial to a country’s economy.

High oil prices also mean that people are more willing to tap into other sources of energy. Environmentalists encourage the research into different sources of energy such as biofuels, which are not harmful to the environment. The countries that have chosen not to depend heavily on oil have looked into and researched other sources of energy and this has led to the growth and development into these sectors. This improves the country’s economy because less money will be used in importing and refining crude oil. Governments and nations are forced to depend on other industries, other than manufacturing, which do not depend heavily on crude oil. Governments, which have chosen to do this, have invested in the services sector and they are reaping the benefits because this sector does not depend heavily on oil and it will therefore not be affected when the oil prices soar.

Work Cited

Zarroli, Jim. High Oil Prices affect many Products. 12 Nov. 2007. Web. 21 Mar 2011.