LetsLearnFinance

Impact of Oil Price

Oil is one of the most important accelerator for an economy to grow. In fact it’s one raw material for any sector which if faces supply bottleneck has a tremendous negative impact to stagnate the growth of an economy.
However according to various studies and even the reports of IMF shows that oil prices has witnessed a steady growth over a period of time. While the over all oil consumption has not reduced but the fluctuations in the oil market has definite impact on any country, be a first world nation or a third world country or emerging economy like China and India. We have witnessed that oil consumption has regular impact on GDP of any country. Russia witnessed a sharp decline in Gross Domestic Product in line with the decline in consumption of oil. There has been a rise in cost of production of goods and services along with rise in demand, profit margin has declined. It has also witnessed wage price ratio tilting towards lowering of real income.
First World Nations are witnessing several impacts depending upon the complexity of their respective economy. The inflationary impact and monetary policy response are most significant in the United States and European nations, reflecting a combination of relatively high energy consumption (which increases the inflationary impact in the United States), inertia in the inflation process (which is particularly important in the euro area, with its labor market rigidities), and differences in resistance to real income losses. However US has faced lesser negative trait on trade due their own capacity and supply of petroleum, European countries and Japan has taken a beating worse than USA.USA, European nations, Japan has faced inflationary impact out from the oil price shock which affected their respective GDP to some respect. But thanks to their resource availability and modernization and capital intensive approach towards production they have maintained resilience towards the price shock.
Developing nations and Transition Economies have faced a different scenario with respect to oil price hike over years. Two all together different aspects rounded up here, while the oil importing countries had huge dependency in importing oil. their terms of trade worsened with the hike in oil price, they benefited with certain fall in price but getting squared up with rise in domestic demand and no self reliance to improve their own production it hardly mattered, while oil exporting nations had direct impact even more to face with standing of their economy has only a base on petro dollar. It signifies their reliance on oil export heavily.
Resulting impact however has retaliated result for oil exporting countries. United Arab Emirates had a large current account surplus and that the oil price increase is expected to further increase that surplus by more than 5 percent of GDP.
Major emerging nations have been in rough with rising oil price. Asia experiences the largest negative impact on growth. Latin America, emerging Europe and Africa are less adversely affected by the oil shock owing the larger influence of net oil exporters in aggregate activity.
Oil Importing HIPC and CIS Countries have visualized tremendous pressure in the
rising oil price phase. Heavily Indebted Poor Countries (HIPC countries) have significant low world market share, their per capita income is also poor, hence their terms of trade declined and had huge current account deficit, a feature quite common with transition and emerging countries. Majority of the Commonwealth of Independent States (CIS) countries, are net oil importers and has faced similar problem of HIPC countries.
OPEC countries has improved their terms of trade, their GDP rose sharply approximately around 7% annual growth.

Impact in financial Status of the countries
In the Stock markets, an increase in oil prices would be expected to lead initially to a weakening in the earnings of firms producing energy intensive output and in their market valuations. Rise in cost of production, fall in profit margin and consequent decline in GDP. Oil price rise has been directly responsible for the recent turbulence in advanced country financial markets and movements in currency markets.

While the impact accounts a lot for any country, developed nations moving miles ahead, riding on technological accelerator, time has arrived to accept the over riding
impact on financial sector and slow but steady approach to plug in alternative energy.

Thanks
Pamela