9/29/2004

Are oil prices really to blame?

At the World Economic Forum (WEF) held Feb. 2002 in New York City one major focus of conversation was the critical role of oil prices on the global economy. High oil prices are generally seen as detrimental to the overall health of western consumer countries. With exception to countries in the oil exportation business, cheap oil prices are beneficial to developing countries. The WEF concluded that would increase OPEC revenues in the short run but that the price increases would have a negative effect on the demand for oil in the long run.
However, it seems that the effect of oil prices on the world econoomy might not be quite as critical as originally expected. IMF chief economist Raghuram Rajan siad that oil prices are going to have only a moderate effect on the world.

An article published by the BBC News states that the International Monetary Fund (IMF) raised its world's economy growth forecast to 5%, up from 4.6%, for 2004. If this forecast is correct, world growth will be that fastest it has been since 1973- despite the rising oil prices. Rising corporate profits and a solid housing market are cited as the reason for growth. The US is still the driving force behind global growth with a lot of support from Asian, Latin America, and Sub-Saharan African countries.

The increase in globalization and technological advances has given rise to many opportuties for growth in previously under-developed countries. Oil is important and oil prices definately have an impact on the economy but reasons for the world growth seem to be so diverse that it is only realistic that the economy would grow, despite oil prices.

2 comments:

Bryce Larkin said...

I would have to disagree. I believe that if the price of a barrel of oil goes up more than $50 then it will slow down the economy. Many products that we take for granted would go up in price due to the price of oil. All shipping costs and service-oriented businesses as well as others will have a price increase in their products. I think the economy will suffer in the short-run, but we will make the best of it.

Dr. Tufte said...

-1 Spelling mistakes in the post, Kova.

Also, this isn't really a managerial economics topic.

Macroeconomists are still a bit confused about this, but it appears that this oil price shock is largely demand driven (so I agree with Kova but not Bryce on this one). The argument that oil prices shocks are a problem for the economy relies on them being supply driven. That sort of shock causes problems because it reduces the potential output of the economy, and puts upward pressure on prices which are compounded by any attempt to use fiscal or monetary policy to stimulate the economy. A demand driven price rise just doesn't cause the same problems (as long as you are in one of the economies that has high demand - which the U.S. seems to be).