ECONOMICS

NATIONAL UNIVERSITY OF
MODERN
LANGUAGE. LAHORE
CAMPUS
 ECONOMIC
S OIL PRICE EFFECT ON WORLD
ECONOMICS

presented by;
Usman
Ahmad Qadri
MBA-2
night Numl student
Asad
Iqbal
MBA-2 night
Numl student
Awais
Ahmad Tahir
 MBA-2 night
Numl student
SHUMAIR
IJAZ
MBA-2 night
Numl student

Fahran
Nasir
Mba-2 Night
numl student

Presented to;
Miss
Fatima

This Project is Dedicated to

my Beloved
Father & Mother,families,our
friends
And all the teachers how
teach me …
--Usman Ahmad
Qadri
 Asad Iqbal
Awais Ahmad
Tahir
ShUMAIR Ijaz

FAHRAN NASIR

TABLE OF
CONTENT
1. Introduction……………………………………………
(1)

2. History…………………………………………………...
(3)
i. Truman doctrine……………………………………………………………………
(3)
ii. Expropriation vs economic warfare 1950………………………………………
(3)
iii. Suez(post war petroleum order)………………………………………………
(4)
iv. Opec(organization of the petroleum exporting countries)…………………
(5)
v. End of 1960 to early 1970…………………………………………………………
(6)
vi. 1973 Yom kippur War……………………………………………………………...
(6)
vii. 1973 Oil crisis ………………………………………………………………………
(6)
viii. Desert Storm………………………………………………………………….........
(8)

3. Current oil price impact on Transition

economy….(9)
i. In 2000-2007…………………………………………………………………………
….(9)
ii. In 2008 to upward…………………………………………………………………….
(12)

4. Oil price impact on different countries…………

…..(17)
 i. Oil price Impact on Pakistan Economy…………………………………………..
(18)
ii. Current situation……………………………………………………………………...
(18)
iii. How Pakistan is coping with the challenge of High oil
prices?.....................(19)

5. Analysis of the Impact of high oil price

Impact on Global economy…………………………
…..(24)

i. Oil price shocks and the Economy

1. oil price shocks affect economic activity
2. purchasing power effects
3. sensitive is GDP to oil price shocks
4. Economy relationship symmetric

Twenty Surprising ways High oil price affects the

6.
Global economy……………………………………
……(25)

Conclusion………………………………………………….(

1)-Introduction
Crude Oil:

Is the raw, unprocessed, liquid form that comes out of the

ground. It is also known as petroleum. Crude oil is a fossil fuel,
meaning that it was made nat-
urally from decaying plants and animals living millions of years
ago Crude oils
vary in color, from clear to tar-black, and in viscosity, from water
to almost solid.

Fuel:
Any substance (liquid, solid or gas) that releases its stored heat
energy and turns it into actual heat and motion energy, when
treated in a certain way such as by burning or by combustion in
an engine. When the fuel is burned it is destroyed and leaves us
with carbon emissions.

Fuel prices:

Typically displayed in either Price Per Liter (Litre) in the UK,

Europe, Australia, New Zealand and South Africa and Price Per
Gallon in the US and Canada.

Fuel economy:

Also known as Fuel Efficiency can be best described as ways to

drive carefully, smoother and effeciently to get achieve more
miles per gallon.

Petrol:

Also known as Gasoline refined from Crude oil and is approx.

15% lighter in density than petroluem diesel. A mixture of
various hydrocarbons used as a fuel.
Oil resources in the different part of world:
 2)- HISTORY

2.1)-March 12, 1947 Truman Doctrine:

• New Aramco: Socol, Standard Oil of NJ, Texaco, Socony
• Gulf Oil – Shell in Kuwait.
• Iranian contract between Anglo Iranian and Standard Oil,
• Socony.

2.2)-Expropriation vs. economic warfare,

1950:
• No oil export no money, economic trouble
• U.S. and Brithish assisted coup
• The shah regained power

 Oil consortium: Jersey, Socony, Texaco,

Standard of California,
Gulf; Shell; CFP;
Anglo Iranian.

Result: The economic is trouble because they have no

trend export of oil in the world.
2.3)-Suez:
• Suez represented the post-war petroleum order:
• 2/3 of Europe’s oil passed through Suez
• 2/3 of traffic in Suez was oil
2.4)-OPEC: (Organization of the Petroleum Exporting Countries)
 • End of 1950s: Soviet Union is the second largest oil
producer:
• Oil companies cut prices

OPEC’s aim:

• Building national refineries.

• National integrated oil companies.
• Stabilize market for themselves, 60-40 % share.
 2.4.1)-Founding of OPEC:
The Organization of the Petroleum Exporting Countries (OPEC)
consisted
of thirteen countries, including Iran, seven Arab
countries, plus Ecuador
Indonesia Nigeria Angolaand Venezuela. OPEC had
been formed on
September 14, 1960 at the Baghdad conference.
It was made to protest pressure by major oil companies
(mostly owned by U.S., British, and Dutch nationals) to reduce
oil prices and
payments to producers. At first it had operated as an informal
bargaining unit
for the sale of oil by Third World nations. It confined its
activities to gaining
a larger share of the revenues produced by Western oil
companies and greater
control over the levels of production. However, in the early
1970s it began
to exert its strength.

2.5)-End of 1960s, early 1970s:

Recession in US and British power:
• Demand in oil was catching up with supply – end of surplus.
• Huge economic growth fueled by oil.
• US oil production: 11.3 million barrels per day, the peak
• More dependency on Middle Eastern oil.

2.6)-1973 Yom Kippur war:

• The Soviet Union supported Egypt and Syria.
• The USA supported Israel.
• World War conflict was imminent.
• Oil exporters increased oil prices 100%.
 • Arabs cut oil supply and eventually stopped exporting to
USA.

• A weak president in the yom kippur war

contributed to the
oil crisis.

2.7)-1973 oil crisis:

• January 1973—The 1973–1974 stock market crash begins.
• August 23 1973—In preparation for the Yom Kippur War,
Saudi King Faisal and Egyptian president Anwar Sadat
meet in Riyadh and secretly negotiate an accord whereby
the Arabs will use the "oil weapon" as part of the upcoming
military conflict[8].
• September 15—The Organization of Petroleum Exporting
Countries (OPEC) declares a negotiating front, consisting of
the 6 Persian Gulf State, to pressure for price increases and
an end to support of Israel, based on the 1971 Tehran
agreement.
• October 6—Egypt and Syria attack Israel on Yom Kippur,
starting the fourth Arab-Israeli War
• October 8–October 10—OPEC negotiations with oil
companies to revise the 1971 Tehran price agreement fail.
• October 12— The United States initiates Operation Nickel
Grass, an overt strategic airlift operation to provide
weapons and supplies to Israel during the Yom Kippur War.
• October 16—Saudi Arabia, Iraq, Abu Dhabi, Kuwait, and
Qatar unilaterally raise posted prices by 17% to $3.65 per
barrel and announce production cuts.
• October 17—OPEC oil ministers agree to use oil as a
weapon to punish the West for its support of Israel in the
Arab-Israeli war. They recommend an embargo against
unfriendly states and mandate a cut in exports.
• October 19—US President Richard Nixon requests Congress
to appropriate $2.2billion in emergency aid to Israel,
including $1.5 billion in out-right grants.[9] Saudi Arabia,
 Libya and other Arab states proclaim an embargo on oil
exports to the United States.
• October 23–October 28—The Arab oil embargo is extended
to the Netherlands.
• November 5—Arab producers announce a 25% output cut.
A further 5% cut is threatened.
• November 23—The Arab embargo is extended to Portugal,
Rhodesia, and south africa.
• November 27—U.S. President Richard Nixon signs the
Emergency Petroleum Allocation Act authorizing price,
production, allocation and marketing controls.
• December 9—Arab oil ministers agree to another five
percent cut for non-friendly countries for January 1974.
• December 25—Arab oil ministers cancel the five percent
output cut for January. Saudi oil minister Yamani promises a
ten percent OPEC production rise.
• January 7–January 9, 1974—OPEC decides to freeze prices
until April 1.
• February 11—United States Secretary of State Henry
Kissinger unveils the Project Independence plan to make
U.S. energy independent.
• February 12–February 14—Progress in Arab-Israeli
disengagement brings discussion of oil strategy among the
heads of state of Algeria, Egypt, Syria and Saudi Arabia.
• March 17—Arab oil ministers, with the exception of Libya,
announce the end of the embargo against the United
States.
 December 1974—The 1973–1974 stock market
crash ends.

2.8)-Desert Storm:
 • August 2, 1990: Iraqi invasion of Kuwait
• New oil shock, supply decreased
• Loss had been compensated by December from other
sources

• January 17, 1991: Desert Storm

• February 28 cease fire

Desert storm
3)-Current OIL PRICE IMPACT ON
TRANSITION ECONOMIES:

3.1)-IN 2000 – 2007:

• The price of oil affects just about everything that is made,
transported, eaten and sold in the United States. But with
oil approaching $100 a barrel, the impact on the U.S.
economy has been less than many analysts expected.

• Time and again, economists from Alan Greenspan on down

have warned that higher oil prices are inflationary. They
make it more expensive to drive, to buy an airplane ticket
and to manufacture anything from air conditioners to
zippers.

• Despite that, the economy grew at an annual rate of 4.9

percent last quarter. That's been a surprise to Jay Bender,
president of a South Dakota injection-molding company.
NPR interviewed him in January 2003 when oil sold for $32
a barrel. At the time he worried that rising oil prices would
make raw materials more expensive.

• "That's going to be a challenge and if it does squeeze our

bottom line too hard, it will have an impact on our ability to
invest in capital equipment and grow our business," Bender
said in 2003.

• Today, he says, the cost of raw materials has increased, but

"I would say probably not as much as I thought it would
and maybe what I was forgetting [in 2003] … is when these
costs go up they impact my competitors as well."
• So, how is his company doing now?

• "We're doing well," he said. "I would say it's the same
scenario as three or four years ago that our sales are
continuing to increase, our top line is good, we just set a
sales record in August and we broke it again last month in
October."

• Bender said he has survived because by becoming more

efficient, fighting back against higher prices and passing on
some increases to customers.

• Economist Ken Goldstein of The Conference Board, which

compiles the Consumer Confidence Index, said what's
happened to Bender is happening across the economy. He
said it may not look like it when you see all those SUVs but
the U.S. is more energy efficient than it used to be and
alternative fuels are more widely available.

• "When oil gets much more expensive … some biofuels,"

become more cost effective, Goldstein said. "We are able
to make that switch today. We weren't able to make that
earlier."

• Federal Reserve Governor Alice Rivlin said there is another

reason the economy has survived price increases — less
manufacturing.

• "We don't depend on energy as much because we don't

depend on manufacturing as much," Rivlin said. "Services
are less energy intensive."

• Goldstein believes the days of relatively painless price

increases are ending. A lot of things are getting more
expensive.

• "For example, the price of some of these sports drinks

hadn't increased in seven years. It did this summer and
precisely because the price of transporting that stuff by
 truck to the supermarket to the grocery store got more
expensive to the point where they had to go for a price
increase," he said.

• Goldstein says there is always a lag between the time

when oil goes up and the time its impact is felt in the
economy.

• "This $100 — near $100 — a barrel crude oil, that's still on

the tanker," he said. "That hasn't even gotten to the
refinery, let alone to the gas station on the corner."

• When it does, he said, gasoline could hit $4 a gallon.

• That's bound to be felt by consumers. Whether they stop

spending will depend partly on other factors, such as how
well the housing industry and the job market do. But the
past few years have shown that the economy can adjust to
rising prices better than people once thought.
 $/bbl
$80

$70

Financial Markets
$60 Discover Commodity
Investing
Nigerian
$50 Disruptions

Saddam Iraq Chinese Demand

$40 OPEC war
gets mad
King Fahd OPEC agreement
gets mad market
$30 share strategy: Fund
a bad buying
Tanker
war idea
$20 9/11 Threat of
Iraq embargo
Exxon
Valdez Warm
Iraq-Iran Asian
$10 Everyone winter
war ends recession
gets mad

$0
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007

3.2)-IN 2008:
CURRENT ISSUES ABOUT THE OIL PRICE:
I. Retail gasoline prices fell to a national average of
$2.22 a gallon, dragged down by the falling price of
crude, which now costs 60 percent less per barrel
than it did in mid-July.
II. Light, sweet crude for December delivery fell more
than 5 percent, or $3.25, to $59.16 a barrel on the
 New York Mercantile Exchange. In earlier electronic
trading, crude fell to $58.32, it's lowest point since
March 2007.
III. Oil prices fell two days ahead of a report from the
International Energy Agency, which some analysts
expect will cut its 2009 oil demand forecast for the
third consecutive month.
IV. Volatile price swings are occurring almost every day
on the trading floor.
V. While the Nymex contract is now trading near first-
half 2007 prices, the difference then between daily
highs and lows was around $1.50 a barrel, while
now the average daily range is around $5.50 a
barrel with recent daily peaks at $9.50, said analyst
Olivier Jakob of Petromatrix in Switzerland.
VI. Investors have grown increasingly leery about the
swooning U.S. economy, which faces its worst
recession in decades.
VII. Industry analysts had expected China and India
would continue buying crude if the U.S. and other
western nations went into recession, but the booming
economies of Asia have begun to show signs of fatigue.
VIII. Some forecasts had called for China's gross domestic
product to grow 10 percent next year. More recent
 forecasts have it closer to 6 percent, the firm Cameron
Hanover said in a report Tuesday.
IX. A $586 billion stimulous package in China boosted markets
globally early Monday, but those gains fizzled quickly and a
sell-off that began by midday in the U.S. continued in Asia
and Europe Tuesday.
X. On Tuesday, the Dow sank more than 200 points after
Homebuilder Toll Brothers Inc. and Starbucks Corp. gave
investors more evidence the housing market and consumer
spending are getting weaker.
XI. Toll Brothers said fourth-quarter revenue fell 41 percent
from the year-ago period, while Starbucks reported lower
sales across the coffee chain, leading to profits that fell
below analysts' expectations.
XII. Gasoline fell again overnight, dipping 2 cents to a national
average of $2.22 for a gallon of regular unleaded,
according to auto club AAA, the Oil Price Information
Service and Wright Express. The average price has fallen
nearly 32 percent in the past month and, according to AAA,
could be headed to $2 a gallon nationally by year's end.
XIII. Crude demand from the U.S., the world's largest consumer
of energy, is a key driver of oil prices.
XIV. "We saw extremely poor car sales and pretty shocking
unemployment numbers from the U.S. last week," said
Toby Hassall, an analyst with Commodity Warrants
Australia in Sydney. "It wouldn't surprise me if oil edged
down toward $50."
XV. U.S. car sales fell to a 25-year low in October while the
unemployment rate shot to a 14-year high of 6.5 percent
last month.
XVI. Oil prices fell despite signs that OPEC members are going
ahead with production cuts agreed to at an emergency
meeting in Vienna, Austria, last month.
XVII. Many analysts are expecting another cut by the
Organization of Petroleum Exporting Countries, which will
meet on Dec. 17 in Oran, Algeria.
XVIII. The prime minister of Qatar said Tuesday that "fair" oil
prices of between $70 to $90 per barrel would ensure that
expensive oil exploration could continue, avoiding price
spikes in the future.
XIX. Sheikh Hamad Bin Jassim Bin Jabr Al-Thani said that while
oil prices below $70 a barrel may seem like a gift to
consumers, it could trigger price spikes in the near future
when demand picks up.
XX. But for now it is waning energy demand, not the supply
controlled by OPEC, that is dominating crude prices.
XXI. Events that earlier this year threatened to cut off supply in
oil producing nations no longer appear to have the power
to send prices surging.
XXII. Militants in Nigeria on Monday resumed attacks on the
country's oil installations. The military said it killed eight
people while guarding a facility in the oil-rich south of the
country.
XXIII. Militants frequently attack oil facilities, seeking to hobble
Africa's biggest petroleum industry and force Nigeria's
federal government to send more oil funds to the southern
states where the crude is pumped.
XXIV. "The focus of the market has really been on the demand
side," Hassall said. "I'd be surprised if supply side issues in
Nigeria could change the mood of the market."
XXV. In other Nymex trading, heating oil futures fell 7.48 cents
to $1.93 a gallon, while gasoline prices dropped 7.3 cents
to $1.2945 a gallon. Natural gas for December delivery
tumbled 39.8 cents to $6.85 per 1,000 cubic feet.
XXVI. In London, December Brent crude tumbled 6 percent, or
$3.54 to $55.54 a barrel on the ICE Futures exchange.
4)-OIL PRICE IMPACT ON
DIFFERENT COUNTRIES :
4.1)-OIL PRICE IMPACT ON
PAKISTAN ECONOMY:

4.1.1)-CURRENT SITUATION:

• On month-on-month basis, Pakistan’s oil import bill rose

to 1.406 billion dollars during August 2008 from 995.7
million dollars in the corresponding month of last year,
witnessing surge in oil import prices both in Arabian Light
Crude and frequently hike in crude oil prices in western
countries during the period under review.

• Given domestic shortages and emerging political

concerns for strategic reserves, the country’s food import
bill increased to 252.1 million dollars with an increase of
51.8 million dollars during the second month of current
financial year from 200.3 million dollars in August 2007.
However, official sources and economic experts are
foreseeing that currently with international crude oil
trading close to $92 per barrel, 7 months low, Pakistan
can save $1-1.5b in oil import bill. This will have a
positive impact on current account deficit for the
upcoming months of FY09. The country imported $41.869
million worth of wheat, which along with price hikes of
palm oil and other products raised the food import bill to
$51m during August 2008.

• The State Bank of Pakistan reported on Tuesday that in

the category of petroleum group, country’s import
payments on petroleum products increased to $754.2
million in August 2008 against $355.2 million in August
2007 while country had spent $652 million on the import
 of petroleum crude.

• It is important to note that in August 2008, petroleum

products with petroleum crude and palm oil in food group
imports requirements registered a strong growth as
compared to slowdown in import growth of these
commodities witnessed during last month of FY09 (July
2008).

• The total machinery group’s import payments swelled to

$452.9 million in the month of August 2008 against 433.1
million in August 2007, showing an increase growth in
power generating machinery and textile machinery which
surged to $ 76.631 million and 93.196 million
respectively during the course of period under review.

• In machinery group, mobile phones growth substantially

hampered by 21 million dollars to 18.351 million dollars
in August 2008 to 39.380 million dollars in August 2007.
According to official data on foreign trade, trade deficit of
the country had widened by 47.67 percent to 3.522
billion dollars during July-August 2008 from 2.385 billion
dollars in July-August 2007 on year-on-year basis amid
record acceleration in the import growth caused by
inflated petroleum group imports, increased import of
wheat and slowdown in export growth.

• During August the second month of the current financial

year, trade deficit amounted at 1.877.7 billion dollars,
showing an increase growth of 14.18 percent against
1.644 billion dollars in the last month of prevalent fiscal
(July 2008). During the particular course of past month
(August 2008), country witnessed record volume of trade
deficit soared by 46.37 percent to $1.877b from $1.282b
in the corresponding month of FY08.
4.2)-How Pakistan is coping with the Challenge of
High Oil Prices?
The trend in rising prices has become a grave concern for the
developing economy
like Pakistan. Because if this trend continued can result in
inflationary pressures in the
economy, increasing budget deficit and balance of payment
problems and slowdown in the
economic growth

4.2.1)- Pakistan Energy Sector Scenario:

Energy sector has a direct link with the economic development
of a country. In line
with the rising growth rate of GDP demand for energy has also
grown rapidly. Per capita
energy consumption of the country is estimated at 14 million
Btu3,
the energy consumption has grown at an annual average rate of
4.4 percent
from to 2005-08.

Although it is only a fraction of other industrialising countries in

the region as Thailand and Malaysia.

in Pakistan has led to rising crude oil imports from Middle East
exporters (Saudi Arab playing the lead role). In addition, limited
refining capacity leads to
heavy dependence on the imports of petroleum products.
According to the Ministry of
Petroleum and Natural Resources (MPNR) the demand of
petroleum products in the country
is about 16 million tons out of which only 18 % are met through
local resources while the
balance 82 % is met through imports. Therefore, the
international oil price fluctuations have a direct impact on the oil
prices in the local market

4.2.2)-Impact of High Oil Prices:

In July 2008 has seen the maximum of $147 per barrel. This
rising trend in oil price in the international market has hurt the
economies of many countries in the world including that of
Pakistan. The extent to which economies hurt as a result of price
shock depends on the country’s dependency on oil. Before
analysing the impact of high oil prices at the macro level the
paper will look at some of the indicators showing the
vulnerability of the Pakistan’s economy.

4.2.3)-GDP Growth and Oil prices

Increasing oil prices squeeze income and demand. At a given
exchange rate,
more domestic output is needed to pay for the same volume of
oil imports. If the domestic
currency depreciates in response to induced payments deficits,
this further cuts the purchasing
power of domestic income over imported goods. Since important
trading partners are also
likely to suffer income losses, slower growth of external demand
aggravates these direct
impacts.

The government has consumed its budgetary target of bank

borrowing (Rs. 130 billion) by
January 2008, further borrowing from banking or non-banking
sources may destabilize the
financial health (Khan 2008). It is estimated that utilization of
PSDP would remain
significantly lower than allocated Rs. 520 billion.
Rapidly growing economies will generally experience more rapid
growth of non-oil taxation,
and hence be better able to withstand the fiscal impacts of a
less than fully passing on of oil
price increase. In Pakistan, non-oil taxation is more or less the
same for the last few years.

4.2.4)-Oil Prices and Inflation:

Another channel via which high oil prices may affect
macroeconomic performance is through
the high costs of production thus reducing output.

4.2.5)-Balance of Payment Effect:

Our petroleum imports account for 24 percent of total imports
(and represented up to 44
percent of export earnings) in 2006-07. While, in 1999-2000 the
share of petroleum imports
was 27 percent of total imports and accounts for 33 percent of
total export earnings.

Improving terms of trade would mean that a smaller volume of

exports would be needed to
pay for a given quantity of imports. For Pakistan this ratio
however is decreasing, that is more exports are needed to offset
the burden of rising import bill.
 2004 2005 2006 2007 2008

4.0

3.5

3.0

2.5

2.0

1.5

1.0

0.5

0.0

-0.5

-1.0

-1.5
Price Effect Income Effect Substitution Net Demand
Effect Change
5)-Analysis of the impact of
high oil price on the Global
Economy:
5.1)-Oil Price Shocks and the
Economy:
5.1.1)-oil price shocks affect economic activity:
• Eight out of ten post WW2 recessions followed by oil price
shocks
• Statistical evidence links oil prices to inflation, higher
interest rates and higher unemployment rates
• Consensus: An inverse statistical relationship
between oil price changes and economic activity

5.1.2)-Purchasing power effects:

 • Oil price increase shifts purchasing power from oil-
importing nations to oil-exporting nations
• On net, demand for oil importer’s goods reduced
• Lower consumption, lower GDP growth, higher saving and
lower interest rates

5.1.3)-Sensitive is GDP to oil price shocks:

• Empirical studies: The economy’s sensitivity to oil price

shocks has declined in past decade.
• Monetary policy can shape how oil price shock is
experienced: slower growth versus higher inflation.
•
5.1.4)-Economy relationship symmetric:

• Rising oil prices seem to retard economic activity more

than falling oil prices stimulate it.
• Possible explanation: more economic adjustment costs and
coordination problems with rising oil prices

6)-20 Surprising Ways High Oil Prices

Affect the Global Economy:

When you think of high oil prices, you’re probably reminded of

huge bills at the pump and inflating costs on goods and
services. However, the high cost of oil brings on so much more
than that.Following some of the lesser-known ways high oil
prices affect the global economy.
1. Less Asian growth: As China and India grow, they rely
heavily on oil, which is part of the reason for the spike in
prices. However, they’re shooting themselves in the foot
because the higher prices go, the less they can afford, and
their growth is slowed. They also use energy less
efficiently, so the prices are exacerbated.
2. Bargaining power: With higher oil prices, oil-exporting
countries hold the power. This might embolden these
nations to become more assertive or demanding of other
countries in both political and economic ways.
3. Alternative energy grows: As oil gets more expensive,
alternative energy becomes much more attractive.
Investment and employment in clean technology goes up
right along with high oil prices.
4. European countries are marginally affected: With the dollar
declining on the euro, Europeans feel the rising cost of oil
much less than others.
5. Bad monetary policy: Rising energy costs are a cause for
concern in most households, and governments tend to
react to this sort of situation. However, if they react with
inappropriate policies, they can make things worse by
simply prolonging the inevitable.
6. Exporters hold on to their money: Instead of pumping profits
back into the global economy, exporters tend to save them.
That means that the global demand will tend to fall.
7. Helps US dollar: Although we’re not seeing this currently, in
theory, higher oil prices should support a stronger dollar.
This is because oil is priced in dollars, and demand for
dollars will increase with higher oil prices and dollar-
denominated investment from exporters.
8. Other energy exporters flourish: Exporters of non-oil energy
like coal and gas flourish as consumers attempt to shift to
cheaper energy.
9. New capital shift: As prices are hiked, investors consider
putting their money in other sectors, which has a
stimulating effect on the economy.
10. China has a cushion: Although as a developing country
China is hit harder by oil prices, they seem to have a
 cushion as investment moves away from oil, and they
maintain a fixed exchange rate with the dollar.
11. The US doesn’t have it so bad: Although your wallet may
beg to differ, the United States is not hit as hard as other
oil importers because we still produce about 40% of the oil
we consume.
12. Government subsidies fail: Some governments subsidize
fuel, and higher oil prices put pressure on them. The
subsidies interfere with supply and demand, as consumers
continue to demand more while prices stay relatively flat.
13. Interest rates go up: As higher oil prices lead to inflation and
rigidities in government expenditures, interest rates rise.
14. Oil-producing countries don’t earn as much as you’d think:
While the dollar suffers, oil exporting countries are subject
to reduced purchasing power as they buy goods in euros.
15. International business suffers: When the cost of oil goes up,
flights get more expensive and corporate travel costs go
up. This leads to less frequent business trips to
international locations.
16. The virtual economy flourishes: As the cost of transportation
rises, virtual work and net meetings become more popular.
17. The travel sector suffers: Hotels, cruises, airlines, and others
in the travel industry are affected negatively by high oil
prices because transportation costs are higher, and
consumers are spending less because of stress on their
budgets.
18. Countries will stop paying bills: At some point, many
countries may be forced to choose between oil and
international debt repayments. As they default on these
loans, they’ll hurt large international finance institutions.
19. Consumers save more: When consumers are faced with
rising oil costs, many create precautionary savings just in
case things get worse.
20. Consumers buy cars: Although budgets are being squeezed,
consumers
will buy more cars, presumably to upgrade to a more fuel-
efficient foreign model.
7)-Conclusion:
• The economy experiences some
costly adjustment to both rising and
falling oil prices
• When oil prices rise, slowing
economic activity is further retarded
by adjustment costs.
• When oil prices fall, stimulated
economic activity is somewhat offset
by adjustment costs
• We then have asymmetry: rising oil
prices retard economic activity by more
than falling prices stimulate it.