Higher Oil Prices Effects Trade: Oil prices have gone up drastically over the last decade, so how have these prices affected the economy?
Due to oil demand being inelastic, the price rise has been positive for producers due to their increase in revenue. In addition, this will lead to the current accounts of oil exporters like OPEC countries to be improved, however, oil importers such as Germany and China will see a decrease in their accounts.
Reason of Transportation Costs Increases
A rise in oil prices also caused higher cost-push inflation due to transportation costs increasing, thereby causing higher prices for many goods. This further affects consumers as their costs increase but their incomes do not rise to compensate, potentially resulting in slower economic growth. Higher cost-push inflation often requires higher interest rates as well posing a problem for policymakers.
For firms, as seen in the oil price shock of the 1970s, manufacturers began changing their ways to try and combat the higher prices. United States car manufacturers started paying attention to fuel efficiency and encouraged the making of non-petrol cars. This has reigned true throughout the years as well. On top of this, firms may start finding more oil supplies as more countries begin producing oil.
Overall Higher Oil Prices Effects Trade, an increase in oil prices causes a small fall in demand due to its inelastic nature and consumer need for petrol in cars. In the long term, however, this may cause consumers to opt for hydrogen-powered cars and other methods in order to avoid the need for higher costs. This all may cause oil to go from inelastic to more price elastic.
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