The Impact of High Oil Prices on Global Economy - Essay Example

Goods movement across a country or between international countries depend on transporting vehicles like, ships, train, cargo planes, trucks etc; all require oil as fuel. Any price hike in oil and gas price can increase the transportation cost and thereby the cost of the goods also. Oil is also required for the production of electric power which is the most important component of every industry. Many other essential commodities of everyday life like plastics, medicines, clothing, cosmetic items; all depends on oil for its production.

Thus global economy is directly proportional to oil price. 1973 -1975 oil price hike has shocked the world economy. The growth rate fell to 2.1% in 1974 and to 1.45 in 1975. The worldwide trade growth rate also dropped heavily from 12% in 1973 to -5.4% in 1974 and -7.3 in 1975. Foreign Direct Investment (FDI) has dropped from 40% in 1973 to half of it in 1974 (Oil prices and global economy) The above statistics clearly shows the relation between oil price and global economy. In fact oil is the blood of global economy.

The world is moving with the help of the energy provided by the oil. Most of the activities in the industrial world, and the real life situations are heavily depend on the availability of oil. For example, consider the case of transportation activities without oil resources. In fact 99% of the transportation facilities depend oil for the fuel needs. All the vehicles which use petrol or diesel engines require oil and any scarcity of oil or price hike of oil may affect the transportation industry drastically.

Higher oil prices affect the global economy through a variety of channels: There will be a transfer of income from oil consumers to oil producers; There will be a rise in the cost of production of goods and services in the economy (IMF Research Department) Oil price hike will positively