Impact of Oil Prices Essay

2388 WordsJun 27, 201510 Pages
University College Dublin Economic Policy and the Global Environment ________________________________________________________________________ 1. Impact of Oil Prices Of all the factors that contributes or affect the economy, oil price remains a major influence in the world's economy today. Over the years of industrialization, oil has become the chief production input in the economy. Any changes in its prices will implicate a profound effect throughout the economy. 1.1 Inflation and Unemployment Oil, is used indispensably in many business production processes. When prices increase, the overall production cost is pushed up, making it costlier to produce. Producers will logically react by producing less, hence decreasing the output. Cost will be passed on to the consumer, making end products costlier, and contributing to a cost-push nflation. Therefore as oil prices increase, inflation will follow in the same direction establishing a direct relationship. Additionally, as the general cost of production rises, the reduced output from the producers will contribute in the rise of unemployment, specifically cyclical unemployment. ________________________________________________________________________ 1 University College Dublin Economic Policy and the Global Environment ________________________________________________________________________ Figure 1.1.1 The Impact of Oil Price Increase Figure 1.1.1 illustrates the flow of impact initiated by a change in the oil price. When price raise, output will decease resulting in inflation from shortage of supply and raise in end-product cost. Unemployment will increase as production output decline equates to less work opportunities. 1.2 Consumption and Investments High oil prices hurt both consumer and investor confidence. When oil prices increase, inflation sets

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