Publish Date: in Finance101
Oil is a natural substance that is mined, and one of its derivatives is gas, which is used for fuel worldwide. Even though the world is trying to find less polluting alternatives, but up until now, it is still the primary fuel source. We depend on it to power electricity generators, heating systems and transportation, and other machines that sustain day-today activities. That is why oil has a direct effect on the economy.
Oil prices affect each group differently. For countries that export oil, a price increase is a positive thing because it brings in more revenue. At the same time, citizens living in those countries still suffer from the price increase. As for the countries that import oil, the price hike has a negative impact because it means they have to spend more on fuel and also their citizens face increased prices.
Oil is part of everything that affects consumers’ daily lives, because all goods are shipped or transported, meaning that all goods require fuel. So, any fluctuation in the price of oil, directly affects prices, meaning that it directly influences inflation. Hence, when oil prices increase, consumer goods’ prices increase, leading to an increase in inflation. If you want to know more about inflation, click here.
Any fluctuation in the price of oil, directly affects prices, meaning that it directly influences inflation.
An increase in oil prices, negatively affects consumers, making them unable to spend due to the general increase in prices. This will lead to a slowing down in consumer activity, which can cause a recession. However, according to financial experts, for the oil to cause a real recession, its price has to increase above USD 100 per barrel. They also add there is not a direct relationship between oil and recession. Usually, oil is not the only causer of recessions, but is one of many factors.
Oil is a component of many industries such as plastics, lubrication and road-paving. Even though, many people believe that our dependence on oil is waning, this is not true. The world still heavily depends on oil, so much so, that tech companies like Google and Amazon have developed AI programs to help detect oil wells.
Despite the negative effects of oil price increase on most products, when it comes to renewable energy sources, it has an opposite effect. Usually, when oil price increases, people look for renewable energy sources as replacements.