Whether it is the price of gasoline or airplane fuel, oil prices have a significant impact on costs for production and transportation in the United States. In addition, the price of oil influences the cost of other energy sources and products that use those materials for manufacturing, such as industrial chemicals. This makes the economy susceptible to oil price fluctuations as economic conditions change.
Oil price fluctuation can be caused by a wide range of factors, including geopolitical events and natural disasters. Political instability in the Middle East, which accounts for a large portion of the world’s oil supply, has led to major fluctuations in oil prices in recent years. Additionally, natural disasters like hurricanes and floods can disrupt the supply chain and impact the price of oil.
Another factor influencing the price of oil is interest rates, which can have an inverse relationship to the demand for oil. Increasing interest rates raise consumers’ and manufacturers’ costs, which reduces their consumption of products that require oil. When this happens, the demand for oil decreases, and the price of oil decreases as well.
Research shows that the macroeconomic effects of a change in oil prices depend on the source of the shock. In particular, exogenous disruptions to the oil supply cause depressed economic activity and rising inflation in oil-importing countries. However, shocks to the oil demand can also have important consequences for economic growth. Our analysis of a sample of oil-exporting countries suggests that the evidence is mixed, and reveals asymmetric responses to an oil price shift depending on the nature of the shock.
