The economic impacts of changing oil prices

Since the oil shocks of the 1970s, we have known to what extent variations in oil prices can have an impact on economies that are still highly dependent on this source of energy. Falling or rising oil prices of course have very different effects.

The drop in prices: positive consequences

In general, the price of a barrel of oil has been on a downward trend since 2014, with, here and there, momentary recoveries.

In itself, this development has positive effects for the economies of importing countries. It translates into a reduction in the energy bill for companies, which leads to a limitation of production costs and, ultimately, selling prices. In this favorable context, companies can count on a significant increase in their turnover.

This fall in the price of a barrel of oil also favors households. This development allows a significant reduction in the price of fuel or heating, if an oil appliance is used. This will also be the case for petroleum-derived products, such as plastic items.

This fall in the price of oil therefore translates into a gain in purchasing power for consumers. Rising consumption and more profits for companies are the guarantees of stronger growth.

Positive effects to be tempered

First of all, it must take into account the evolution of the euro against the dollar. It is in fact in the latter currency that the price of a barrel of oil is calculated. If, in fact, the euro is too low against the dollar, as has happened in recent years, the positive impact on importing economies will be somewhat lessened.

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Furthermore, oil prices that are too low could pull prices down overall. Such a deflationary situation would have the effect, among other negative consequences, of discouraging investment. In this case, in fact, entrepreneurs would tend to anticipate too great a reduction in selling prices.

Finally, this drop in oil prices could lead to an economic recession in exporting countries. This situation would force them to limit their exports, thus penalizing the economies of many countries.

The negative effects of rising prices on the economy

On the contrary, a rise in the price of a barrel of oil, as recent years have seen, has negative consequences on the economies of importing countries.

Such an increase in oil prices results in opposite effects. Companies have to pay higher energy bills, which impacts production costs. It’s the same thing for households, which tend to reduce their consumption. This situation may lead, in the more or less short term, to an economic recession.

Soaring oil prices may encourage businesses and consumers to demand price and wage increases to offset the negative effects of rising energy bills. This price increase therefore plays a significant role in the development of an inflationary processwhich can, among other consequences, put a strain on household purchasing power and reduce exports.

Less significant consequences

However, the impact of a sharp rise in the price of a barrel of oil would probably be less felt on the growth of developed economies than in the 1970s.

Indeed, we observe a certain decrease in oil demand, both from businesses and individuals. It is explained precisely by the desire not to make the performance of the economy depend on variations in oil prices.

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If we consume less oil, it is also because of the polluting nature of this source of energy. Releasing a significant amount of greenhouse gases, oil contributes to global warming. The catastrophic effects of oil spills on the environment should also be taken into account.

Oil is therefore partly replaced in many countries by less polluting energy sources, such as gas or electricity, or by renewable energies.

Consumption patterns have also changed. Anxious to take action to save the planet, many people tend to reduce their consumption. Likewise, today there are more energy-efficient technologies. All of these factors therefore contribute to a reduction in the demand for oil.

Furthermore, structural decisions taken by certain countries limit the inflationary effect of the rise in the price of a barrel of oil. This is the case, in particular, of the de-indexation of wages to inflation. In this case, the establishment of the price-wage spiral, to which the rise in oil prices contributes significantly, is delayed.

Finally, if the euro is stronger than the dollar, the increase in the price of oil, billed in the latter currency, will be less significant for the inhabitants of the countries of the euro zone.

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