Undoubtedly, it is really daunting and dismaying to know that increase in the oil prices affect the economy. Oil prices have always been fluctuating and that can either lead to inflation or deflation in the economy. Let us delve deep into this article which tells us how crude oil affects the economy.
When oil prices rise?
Oil pricing is such an essential component that its demand is always growing among developing countries like India and China. Due to the industrialization and urbanization in the economies of developing countries, the need for oil is still multiplying. It is also known that there was a heart-stopping increase in the price of oil in the year 2007 and 2008. Consequently, the budget of all the middle-class families shook and disturbed. You may be surprised to know that the oil and gasoline prices are interrelated to each other. The spike in the cost of the one leads to the spike in the value of the other.
When oil prices fall?
Undoubtedly, we can find an increased flexibleness in labour markets and updated monetary policies. Due to this, there is a decline in the effect of oil shocks in developing countries. When there is no direct effect of oil on the economy, there is no more inflation, and the situation remains adjusted.
Let’s read some major inputs on the effect of crude oil on the economy:
- There are a rush and surge in the oil prices due to unexpected tensions in the Middle East countries and lower supply of oil from the oil producing countries
- India imports approximately 70% of oil which is a significant burden on its finances.
- Oil import not only leads to a trade deficit for India but this deficit increases with the rise in demand for the crude oil
- Drastic changes in the prices of oil have led to inflation in the country
- Change in the price of the oil also leads to change in the value of local currency. There can be a fiscal deficit and less of FII in the economy
