How Rising Oil Prices Threaten Economic Growth and Impact Businesses and Managers

How Rising Oil Prices Cause Inflation

It is a fact of business that increases in the prices of raw materials increase the overall costs of doing business. This is simple common sense as the businesses use the inputs to process into finished products and hence, any rise in the input costs leads to overall increase in the prices of the products. However, the case of a rise in oil prices is completely different as not only do the input costs rise, it also leads to an across the board rise in costs. This is because oil is an integral component of the modern global economy as virtually every aspect of economic activity depends on oil for its sustenance. Consider for instance, the business of making steel. An increase in oil prices leads to an increase in the Processual costs as the Blast Furnaces depend on oil for their operations. Next, as the transportation of iron ore needs oil, this cost also increases. Further, the finished steel bars and ingots have to be transported which again raises the costs incurred. Therefore, an increase in oil prices leads to an across the board costs of doing business.

How Rising Oil Prices Threaten Economic Growth

Now, consider what happens to entire economies when the prices of oil increases. Just like the example of steel, an increase in oil raises the costs of virtually every component of the economy leading to inflation. For instance, transport costs, input costs, Processual costs, and virtually all-economic activities witness a rise in costs leading to all round inflation. Further, we use oil in virtually all products that we use. Plastics, metal items, electronic goods, and even processed food items that depend on oil for their manufacture all witness an increase in costs leading to all round inflation. This is the reason why the saying that without oil, the modern industrial civilization would collapse is considered a truism among economists and policymakers alike. This is also the reason why market analysts, stockbrokers, and virtually everyone dealing in finance watch the developments in the oil markets around the world along with the geopolitical happenings in the Middle East. This is because this region contributes to the lion’s share of the world’s oil production and hence, is considered sensitive and crucial to determining the price of oil. Apart from this, it can be said that oil is the lifeblood of the modern economy that we have now and hence, we cannot simply ignore the importance as well as the centrality of oil in our lives.

The Oil Age will not end because we ran out of Oil

Turning to the eventual decline in oil production that experts predict would happen soon, it is the case that we need to transition to an alternative source of energy. As the saying goes, the Stone Age did not end because we ran out of stones. In the same manner, the oil age will not end because we ran out of oil. On the contrary, the oil age would slowly screech to a halt as the costs of extracting and finding new oil sources became more and hence, it would no longer be feasible to make a profit from oil or even recover the costs. The result would be that the price of oil would continue to stay high leading to less economic growth as inflation takes its toll on modern economies. This is the reason why despite all promises of recovery, the world is yet to emerge fully from the slump as high oil prices lead to all round price increases and cause growth to sputter. Therefore, it would be advisable in the interests of the future generation to find alternative sources of energy quickly and without causing too much disruption so that we can at least hope for a smooth transition to an age beyond oil.


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Managerial Economics