Question

Why might a oil price increase be beneficial to economic efficiency?

Answer 1

Both rising demand and fears of supply disruptions are probable to have put upward pressure on oil prices. Global petroleum demand has risen, outstripping any petroleum manufacturing profits and surplus ability. A big reason is the rapid growth of developing countries, particularly China and India. These countries have become increasingly industrialized and urbanized, contributing to an rise in world oil demand. Furthermore, fears of supply disruptions in oil-producing countries such as Nigeria, Venezuela, Iraq and Iran have been prompted in latest years by unrest

The amazingly sharp rise in oil prices in the last half of 2007 and the first half of 2008 has resulted many to argue that enhanced speculation has played a part in commodity markets, and there is proof of enhanced activity in these markets. However, it is open to debate whether speculation plays a part in high oil prices. It is also helpful to remember that both demand and oil supply respond slowly to short-term price changes, so that very big price changes may be needed to restore equilibrium if demand is to move out of line with supply even modestly..

As gasoline prices rise, it is likely to be spent on a bigger share of household expenditures, leaving less to spend on other products and services. The same applies to companies whose products have to be transported from location to location or which use fuel as a significant input (such as the aviation sector). Higher oil prices tend to make manufacturing more costly for companies as they make doing the stuff they usually do more costly for families.

Increases in oil prices are usually believed to raise inflation and decrease economic growth. In terms of inflation, oil prices have a direct impact on the prices of petroleum-based goods. As stated above, oil prices have an indirect impact on expenses such as transportation, production and heating. In turn, the rise in these expenses can influence the prices of a variety of products and services, as manufacturers can pass on to customers the cost of manufacturing. The extent to which increases in oil prices lead to higher prices for consumption depends on how significant oil is for producing a particular sort of good or service.