20 Surprising Ways High Oil Prices Affect the Global Economy

February 12th, 2008

By Jessica Hupp

When you think of high oil prices, you’re probably reminded of huge bills at the pump and inflating costs on goods and services. However, the high cost of oil brings on so much more than that. Here we’ll take a look at some of the lesser-known ways high oil prices affect the global economy.

1. Less Asian growth: As China and India grow, they rely heavily on oil, which is part of the reason for the spike in prices. However, they’re shooting themselves in the foot because the higher prices go, the less they can afford, and their growth is slowed. They also use energy less efficiently, so the prices are exacerbated.
2. Bargaining power: With higher oil prices, oil-exporting countries hold the power. This might embolden these nations to become more assertive or demanding of other countries in both political and economic ways.
3. Alternative energy grows: As oil gets more expensive, alternative energy becomes much more attractive. Investment and employment in clean technology goes up right along with high oil prices.
4. European countries are marginally affected: With the dollar declining on the euro, Europeans feel the rising cost of oil much less than others.
5. Bad monetary policy: Rising energy costs are a cause for concern in most households, and governments tend to react to this sort of situation. However, if they react with inappropriate policies, they can make things worse by simply prolonging the inevitable.
6. Exporters hold on to their money: Instead of pumping profits back into the global economy, exporters tend to save them. That means that the global demand will tend to fall.
7. Helps US dollar: Although we’re not seeing this currently, in theory, higher oil prices should support a stronger dollar. This is because oil is priced in dollars, and demand for dollars will increase with higher oil prices and dollar-denominated investment from exporters.
8. Other energy exporters flourish: Exporters of non-oil energy like coal and gas flourish as consumers attempt to shift to cheaper energy.
9. New capital shift: As prices are hiked, investors consider putting their money in other sectors, which has a stimulating effect on the economy.
10. China has a cushion: Although as a developing country China is hit harder by oil prices, they seem to have a cushion as investment moves away from oil, and they maintain a fixed exchange rate with the dollar.
11. The US doesn’t have it so bad: Although your wallet may beg to differ, the United States is not hit as hard as other oil importers because we still produce about 40% of the oil we consume.
12. Government subsidies fail: Some governments subsidize fuel, and higher oil prices put pressure on them. The subsidies interfere with supply and demand, as consumers continue to demand more while prices stay relatively flat.
13. Interest rates go up: As higher oil prices lead to inflation and rigidities in government expenditures, interest rates rise.
14. Oil-producing countries don’t earn as much as you’d think: While the dollar suffers, oil exporting countries are subject to reduced purchasing power as they buy goods in euros.
15. International business suffers: When the cost of oil goes up, flights get more expensive and corporate travel costs go up. This leads to less frequent business trips to international locations.
16. The virtual economy flourishes: As the cost of transportation rises, virtual work and net meetings become more popular.
17. The travel sector suffers: Hotels, cruises, airlines, and others in the travel industry are affected negatively by high oil prices because transportation costs are higher, and consumers are spending less because of stress on their budgets.
18. Countries will stop paying bills: At some point, many countries may be forced to choose between oil and international debt repayments. As they default on these loans, they’ll hurt large international finance institutions.
19. Consumers save more: When consumers are faced with rising oil costs, many create precautionary savings just in case things get worse.
20. Consumers buy cars: Although budgets are being squeezed, consumers will buy more cars, presumably to upgrade to a more fuel-efficient foreign model.