Oil Price Shocks Advantages And Disadvantages

Kaushik Bhattacharya et al. (2001), studied about the transmission mechanism in petroleum prices on the prices of other commodities. The world economy has witnessed four bouts of oil price shocks in the last thirty years from, 1973-74, 1979-80, 1990 and early 1999. Oil price riseproduce cost-push inflation that leads in fall in output and shifts in the terms of trade. Impact of Oil price shock on other commodities may lead to hoarding of commodities and produces cost push effect whose impact is felt after completion of production. Theoritical research concludes with the fact that oil price shocks lead to increase in wages and prices and fall the real output. Utilising the four equation model VAR model, they had tried to identify the structure …show more content…
She tries to find out whether the increase in crude oil prices have a long term impact in the economy as a whole. Increase in the price of crude oil can lead to steep fall in the current accounts which further leads to worsening the treasury budgets and the savings and investments. These imbalances remain to worsen because of the increase in crude oil prices and push the economy to larger crisis. India, being a major oil importer suffers from all these threats. Developing countries are affected more than the developed countries due to absence of advanced technology. She had attempted to find out the relationship between crude oil, GDP growth, IIP and WPI. The VAR model has been used in this research. In her research work, she stated that the positive change in the crude oil price has an immediate negative impact on the increment in the GDP and IIP whereas it affects the WPI positively. Any sudden change in the price of oil has the ability to impact the industrial growth adversely. It also causes a very high spurt in the WPI. Altogether, change in oil price, WPI increase and declining IIP affect the economy negatively and even if the impulse or shock is short term, it has a long lasting impact on the …show more content…
(1982) have analysed the effects of price shocks on the economy theoretically and empirically, with a superior focus on United Kingdom manufacturing in the 1970’s. They had concentrated on the raw material price shocks, which declines output and profitability and further a longer slowdown on productivity growth, capital accumulation and real wage growth. The theoretical model helps to trace the dynamic adjustments to the price shocks, and show that the routes of output, employment and capital stock depend crucially on the responsiveness of real wages to labour market slack. Even when there is full labour market clearing, an input price shock causes a fall in output, productivity, real wages and real equity prices on impact, and leads to a continued falling in the capital stock and output overtime. Higher input prices have played a significant role in the slowdown of the economic performance in UK since 1973. It has experienced a serious squash in the profits and investments from the dates of first oil shocks. They had developed the case using the UK details by estimating gross output function, investment equation and real wage equation for the manufacturing sector, using the theoretical model. Estimates of the factor price edge showed a sharp shift in the frontier after 1973, in line with the observe drop in profitability of the economy from 9.5% return on capital during 1960-1972 to under 5.0% during 1973-1978. The estimates of output supply developed