Title: Education | What are the possible causes and consequences of higher oil prices on the overall economy?
Headings: What are the possible causes and consequences of higher oil prices on the overall economy?
What are the possible causes and consequences of higher oil prices on the overall economy?
Content: Figure 2 shows the “real” oil price, calculated by dividing the price of oil by the GDP deflator. 1 This removes the effect of inflation and thus gives a more accurate sense of what is happening to the price of the commodity itself. In essence, the “real” measure allows you to compare oil prices over time in a way that you can’t when inflation is also part of the change in price. You can see that real oil prices have varied a lot over time, and large fluctuations tend to be concentrated over somewhat short periods. You can also see that by the spring of 2008, as this posting was prepared, the real price of oil has easily exceeded that of the late 1970s. Figure 2. Real Oil Price
Why are oil prices rising? It is likely that both increases in demand and fears of supply disruptions have exerted upward pressure on oil prices. 2 Global demand for oil has been increasing, outpacing any gains in oil production and excess capacity. A large reason is that developing nations, especially China and India, have been growing rapidly.