The impact of higher oil prices on the world economy

Oil prices remain a key determinant of global economic performance. Higher oil prices have contributed to the recent downturn in the global economy. Together with declining business and consumer confidence, the recent increase in oil prices threatens to stall the expected economic recovery in 2003 and 2004. An increase in oil prices leads to a transfer of income from the importing to the exporting country through a shift in the terms of trade. For net oil-importing countries, an increase in oil prices directly reduces real national income because spending on oil rises and there is less national income available to spend on other goods. For net oil-exporting countries, a price increase directly increases real national income through higher export earnings. Higher oil prices adversely affect the trade balance, drive up inflation and exacerbate unemployment in importing countries. The boost to economic growth in oil-exporting countries provided by higher oil prices is generally less than the loss of economic growth in importing countries, such that the net effect on the global economy is negative. The vulnerability of oil-importing countries to higher oil prices varies. Recent studies suggest that a sustained increase of US$ 10 in the crude oil price would reduce economic growth in the OECD as a whole upto 0.5 per cent. The impact on growth in developing countries is thought to be significantly higher, because energy-intensive manufacturing generally accounts for a larger share of their GDP and energy is used less efficiently. On average, oil-importing developing countries use more than twice as much oil to produce a unit of economic output, as do developed countries. For as long as oil prices remain high, global economic recovery will be slow. But the fragility of the global economy is also due to other macroeconomic and structural factors. Even a rapid resolution of the Middle East crisis and sharply lower oil prices in the coming months may not be sufficient to stimulate a rapid recovery in the world economy.